Is the free ride over for successful businesses?

http://voices.washingtonpost.com/small-business/2009/01/irs_may_push_for_tax_complianc.html

OK, so we know some of our friends across the big pond have been paying VAT for well over a year. But this is different. They're paying taxes for services. THIS is a business tax. (Assuming it actually happens of course.)

OQ--Do you suppose this is going to affect your business?

I already pay taxes on what I earn in SL, so it won't effect me if they crack down or not.

I know some folks do. I also know others don't.

But I don't like the idea of the government poking into yet another aspect of my life and the potential costs there. I'm guessing this would likely increase operating costs for LL also.

they can not tax it till it's converted.

much like stocks due to the market value fluctuations

edit:

And you already have to report the income by law.

even if said income is from illegal methods you still got to pay taxes on it. Look at al capone... they got him for tax evasion on his ill gotten rewards

Not to post a "me too" reply...but

What Betty and Mort said is absolutely correct.

For US residents...you should already be reporting SL income to the IRS. Whether they actively investigate or not.

You're confusing investment income (capital gains) with earned income.

If I buy foreign currency as an investment, then I'm taxed when the currency is sold. So perhaps I buy some Canadian dollars with USD, sell them at a later date back for USD, and make a profit. That's a taxable capital gain. If, instead, I sell them for Japanese yen, I still have a taxable gain or loss to report (depending on the value of the dollar versus yen at the time), even though I haven't converted them back to dollars yet. It's the fact that I've bought or sold an investment that matters, not whether I've converted them back to dollars.

On the other hand, if I drive across the border to Canada to do some computer work for a day or two (ignoring any visa issues with a short term, technical specialty contract), and get handed 500 Canadian dollars in cash, that's taxable income that instant. It doesn't matter when I convert those Canadian dollars into US dollars, if ever.

Linden dollars are more interesting because they're presumably not currency, unlike yen, euros, and Canadian dollars. (I won't get into the possibility of them being declared a private currency.) But it still doesn't matter, because barter income is income. If a neighbor buys a new $2000 snowblower, hurts his back, and we agree that he'll give me his snowblower if I clear his driveway all winter, that's earned income to me. It doesn't matter that I'm not going to sell the snowblower for another ten years, I have to pay tax on it when I get it. I did the work, I got compensated, dollars, euros, chickens, or snowblowers, it doesn't matter.

As a practical matter, given the relative stability of the L$, and assuming you cash out regularly, the IRS isn't going to quibble about small change unless you get stuck in one of those very detailed audits. In fact, given that the L$ has gone up in value, you're actually going to show more income if you sold L$ in Dec 2008 or now than if you'd sold them last March. However, if you're earning L$ in-world, and you keep accumulating them in the mistaken belief that you don't owe taxes till you convert them, and if the IRS takes notice, then they're likely to get very nasty over it. As in illegally hiding income to avoid taxes.

The biggest 'if' in the preceding paragraph is "if the IRS takes notice".

In total I pay over 45% income tax, then nearly 20% VAT over whatever I have left.

And of course, VAT on products that are considered immoral or really necessary. Like Gasoline, and drugs.

I don't need another TAX to worry about >.<

In the Netherlands we already have this "snack-tax" Extra VAT on product that are considered "unhealthy" by the government. such as Burger king products.

Who can top the insanity here?

There will soon be straight-to-paypal transactions within SL. Ithink that is when they will be able to tax us. Linden Lab will protect their funny money to the end so they don't end up on the wrong side of the IRS.

Fixed that for you. Over here, we had a revolution a while back to throw out the so-and-sos who were overtaxing us. Think about it.

I meant to "top off" actually. So there must be something worse out there. I don't know what Linden Labs does in this financial crisis. But it's their problem. I already pay way too much for a piece of land that doesn't exist.

land that doesn't exist 4TW!

and I pay my taxes too

The most difficult bit will, I think, be paying tier with in-world income.

See, technically if you pay tier with your in-world income, then it still did exist as US$ for some amount of time, so it's part of your income and you can be taxed on it. So if you only just made tier, you didn't make tier after all, because there's tax to pay on top. You can pay that from your own pocket, of course. Or you can cash out enough to pay the tier and tax, but then the tax is more, because you cashed more out. And the government will need the tax paid to them, not to LL, so you have to set up arrangements for cashing out to your bank account..

Now, this said it might not be too bad (in the UK, for example, if you're just making tier then I believe you're OK because it's within the "hobby income" threshold that isn't taxed - but IANATA) but it could be a problem if it came up regularly.

I know what you meant. You were looking for someone who's taxed more than you, so you wouldn't have to feel so bad.

I was pointing out that there comes a point at which you have to stop moaning about high taxes and do something about them. The American Revolution was about what were, at the time, considered unconscionable tax rates...and they were MUCH lower that any country's taxes, anywhere in the world today. The colonial hotheads and rabble rousers created a country over an argument about less than 5% taxation. What will it take today? 80%? 90? Everything you've got?

Doesn't the Netherlands have coffee shops, for gods' sake? Start meeting there with some fellow disaffected citizens. When you get serious about it, we'll send you some F-16s.

So do I, it is already an IRS requirement that you report this income. Anyone who doesn't is asking for problems because it will be so easy for the IRS to find out how much you have cashed out from SL and XStreet and Apez.

If you have to pay taxes on inworld income once you move it to RL, would you also be able to claim expenses for your business? Write off part of your computer, internet, home office, etc expense?

This could turn out to be actually a plus for small businesses in SL while they are setting up their biz as well as legitimize it in the RL.

Fortunately for you, THIS one shouldn't affect you. The article is about recommendations made to the IRS, which is the agency responsible for assessing and collecting taxes from citizens of the US. (OK, I'm sure there's more to it than that, but, in this case, I think I've covered the important points.) When you guys started paying VAT, it didn't affect MY fees at all. At least not directly and not that I noticed.

I pay taxes on my income too but my main concern is that they'll come up with some new tax that I'll have to pay in addition to income tax. Or maybe they'll invent some ridiculously arduous system for declaring imaginary income.

Yes. I take deductions just like any other business.

As far as paying rent, I consider that an expense just like any other RL shop rent that would be subtracted from the total made to figure profit. So the amount I take out of SL is the profit and then things such as computer, software, etc, I claim as deductions. Luckily, I have a mom who is a tax whiz at this point because my dad is always starting up little side businesses.

I think the big question is at what point does the income become taxable. If it's at the point of conversion whilst it sits in your US dollar account I'd guess many people are underpaying tax, if it's when you cash out then it's a straight forward tax requirement, if they start trying to say the Linden dollar is taxable then we'd have a ridiculous situation.

I declare my income. But I also deduct all my graphic design expenses (including my college tuition) with the exception of my computer. Programs, yes, but I looked into the computer thing and it required one to use it exclusively for work or log when it was work and when not and prorate it. More organized people than I might be able to do that, but...


For someone making the equivalent of $10 USD a month over tier, I doubt very much that the IRS will come knocking on your doorstep any more so than they are fussing about that bicycle you sold for $50 to your neighbor. Technically you should pay taxes in both instances, but realistically they've bigger fish to fry. On the other hand, if you are a top clothing designer in SL who supports herself with that income, I imagine it would raise a flag if you live in a house and claim no significant income from any other source.

The catch there is it has to be realized income, as the linden dollars are a virtual currency. LL can and does add more with really no backing at a whim, it is more of a stock for stock trade in world, and till that value is realized in RL funds should not be taxable.

Because it's reported by banks and financial groups (pay pal for example) if it reaches a certain point after being cashed out.

Now when you convert it to pay tier, it might be considered income at that point.


PS: Had a long talk at my last job with some of the accountants about it, and well the firm handled lots of corporate and personal tax issues, and by talking to some of the irs folks because one client had an in world venture they worked out that till it was realized in US dollars that it wasn't taxable

well they cannot tax me on lindens i buy because that gets taxed already..

if i am paying tier to run a business how can they tax me on that when it would be outgoing funds instead of income?who is to say we haven't already payed a sales tax on that..
that would be more of a write off than anything and i would use that in my itemized deductions..
if we hadn't already been paying sales tax i'm sure LL would have been in trouble with the IRS long ago..

all my upload fee's for my products would also go into deductions any outgoing expense any losses of time .my internet connection..they are opening a whole new area for deductions..

now people renting homes can deduct their homes and utilities and more..

if they want to try and get you on the way out...
say i buy my lindens from the blue button??how many have bought lindens from the blue button and exchanged them for more than they have payed for them?

the only taxable income would be from any profits made at the current value of the lindens at the time you received them in world compared to their exchange rate.only if we would have actually invested in the lindens which our customers were giving us..which we don't until it is handed to us in world..
so it is income generated inworld and only would be taxable on the way out.

the only way i can see you getting taxed for exchange rate profit is if you invest into the linden itself working the exchange rate for a profit..

i see nothing but a whole new area of more itemized deductions..letting more people write off homes and bills making the money they do make in sl go a little farther in the RL..

i guess it is gonna depend on the way you use your lindens..

all i really see is the IRS trying to work it's way onto the net.

also it's just another clue that virtual worlds are going to be a popular thing in the future..

That the money one makes on virtual businesses is taxable in the U.S. is nothing new. The challenge is the I.R.S. figuring out how to monitor it.

The problem is that of all the Second Life businesses, for example, very few make enough profit to be worth the I.R.S. investigating Second Life, for example. How much time and expense does the I.R.S. want to invest in going through, say, 10,000 businesses just to find the one that actually made enough money to tax?

There was a new law passed recently (I forget the cite on it, it's been mentioned in the forums before), that might require Linden Lab to report transactions of a certain amount over a certain period of time. (The law applies to PayPal for sure, for example, but it was unclear of whether it would apply to something like Second Life.)

Getting Linden Lab to report transactions is the only way that the I.R.S. is going to get a hold of taxable income in Second Life. Otherwise, they will be searching for tiny needles in big haystacks, and it's not worth it. As it stands, Linden Lab doesn't even keep transaction logs for more than a month (at least they don't make them available to us).