A tax question

Can any currency traders tell me how you handle your tax liablities?

Nope.

Aww, why not?

The only place you need to track money flow for tax purposes is when it enters and leaves linden labs - you get charged on your credit card, or they send you a check/paypal payment. Everything else is internal accounting on their part.

As a comparison, when you work a real life job, you may have built up credits on your employers books during the week as you work, but its not 'income' for tax purposes until you actually get a paycheck.

Here's another way to look at it: Your US Dollar balance on your account is "prepaid server and network resources", and what we call land tier is the monthly usage deducted from that prepaid account. As long as its a balance on your account, its not "money in your hands" that you can spend as you see fit (ie buy real life food, etc). It can only be used to pay for linden labs services (land tier) or digital content tokens (L$)

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Disclaimer per Desmond Shang's comments @ #6:

I am not a tax professional, though I have been a landlord and had other businesses for 25 years, and worked for a big company about as long. W-2 wages were always reported based on the date the paycheck was in my hands, my mortgage interest was counted by the bank if they got my check on or before Dec 31st, and I counted rent on the day I got a check from my tenant, and thats never seemed to cause an issue.

By all means, I encourage people to seek competent tax counsel, but as a realist, I just don't see the IRS investigating the billions of linden $ transactions. Process credit payments that hit your Paypal account, and charges to your credit card for tier seem the most natural places to track "money in and money out".

If I give an escort a dress and then we go have sex, was it a gift for my girl, or payment for services? Does it matter if I buy it from the shop and then transfer it to her, or I have to give her the lindens in the shop cause its a no transfer item? Does it matter if we like each other as people and chat in a friendly manner outside the bedroom? If she gets off too on our sex play, does that make it pleasure for her and not business? Did the store have inventory, when the item was made as a copy at the time of purchase? Does a copy even exist, or is it just a pointer in the linden labs databases to the original on their asset server?

All these questions might be interesting from a purely intellectual standpoint. And it might make sense for someone to create a business avatar, and keep that separate from their fun avatar (s), for the same reason people have business and personal checking accounts - it makes tracking the money easier. But I would be very surprised if the IRS ever digs past the buy lindens and sell lindens level. In most cases I dont think they would even look past the credit card charges and process credit level, as long as you have the statements on hand to back up your tax return.

Thank you.

This is how I assumed it worked.

I am just going to add any withdrawals to paypal as income.

As compelling and clear as a position may seem on a forum, if you stand back and think about it, this isn't the greatest place in the world to get tax advice.

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One of THE BEST 'red flags' to wave in front of the US IRS is to have unearned income magically appear in your accounts from some mysterious source. The IRS is VERY interested in how you earned your income.

- should wage taxes apply

- should capital gains apply

- are claimed deductions allowed
(you can't deduct steeltoe boots occupationally if you are a ballerina!)

- did you win the money gambling, did you find it on the street

... stuff like that.


Let's consider the paycheck example.

Perhaps it doesn't seem like income to you until you get a paycheck, but to the IRS the hours you have worked have incurred medicare, social security, unemployment, federal and state income taxes, disability, employment retraining taxes (in some states) and so forth. You could get paid once a year, for all the IRS cares. But your employer will have to pay their wage taxes (and yours) far more frequently, on a schedule that the IRS determines.

Just for illustration, the way it works is that your employer sends both their wage tax contribution and yours (it's split) to the federal government via form 941 on either a quarterly, monthly, or semi-weekly basis. The state is taken care of too - in California it's sent in via form DE-88 by your employer.

Depending on what status you claim (head of household, married, kids) you may owe even more, or get a refund at the end of the year because your employer put too much money into the system for you based upon the tax with-held status you claimed.

The IRS *does not care* if you didn't see a paycheck of the money left over after taxes. Not their problem - an employer's failure to issue a check to you is a separate matter entirely.

Should you fail to get paid, your form W-2 at the end of the year will simply have a smaller value on it (as would the employer's W-3), and you might be suing your employer for unlawful nonpayment of wages. But every hour you worked did incur taxes.

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I won't even speculate to anyone about how they should pay their SL-earned taxes. Sure, I've got my own opinion based on professional tax advisement, in my state and based upon my situation both RL and SL.

But I also know that if I was foolish enough to state what I was told, someone for whom it would not apply is bound to copy what I have to do erroneously. I don't care to get blamed for that, or even cause the confusion in the first place.

Seek professional advice, for your own sake.

That's true for individual paychecks, because almost all individuals do their accounting on a cash basis. Most businesses work on an accrural basis, so that wouldn't be true for them. Besides, you owe the taxes on your paycheck even if you never actually cash the paycheck and get real dollars in exchange.

There's a more important difference, having to do with ownership. The employer may show your pending wages as accounts payable until they actually issue the check. Up to that point, they actually own the momey; you can't decide to just take them from your employer a day early. But with lindens, you actually own the lindens when you get them. (Translation: You own the rights to the limited license implied by the lindens.) They're in your possession, you control them, you get to decide whether to spend them on a new poseball or cash them out.

But has been discussed to death in the other tax thread, the situation is more complicated.


You can cash it out on demand (ignoring the technical issue of getting things set up). It's not as liquid as cash in your checking account, but it is in your hands.



Agreed.


The major exception would be if you have a linden balance that keeps growing and growing significantly. They may not find out about it, but if they did, they'd almost certainly be very interested.

For what it's worth, I've been reporting to the IRS not only my cashouts to Paypal, but also my account balance as of the end of December 31 of the tax year in question. In other words, I am being cautious and following Kidd's suggestion. My tax accountant seemed to think it prudent as well. In general, I'm the kind of taxpayer who takes the view: when in doubt, report it.

Income from SecondLife must be reported as Business Income... so dont just add to your W2 statements (if in the US). You'll have to file a Schedule C in addition to your 1040. I'm assuming you are in the US... if not, disregard.. but for Business Income in the US, you'll have to pay Social Security taxes in addition to Income taxes.

Your best bet is to get with a tax preparer/consultant if you have never had a business/hobby income in the past.