When is US currency taxable?

Does anyone know when money becomes taxable in the US?

Is it when Lindens are changed into currency but kept in one's Linden account?

Or is it when the currency is totally taken out of the site (ie. transfered to PayPal, sent via check, etc.)?

I was hoping H&R Block was still inworld but I can't seem to find them now.. lol

Thanks!

I seem to remember that US Citizens are allowed to make a profit of something like USD 400 from a hobby each year; everything after that has to be reported as income. BUT I am NOT a tax expert!! I would absolutely talk to a tax person that knows the rules before I took any knowledge away from the forums here.

Thanks Oryx. I think that has gone up a little - good point for many though, that isn't my concern. I'm trying to figure out WHEN it's taxable...at what stage in SL, or is it after SL.. lol oooo... gotta love the lil details

I think your L$ income is taxable. But as of now it only becomes easily traceable when you exchange it for US$ and transfer it to PayPal. But that could change at anytime. The IRS could easily ask Linden Lab for info on anybodies L$ income that is above a specified amount.

So in other words - don't even think about it!

Most people seem to say keeping tabs on your L$ in world isn't necessary.

And they report it after taking it out of SL.

I don't worry about it anymore since my sales dropped so much.

Its really best asking an accountant.

They've tacked this law onto the back of a housing bill, but it will be paypal, visa and mastercard who report the information and the amount is fairly high.

*reads up* I'm under the impression that if it makes a profit, it's taxable, hobby or not? Strange.

Yes Colette, I agree on the accountant part however, I live in a State where they don't even know what SL is and the idea of paying someone to explain it to them leaves me a little rattled.. lol

Ciaran, if that's true then it would be when it is taken from the SL site (totally out of play, so to speak), which actually makes sense

It's not real until it's in PayPal or wherever. L$ are imaginary currency. They're like Monopoly money. They're therefore not taxable... it's only when you choose to sell them and then transfer USD out to the world that any "profit" that you make in SL is taxable. I suppose you could then consider it, legally, to be profit made on the internet, like some people use eBay to make a living.

in the US, i think the untaxable limit you can earn is $600US. anything above is reportable. i don't know who is looking though.

Talk to a tax professional; I'm quite serious. Whatever you do, don't trust casual answers on this forum.

I've been discussing the income I make here with a CPA for years. Yes, it's time consuming and very expensive to do that. But paying tax penalties and fines for multiple backdated years when the IRS conveniently notices the discrepancy "late" is even worse.

One *very* important detail - it's not just what you made, but *how* you made it, that the US IRS cares about.

Income is generally presumed to be "wage earned" unless you can make a very strong case otherwise. This is mainly because everyone and their dog tries to bow out of paying Medicare, Social Security and other related state and federal taxes.

If you do anything that even remotely smells like "doing an activity that results in money" they will tell you how they think you should pay taxes; if you don't they will fine you accordingly unless you can prove your case. Unlike the common assumption, "innocent before proven guilty" does *not* apply to tax law. Ah, and if you manage to prove you aren't doing something that requires payment of wage taxes, they will be very interested in just what it is you are doing, and if you should be paying capital gains, or other non-wage taxes.

Slip under the IRS radar? Maybe you can. But consider that the biggest, baddest audit trigger the general accounting office has, is money that 'magically falls out of the sky' and into your account.

I really hate being so negative, or scary... but sadly, that's the way it works. Just like the Europeans have to deal with VAT, we have our own taxation issues. It's the law.

For the record, I won't go into my taxation situation too much here because I don't want a bunch of people copying me, thinking "Des figured it all out and it probably applies to me too." It won't. For the record, I'll say this much - I do pay wage taxes on everything earned, and I pay a tax professional to prepare my returns.

Good luck, and I hope you get the right advice from someone who knows US tax law.

Thanks Desmond...no, I don't want to try flying under any radar...thus my question. I am familiar with the ss and medicare taxes for a personal 'business' and pay it each year.

Just wondering about the 'when'. But I think it is after converted to dollars and extracted from the site into some other tangible form.

That's the only question I have. If all else fails, I'll just call the IRS!

sage advice. replies in this forum regarding legal issues should only be used as catapult to further inquiries with a professional CPA.

Well I read about it on the paypal blog:

https://www.thepaypalblog.com/2008/08/proposed-irs-reporting-requirements-become-law/

The most likely effect of this for Second Life (and any other online payments) users is going to be an increase in payment transaction fees I guess.


As for your main question, a tax professional is the only person who can give you a definitive answer. I'm not at all familiar with the US tax system but in the UK they can make different decisions based on whether it's a hobby or a business.

Basically if you have other income that puts you in the filing category there is no difference for the first X number of years. It is treated as self employment and you can deduct expenses which will lower the taxable amount. After 5 or 7 years, I don't remember and I am to lazy to look it up, if you have not made a profit, the income is declared hobby income and you can't deduct expenses, but you do have to pay taxes on the income.

Keeping this general. I don't get specific unless it would fall under my professional liability insurance...

1. There is a reporting limit for income from one payer to one payee in a taxable year. Reporting varies based on who the payer is (to the lesser degree) and who the payee is (mostly). This is NOT the same as a floor to the income subject to tax. All income is taxable to the extent it exceeds allowable offsets/expenses, although materiality comes to play.

2. Income is generally taxable in the period earned, without going into cash, modified cash basis and special rules for some taxpayers. That it is paid in something other than actual US currency is irrelevant - 'barter cheats' wiped out almost every exception years ago. And cash basis means payment, not when you convert it to actual US dollars.

3. Allowable expenses probably include most expenses directly related to the sales in SL. If you consistently make money, you are better off addressing this as a business, not a hobby. Hobby expenses are deliberately restrictive to prevent you from using minor amounts of income to use the expenses of your hobby to take a loss every other year. As a CPA I could have fun with this sometime at a CPE class - you can probably prorate the time you are on-line doing work related activities and deduct that part of your SL fees, but the audit could be not so amusing. Keep a record if you do that and if you think it is worth it - otherwise, let the deduction go. OTOH, if you are paying $ 295 a month in tier, well, its your call.

4. If you are hugely successful in SL in RL terms, pay taxes. Your problem is you are one phone call from a ticked off customer from an audit and, like I said above, the audit would be, well, interesting.

5. If the economy in SL rises above the horizon for the authorities, there are some real issues in the sales tax area. I certainly could see one of the aggressive states stating that SL needs to provide enough information to support sales tax collections. Up to now most states would not tax this type of product, but most states with sales taxes revisit this area every time real estate takes a hit, along with real estate and transfer taxes and they add new items to the list. Could happen...

6. And if you are making more than a couple of hundred, pay an advisor to get specific info about your situation and state.

US currency is taxable when:

You make it
You pay an employee with it
You find it
You give it away
You lose it
It's stolen from you
You spend it
You save it
You try to take out your savings
You pass it on to someone when you die

Welcome to the Land of the Fee.

I'm going to switch to Quatloos along with Brenda.

Curtis, thank you so much for so much! lol

Thank you all for your time and thoughts...greatly appreciated. I'm sure I'm not the only one who has pondered this

If you make money, it's income. Income is taxable by income tax. You ought to report it on your state and federal income taxes. As a rule of thumb, any sort of positive monetary gain at all that you receive for any reason is income, and taxable.

How you report it, and what sort of offsetting deductions you can take against it, is a completely different issue. That's where it's a good idea to have your tax expert. Alternatively, with some patience, you can probably find the answers on the IRS website and/or website of your state's taxing or commerce agency.

One problem you may have when you report that income is that you may find you in fact need a business license in your state to do business in Second Life. So if you make real money, you may want to see about getting that business license. Small business licenses are usually cheap; I'd say as a rule of thumb if you make enough money in a year to pay for that business license, you should get that business license.

As a practical matter, the taxing agencies don't care about truly small potatoes. (Someone mentioned an exemption of up to $400.00 for hobby-related income; though I don't personally know about that specific exemption, $400.00 sounds about right for a cutoff between what a taxing agency might consider small potatoes, and what it might really care about.) I'm not aware that Linden Lab does any sort of systematic reporting to the IRS of the money it pays out in real money for Lindens. So practically, you probably don't get flagged anywhere for truly minor Second Life profits.

However, if you make any significant amount of money, even if far below living wage, it's probably wise not to gamble that the IRS will never find out about it. Even though Linden Lab may not be doing any systematic reporting of transactions, I'd guess Linden Lab still has to report certain kinds of transactions like any bank would have to report to the federal government. (One that comes to mind is that federal law requires financial institutions to report- I forget to what agency- any transaction that involves $10,000.00 or more. That information gets passed around to to various federal law enforcement agencies so that they can track potential drug dealers and terrorists. I wouldn't be surprised if those reports also go to the IRS so it can red-flag people for audits.) It's hard to tell what kind of electronic paper trails exist on your transactions. Since willfully evading tax responsibilities is a serious crime, I personally would think it's better to be safe than sorry.

Edit: I just read the PayPal blog, cited earlier in the thread, about new IRS reporting requirements. Assuming it applies the same way to Second Life as to PayPal, it's going to create the electronic paper trail for all Second Life merchants, if 200 positive transactions triggers the reporting. It's probably not wise to hope that one's Second Life business is making too little money to be noticed by the IRS.

This has happened hasn't it? I'm sure I read a story a couple of months ago about one of the big companies telling their employees that they were contractors and had to report their income.

Thinking about this, I may have read it in the Herald.......hmmm.

My last comment on the issue - the above is not related to income and is related to currency transactions - a rather sensitive subject for some years in the U.S. and Europe. The concern is people using fake eBay transactions (as an example) to move currency from illegal or terrorist activities to apparent legal ones or to fund activities in the U.S. and is more an extension of the reporting that banks and similar institutions have been doing for some time. It has nothing to do with when income is recognized and more likely the FBI or Homeland Security knocking on your door than the IRS.

Won't argue that they may increase the fees for people with more than $ 20,000 in income and 200 transactions, but if you take out the money once a week, you still have the best part of 150 transaction to use...

I'll add though that, before hiring an accountant, that you may really want to take a look at the IRS web site to find the answer. They do provide a lot of information to help people figure these things out themselves, rather than hiring a professional.

If you were never considering hiring a professional to give you the answer, the fact that you tried to report your Second Life income correctly (rather than just ignoring the issue altogether, or relying on non-expert advice) helps even if you ultimately do it incorrectly and you are caught. What penalties, if any, you are assessed often depend quite a bit on how honest of a mistake you made.

Of course, hiring a professional is a smart move, for several reasons. One is that you are more likely to get the answer right. Another is that professionals might be better at thinking of better alternatives to reporting the income which may not be in the generalized IRS information, saving you money. And then another is that if your professionals do get it wrong for you, typically they are going to be on-the-hook for bailing you out.

Thanks Amity...having heard from you and Curtis, I think I will talk to a professional and I'll look for a CPA familiar with virtual situations.

It may also depend on what State you live in.

Oddly enough, I can't find a reference to a "hobby income" listed under my State's tax rules.

Makes me wonder: Cash out every month or save up & do it once a year?