When is US currency taxable?

good question.

and further... is trading L$ for $US but keeping it in the system to be used for tier/membership going to be looked at? or does it not become an issue unless it's sent on to paypal, etal?

It'll only become an issue if you're deliberately trying to hide your L$ income from the IRS. For example - trading it for a years supply of porn mags with your SL buddy Hugh Hefner or a years supply of RL dog food with Travis Lambert. (Nothing personal, Travis! <3)

But legally you should declare it. It's still an income regardless.

I'm not a tax professional, just an interested person trying to parse through the Housing and Economic Recovery Act of 2008, to see if the tax reporting provisions cited in the PayPal blog (http://www.us.kpmg.com/microsite/taxnewsflash/2008/Jun/Housing_relief.pdf) would apply to Second Life.

The relevant provision seems to be Section 3091 of the act (H.R. 3221). The only full-text version of the bill I have found so far is the mark-up version on www.GovTrack.us:

http://www.govtrack.us/congress/billtext.xpd?bill=h110-3221

I can't tell whether it will apply to transactions between residents made in Linden dollars or not.

It doesn't seem to apply. It seems to apply to credit card (payment card) transactions, and escrow-type transactions. As to the latter, the relevant provisions are the ones about "Third Party Payment Networks," which does not seem to describe what Linden Lab does when transfering Linden dollars between residents.

On the other hand, not covering a Linden dollar transaction between residents would seem to provide a big loophole in the kinds of transactions that the section is trying to capture. So even if it isn't clear from the text that Linden dollar transactions between residents would count, I bet there would be an IRS regulation that "clarifies" that such transactions do count.

Someone to whom Linden Lab actually listens should pose the question of how Section 3091 of the newly passed Housing and Economic Recovery Act of 2008 will affect Second Life.

I have a feeling that it will affect Second Life, and a lot of merchants who are used to unreported income are going to get snagged.

And I thought us Europeans had problems with VAT

I pay taxes on the amount transfered from LL to paypal. Also, and if you make any signficant income from SL, I *prepay* the estimated taxes on that money quarterly. That is right -- if you expect to earn money, it is not enough to declare it when doing your taxes, you need to essentially pay it as you earn it.

Small amounts, this doesn't matter (but remember I'm no lawyer or accountant). Larger amounts and you need to pay close attention to the IRS laws on this.

You do know that Paypal requires a password to complete the transaction unless his mother has set up a subscription link with Mega-Bling? Anyway, all of these are discrete items (earning, sale, etc.), with no particular difficulty in them OTHER than most people don't keep their transaction logs and they would be critical in some cases, especially selling an item of no discernable book value for a serious gain. Partnerships and trades of items, especially partial trades, before a sale easily trump this for difficulty (one thing I hate is spending time determining basis in sales).

I guess that anyone that does do a lot of dealings in SL at a profit should probably make a habit out of printing their transaction logs. Otherwise, the IRS may very well construct your receipt of income to maximize your penalty or at least make it larger, if you don't pay estimated.

Linden Labs is who you pay and who pays you when real money is involved:

- When you pay for a premium account subscription, land tier fees, or increase credit, it appears as a charge on your credit card to Linden Labs

- When you cash out to PayPal, you get a message that "Linden Labs has sent you money".

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Look at it this way: As a creator of SL furniture, clothes, or land builds, you are providing digital content for *their* game. They give you credits based on popularity with *their* paying customers. What you might think of as store sales is really just providing access to your content from their database to other people. Since Linden Labs can arbitrarily terminate their relationship and cancel your credits, its not "your" money yet. At the point where they can't take it back, *that* is when you have received something of value.

I am not sure if that point is when you request a cash out to PayPal, or when it clears and drops into the PayPal account, but someplace around there they can no longer suspend your account and keep the money. Now they have paid you, the money is in your hands, so its income. Linden Labs even generates monthly statements for you, for convenient accounting.

As a business, you get to deduct expenses from your income. This can include depreciation on your PC equipment, and expenses for software you bought for business purposes (not the SL client, that's free, but Photoshop if you use it for content creation).
It also includes ISP charges, and what you pay Linden Labs for "server and database hosting, and access to special 3D content creation workspace". They call it "land tier", but you are really just renting servers.

If you have a positive number after subtracting expenses from income, you have a profitable business, and you report it as income. If you have a negative number, you may have a lossy business or a hobby. There are rules to determine which it is.

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All of the above is my personal opinion on the subject. I think its informed opinion, based on 25 years of doing my tax returns for various businesses in real life. But by all means you should read IRS documents and ask tax professionals. Nobody on earth knows *all* the details of US taxation, its too complicated. But there are certainly people who know more than random forum posters like me, cause its their full time job to deal with it.

Actually, I don't know that at all, it sounds quite wrong.

For a paypal cashout from Second Life, you can type in any email address you want.

They make you type it twice so you don't make a mistake.



This is exactly the sort of reason why forum advice on such subjects is dangerous.

I think Curtis and yourself may be on different pages.

You can cash out to any paypal address.

You do need to login to paypal generally to accept a payment, but the process has already started.

For a sum of 10 grand I'd have to jump through a few hoops initially to raise my limits.

There is no limit on processing USD credit whatsoever. There are strict limits on $L and LindeX purchase/sales of course, but nothing at all on processing USD credit once it's in your name.

The reason I know this is because I asked for such limits on my account a long time ago. It's anything but automatic.

As it stands, cashouts from my account above a certain dollar figure have to be confirmed in a special way, or they won't process. Believe me it's not something anyone can hack - it's not a computer process. I had to ask for this, I've tested it, and it works.

Actually the U.S. Congress passed an internet commerce law in 2000 or 2001 exempting digital purchases from taxation. Sales tax shouldn't be an issue for the forseeable future.

Desmond I've just checked and it looks like it's a European issue, maybe some of the other confusion between users comes from different rules for Paypal depending upon where you live:

"If you have a Personal or Premier account and live in Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden or the United Kingdom, you will have a Balance Limit."

Makes sense. No such thing for US citizens or anything under the purview of the US IRS though.

I do know certain transactions will get reported automatically to the IRS, depending on some various criteria.

only after $500 dollars of income.

10 or 20 grand were the figures I saw talked about with regard to the new law, they wanted $500 but payment processors argued successfully against it.

That is correct. Except for the "everything after that" part. All of it must be reported once you reach $400. I sure wish that were true, I would be reporting $8,750 less for income because that's the filing requirement for a single person under 65 in 2007. The filing requirement for self-employment income is $400. It's not like some magical number that only hardcore hobbyists know about. It's right there in the 1040 form instructions. Chart C: "Other situations when you must file."

A common mistake people make is to put this income on the 1040 line 21 "Other Income" This is not where you put this kind of income. The only kind of income I can think of that goes on this line is jury duty. Income that you want to report that you earned from Second Life would go on a different form -- Schedule C or C-EZ.

Also, even if you don't have to file federally, you still might have to file it with your state, because the requirements to file are going to be different from state to state.

I don't know if I can answer the original question though, when it is that it becomes taxable. But I would totally keep a record of any withdrawals that you make on a ledger. And a separate record of money that you put in, so that you can be able to calculate the difference at the end of the year. Further complicating this is that you're probably going to use some of your Lindens to go shopping or just for fun (Oy!).

Its an issue right now. The 'exemption' is really by court case and the case said that Congress had the right to override that ban. The primary objection outstanding was that it would be onerous for businesses to collect sales tax over so many state and city jurisdictions that levy sales taxes. The states have an initiative in place that simplifies that process to overcome that objection - with California and New York working to make this happen sooner than later, it will happen.

In any event, sales tax levies are one side of the equasion. AFAIK, every sales tax state requires that you pay use tax for any purchase that a sales tax would have been due and was not levied. This includes Internet purchases. IOW, while there is currently no requirement that a company levy sales taxes in a state where they have no nexus, that does not mean that you don't have to pay that sales tax as a purchaser. Standard audit item of every sales tax audit. I can see large purchasers of Internet items being called down for that.

Finally, the opposition to the levy is dwindling, with more and more of the big Internet retailers charging across jurisdiction sales taxes, partly in hopes of preventing more onerous conditions being imposed.

And you have to view this in light of what happens in every state when their legislators get together - and right now are looking, state after state, at a revenue short fall from real estate fees based on prices and sales that will not be going up on either side soon. Much easier to pressure Congress to put through one bill to invoke Internet sales taxes. So don't bet a lot of money that this is an process that will not happen soon.

I think you are thinking of the 1099 income, where you have to report $ 600 of payments to any one single vendor, with some exceptions. This is the most common reporting issue of the 'irregular' income - actually, payments other than reimbursements rather than necessarily income.

OK, one point at a time. The $ 400 limit is for when you must file a return (i.e. the 1040, not the Schedule C) and is an exception to what might be otherwise a level of income not requiring filing a return. Normally $ 400 of income would not require a return in many situations, but if the $400 (or more) is from Schedule C, then you must file anyway.

It is NOT a floor to reporting self-employment income.

And yes, Other Income is exactly where it goes if you are not doing this as a business. Generally, the IRS would prefer "Other Income" if you could otherwise claim this as a business, since taking the time to file a Schedule C for legitimate businesses will work in your favor for small amounts (until the employment taxes are an issue). I wouldn't play games with that, though. Still, if this is not a business, it is not a 'common mistake' to use "Other Income" at all (and this line is used and abused by CPAs, with comments improperly squeezed on the line to explain all sorts of special income items).

I do agree with the person that says talk to a tax advisor in person. I'm only trying to respond to egregious errors...