Virtual Income, Land Barons, and the IRS

Ok, I will try to keep it simple.

In general terms the IRS wants its share of our income and it finds ways to get it. The IRS doesnt care if you are a citizen of the US, or if you even live in the US if the source of the income is within the US.

When we earn Linden dollars in SL are we subject to federal taxation? If so, how, why, and who gets hit with the IRS whammie.

Let us start with the concept of virtual income. What does Uncle Sam consider to be taxable income?

Title 26 of the US Code contains the Internal Revenue Code and states:

26 USC §61. Gross income defined: (a) General definition. "Except as otherwise provided in this subtitle, gross income means all income from whatever source derived...." (emphasis added.)

26 USC §63. Taxable income defined: "...the term “taxable income” means gross income minus the deductions allowed by this chapter (other than the standard deduction)."

Taxable income is not limited to wages, dividends or other traditional sources we encounter. You may have taxable income even if no money changes hands. For example, you may have taxable income if you owe a debt and it is cancelled. Or, if someone lends you money below market rate then the money you save is considered income. Or, when someone pays you with property or services other than cash such as one person buying a car from another and paying off the debt with work. "I will buy your car and pay you 25 house cleanings, 7 manicures, and 50 lawn mowings." It is called bartering, its taxable income, and the IRS wants a piece of it.

You must include in your income, and report as income the fair market value of property or services that you receive. This includes cashless exchanges and it does include intangible property that can be assigned a fair market value. Yes, that includes the fair market value of Linden dollars.

The IRS doesnt just want to know how much cash you earned, it wants to know how much value you have acquired from intangible sources such as services and linden dollars, measured by its fair market value.

This means that as a matter of Federal Law, it does not matter whether the income you receive is in dollars, dividends, services or linden dollars as long as there is a fair market value that is measurable. Once you sell the Linden dollars for US currency, you convert a virtual property to one with a measurable fair market value. You have income and it is subject to tax "from whatever source derived." You have been paid. That is bartering.

The Linden dollar becomes a form of scrip that can be converted to real, green, spendable, tradeable, savable, cash. Its real baby, and if you dont agree, then hand me all your Linden and I will demonstrate how quickly I can convert it to US currency.

Technically Linden Lab has an interesting tax issue, There are companies and organizations that facilitate the trading of goods and services among large groups of people. Usually these companies issue certificates, credits or scrip as credits and debits between the traders. Each year these companies are required to send 1099-B forms to the traders, report the trades to the IRS, and perhaps withhold taxes based on the fair market value of the goods and services exchanged.

Concerning a "Chinese woman in Germany who earns six figures a year speculating on Second Life real estate," nonresident aliens must file Form 1040NR if you are engaged in a trade or business in the United States, or have any other US source income on which the tax was not fully paid by an amount withheld. There is a public statement by Philip Rosedale of this income along with a lengthy self incriminating statement against interest posted here by one earning a significant amount of cash in SL.

The public attention to this significant 6 figure income could very well shut it down if the IRS gets wind of this. Would I report this to the IRS? Maybe. Dont piss me off.

*sigh* So, to sum up, A---- C---- is a tax dodger? Is there possibly a thread discussing the financial side of SL that *doesn't* bring up (and invaribly belittle) this particular person???

LMAO sorry that would be the Most hillarious 20,000 member lawsuit for pain in suffering in the history of Electronic games.

"In todays News Katykiwi Moonflower of the Virtual world of Second Life Reported findings about RL cash earnings to the IRS.
Shortly there after constituants of several legal offices filed suit against Katykiwi for the downfall of SL.
Many citing pain and suffering at the demise of thier favorite past time. Other Citing sever capital gains extinguished in the shut down of the virtual world."

"Further News notes over 1.8 billion dollars in personal actions suits against Miss Moonflower. When asking her Lawyer what they will do the Lawyer stated. "We are right everyone else is wrong they bought and sold money they have to pay."
Meanwhile back at the contingency aginst Miss Moonflower press officials there are cited saying. "She will pay for her transgression.....in cash"

The CEO of Linden Labs the founder of Second Life was unable to be contacted for interview.

LMAO sorry katykiwi I had to do it it just struck me as funny...

Shadow

Shadow,

It would not be my most absurd involvement in litigation I can assure you

oh yeah and btw, I only had to pay $46 on capital gains from Gaming on the internet this year on my taxes...pffffft.

Shadow

I don't believe Anshe could be cited for dodging US income taxes and she works and plays from Europe. But I might be wrong, I'm not an attorney.

The international flavor only complicates things more, I'm sure!

-Flip

What are Canada's tax laws? If you're using GOM then the income is being "earned" in Canada, isn't it? I take it IGE is in the US though.

Having said that, it's a shame you had to point fingers in your post which actually holds a lot of valid information many others who also exchange L$ for US$ may find interesting. Quite why you need to bash she who should not be named (no, not Lord Voldemort silly), which detracts from what you're saying, I don't quite understand.

I always thought that IRS and SL could be problematic. Kudos to you Shadow for claiming your dealings, but I wonder how many others will.

It does make me a bit nervous to possibly have the IRS poking around in SL. I dont think LL will have a problem, its all on the residents. But, what happens when the IRS starts asking them, "Who is this (insert any leaderboard name) character? We need to have a talk with them."

Whoa, you raise an interesting point there Loki.
LL care to answer or muse on this ?

Katykiwi, what field of law do you practice? Are you a litigator, or are you in tax/business law?

Not knowing much at about U.S. tax law, I find this extremely interesting. Does this imply LL could write off stipends as a business expense? Every week they give me the equivalent of ~US$2 in stipend. Multiply that by, say, 15,000 premium account holders, and you've got a potentially good way to reduce taxible income.

No it would far from the most absurd move in litigation I have seen or made either. So what is your take on the tax status of unconverted $linden. I ahve been wrestling with this since I came on....is unconvereted $L income?

Then of course does this mean costs associated with vritual business can be takien as write-offs against non virtual income?

20,000 potential plaintiffs..think we could certify a class?

Wow, I hadn't thought of that angle either. Egads I sincerely hope LL has this covered and the IRS never ponders these issues. What a pandora's box begging to be opened. Especially with increased press coverage of LL and SL.

None if this is new, of course. In game currency has had a RL value since UO, at least, including people making respectable sums off of it.

I'm sure it's been dealt with already on a corporate level... Linden may not be the largest company in the world, but companies like Blizzard, Origin, Sony, Microsoft, etc, have certainly paved the way on their end.

On a per-player basis, I don't think the issue has ever came up directly... Some people report it, some don't.

Here's one for you..... I run a buisness that's essentially non-profit by design.

Would I need to register in the US as a non-profit organization?
How the hell could I prove that my virtual organization in SL is actually non-profit?

I have a headache now....

Haven't we been over this already?


Like five times?

First of all I highly doubt that Anshe has pulled 6 figures out of the game....a big amount yes but with tier fees and the rest I doubt 6 figures. But lets say she has and you do get pissed off and tell the IRS...here is a good idea of what will happen if they take it seriously.

First they won't go to anshe but to LL and go through their records of how much money was pulled out of the game and sent to IGE or GOM...now the IRS will also be investigating those two companies as well.

Secondly seeing that real money is being made they may decide to look at every players record that has sold to both GOM and IGE. Anshe makes some serious money but there are quite of few others that make real incomes here as well. So now at the very least the top 10% of the players who make and sell money, the trading companies, and LL will be investigated.

Once the IRS thinks there is money thats not being paid they will drag everyone through the mud to get it and you can bet LL will be made to suffer as well.

no. and even that were the case, it keeps coming back because there are new people who join sl, and ll hasn't said anything definitive about this.

I'm not sure this *has* been dealt with on a corporate level. Sony, Blizzard et al have basically kept a head-in-the-sand attitude toward currency/item trading. If it were determined that convertability of game assets defines those assets as "income" for tax purposes, I predict (a) they would become far more aggressive in shutting down resellers to eliminate convertability and, hence, liability for loss of game assets, or (b) acknowledging a real-world value, implementing item/currency trading themselves, thereby profiting from trade commissions and even potentially getting a business expense deduction from every gp dropped by a mob.

Hmmm... LL didn't send me a W2. Not that I earned more than like $5 or so. hehe

-Ghoti

That was long winded....

My country has a tax treaty with the US, to make sure that we don't get double taxation on money earned. I've already filed my forms, from other biz ventures on the internet. involving US companies and US customers.
http://www.irs.gov/businesses/corporations/article/0,,id=96739,00.html

I don't pay US sales tax, and I don't pay US income tax. However, the local sales tax is 25%, so I get to bleed anyway. Income tax is way higher.

As such, the only one interested in my income is the local government.

Besides, if I were to tax the income in the US instead, excellent. My country has possibly the highest tax pressure in the world. I would be more than happy to pay the puny US taxes instead. But of course, my local govt wants it, so the IRS can't claim it due to the treaty. It's not like I have a US company. I work from home. The fact that I use US resources is irrelevant as long as I pay local taxes on them.

We have a pretty advanced electronic banking system, with full disclosure to the govt., so any money not accounted for in our yearly tax reports would be subject to tough investigations. It is not possible to cash US checks here, they must go directly to a bank account, so it's kinda hard to hide it.

The only way to hide income from abroad here is to use a foreign VISA card in ATMs. I know some MLM companies do that by giving their members VISA cards from countries with shady banking systems. But those MLM's all goes belly up, one after another, so...

I've been here since July and can't remember it before. Of course this is my first tax season as a SLian.

Ricky you have to remember LL produces the ingame money thus in all rights they cannot "Claim" any of the virtual world money as currency.

Now, in respect to what I had to claim on taxes it was based on services rendered. In all honesty the Lindens for US$ is a 3 party establishment thus estranged from LL.

Sooooo, the IRS in essence cannot investigate LL as all their actions are "Legal"

See thats the falicy that everyone gets into is they associate GOM and IGE directly to LL when in essence both organizations have no control on how LL produces or disseminates the L$ used in game.
Thus, IGE and GOM are merely
1 a store front (IGE)
and
2 a trading commodities broker (GOM).
Both of which are already registered with their corrisponding governmental agencys.
So, were the IRS to take a close look they would be talking to GOM and IGE about thier customer base and not Linden Labs.
Even though the commodity is Linden Dollars never mistake that Linden Lab only sanctions it meaning they say "do what you wish but we are not responcible for any liabilitys that you incur".

But non the less katykiwi brings up some valid issues in her post. The irony of it all is it's the individuals responsibility and Linden lab cannot be held accountable for the actions of its client base. Pure and Simple.

Shadow

Hence why Paypal offers an atm card per transaction if you wish..

If I were Madame Chung I would not be posting self incriminating statements against interest about my undeclared income. Consider that to be words to the wise for any income earner in SL!

Is Lindenworld in the United States? If so, then we aren't doing currency conversion - we're earning money.

Still, should I be keeping records of how much I spend gambling and how much that earns me versus how much I spent and made selling land?

How do I declare earnings on virtual land sales? How do I calculate the value of land I bought and now hold? Is it worth current market value in Lindens? Or is it worth the mean price per meter quoted on the Land page at secondlife.com?

Should I be collecting state sales tax, by the way? And what state would that be for?

Where in the world IS Lindenworld?

I suppose the tax guys will simply look at it this way: you paid your fee to play, you played, you earned money. Perhaps they'll let you deduct some of the monthy fees. Perhaps they'll even let you deduct some computer equipment. But I wouldn't try to convince them that your home office is really an acre in size and - since it occupies 100% of your property they should let you deduct all the stuff they didn't let you deduct last year - when your office was that tiny little corner near the TV in the family room.

Not sure what the exemption status would be of the fees paid by all the players who failed to earn more than they paid. Could SL become a tax haven? A place to "lose" money?

Hey! Could SL be a good place to store money, away from the American Banking System and the IRS?

My head hurts too.

:-/