Virtual Income, Land Barons, and the IRS

IGE does have at least office in the United States.

IGE, Carnegie hall Tower, 25th Fl, 152 W. 57th St. New York, NY 10019.

It might just be a mail drop, but they do have space here, for whatever that might be worth.

foreign income:
http://www.irs.gov/faqs/faq13-3.html

hobby income:
http://www.irs.gov/individuals/page/0,,id%3D14477,00.html

barter:
http://www.irs.gov/businesses/small/article/0,,id=113437,00.html
A barter exchange is any person or organization with members or clients that contract with each other (or with the barter exchange) to jointly trade or barter property or services. The term does not include arrangements that provide solely for the informal exchange of similar services on a noncommercial basis.

The Internet has provided a medium for new growth in the bartering exchange industry. This growth prompts the following reminder: Barter exchanges are required to file Form 1099-B for all transactions unless certain exceptions are met.

personally i can't make head or tails of some of the exceptions.

funny (re: illegal income):
http://www.irs.gov/individuals/page/0,,id%3D14478,00.html

Ha ha. I love this thread! You officially win my person-of-the-week award.

~Ulrika~

Tax evasion is often far easier to prove than most other things.

Anti exploitation sisters in evil...sigh....what's a land baron to do...

So lets see: I am Australian, SL is in America and GOM is in Canada. Any international tax experts on hand??

People who are not American Citizens who do not live in the USA do not have to pay the IRS, they pay income tax only in the country of which they are a citizen or they are living, in accordance with the international Tax Treaty.

Just to clarify this does no apply to forgein owned companies that are operating in the US, these companies DO have to pay the IRS, but the owners do no have to pay personal income tax to the IRS.

Actually if i make money from dividens in the US the default tax rate woule be taken out?

My head hurts.

So, if I understand this, I should really be tracking all my income from any sales I make in Second Life. I should also be recording any expenses on property, building, and any other expenses involved in reselling the property (including the house since that's next in 1.6). I should record the 30 Linden listing fees, the tier payments, the cost of the security system, the price for uploading textures, the skin and clothing I wear when showing the property, and the depreciated value of the prims I used to build some of the furniture back when we had to buy prims. Do they depreciate? !?!

Are we entitled to yearly statements from LL as to our stipends and bonuses? That’s income, right? Should I ask for a yearly statement for everything else I've paid them - including Lindens? I know they will probably give me a list of all the tier payments, but will they give me a complete list of all my land listing fees and my texture upload fees?

I assume I have to show some connection between my expenses and income if I'm to do my taxes properly.

How far back does the Account History go? I guess the best I can do is start over for this year and try to track it all from now on. Is LL keeping records so that my books can be verified in case of an audit?

This seems an awful lot of work for a total of $370.

Where's my 1099 damn it?

Non resident aliens engaged in a trade or business in the US, meaning having a financial presence not necessarily a brick and mortar establishment, or having any other U.S. source income on which the tax was not fully paid by amounts withheld, are subject to taxation in the US.

Any reciprocal agreements or treaties would provide an offset, similar to the offsets that exist as a result of reciprocal agreements between some of the states. The income must still be reported however.

And if your account contained the equivalent of $100K US?

the act defines non resident aliens as people who are in the USA at least 31 days of the year, but not long enough to qualify as residence, those people who do not enter the USA and do not operate business there do not qualify under US tax law. Besides for the consequence for a non resident alien not filing a 1040NR is that your green card might be voided. Furthmore treaty with 72 countries indicates a certain level of tax exemntion. Check the IRS web site.

katykiwi;

I brought this up long ago, it remains a concern of mine. If the IRS were to examine the records of the gom or the ige some ppl might be in trouble. I do believe those businesses should be paying taxes if they are not already, as they do recieve a commission on each transaction; "earned income".

I also feel as long as there are ppl in SL claiming that they are a "business girl, guy, man, worman" they should also be paying taxes as LL is a US company. I try to see all points and I think it also needs to be said that there are loopholes. For example any income from SL that I recieve goes right back into SL for the most part. I consider SL my "Hobby" which the IRS views differently.

Thanks for brining this up again I think its a worthwhile topic

Cat

I find it very interesting you are so intently focused on a single individual. You have reacted vehemently against this one person based on a questionable public release that might not even have a factual basis and you don't seem to care at all that nearly everyone in the game cashes out money at some point, in many cases a significant amount, while actually in the US. Regardless of having absolutely no proof or even ancillary evidence of tax evasion you continue to press on slandering her and her business enterprise. Its obvious you just don't like her and have seized the moment in the hope to damage her and her reputation. I smile thinking of you running around trying to track her down and persecute her across the globe because of some virtual dispute when she has already unequivocally denied your claims. Good Luck.

This is technically true -- there are minimum reportable amounts, however. If you are dealing with small amounts of money, you don't have to report it. The US is not going to come after you for netting $100 in an on-line game. (What the threshold actually is depends on how much other US income you have, whether you are a US citizen, and whether you are deemed to be operating a business.)

I seriously doubt the IRS would consider SL players as "having a presence in the US", even if they run a companion web site, and even if a majority of their "customers" are in the US. If anyone knows of any relevant letter rulings or decisions I'd love to see them!

US citizens and residents http://www.irs.gov/pub/irs-pdf/p17.pdf
aliens http://www.irs.gov/pub/irs-pdf/p519.pdf

Buster

They should. I feel we should be provided a summary of all our yearly transactions in SL. Given that we're in a digital world it should be trivial to compile that information and either email it to us, put it on a web page, or send us a letter.

Further, I would like to see:

1. LL publish volume, revenue, and profit statements of businesses in SL
   
2. LL publish a list of income distributions in SL

It is the law that players must pay taxes on earnings and it is an obligation of LL to create a transparent system will prevent players from hiding profits.

~Ulrika~

It's fairly straightforward to set up a record collection system whereby sellers can track their sales and profits. Either a spreadsheet program or a basic bookkeeping notebook or ledger (which can be purchased at a stationery store) can be employed for this task. I'm not sure it's the Lindens' responsibility to provide us with this information as long as we have the ability to access and record it ourselves. Also, I believe the Gaming Open Market allows users to access a history of all their transactions on their site, so it would be fairly simple to go back and see exactly how much revenue in US$s was made by selling game currency if you use their service.

I hate paying taxes as much as anybody else, but it's a necessity because it means our country's infrastructure (roads, firemen, policemen, libraries, schools, etc.) continues to be supported adequately. For most of us, the small amount of money made on SL doesn't really amount to much money lost by the US goverment if we don't claim it, because our other expenses would most probably offset it: broadband cable fees, software and hardware upgrades, heck, even buying computer desks and chairs. However, for someone who makes a significant amount of his/her income in SL, to not pay taxes on it is cheating the American public. When someone publicly and proudly announces he/she makes a comfortable living off SL, it should probably be automatically expected that that person also pays taxes on that earned income.

Katy's doing us all a service in making us think twice about this issue, especially since she's got the expertise to back up what she's saying.

It is not the obligation of LL to create a transparant system for their play money. It doesn't matter that people buy and seel it and it doesn't matter that LL endorses it. They don't pay anyone in real money therefore they do not have a responcibility to publish, revenue, profit, and or income distributions .

Wait a minute. Do I have to pay taxes on my Linden holdings or not?

I took in about $370 US dollars last year. But I also have thousands of Lindens in cash and land. Do I pay taxes on the Lindens too?

If so, what kind of records - and verification - does the IRS expect?!?

Gurgon,

I know we discussed this in world and clarified the actual rule, but I will reply for the information of others who may be interested.

Under US federal tax law, a resident alien is any non citizen living in the US for 31 days or more per year. If under 31 days, they are non resident aliens.

The significance is the rate of tax. A resident alien is taxed at a higher rate than a non resident. Being a non resident does not excuse you from the approximately 30% tax you would owe on income flowing from a business run in the US.

The treaties existing with other countries allow a tax credit in one country for taxes paid in another treaty member. Taxes are still owed to the source of income country.

Let's see....30% of 100k...moocoo bucks.

I have to say, this is a great thread.

Also I don't know how this plays into the situation regarding L$ income and holdings, but the following section of the TOS is probably relevant:


This could be interpreted as L$ really having no value, since LL has full control of every L$ in their system.

CYA boilerplate in case content is lost. Once the gain is realized, it is real baby.

The question is at what point does the gain become realized.

Lets say I am your employee and its pay day. Instead of paying me with currency, you give me a painting that has a fair market value equal to the amount of pay you owe me.

Assume further that every pay day you give me another object or form of property other than a paycheck. One week it is stock in your company, the next it is tickets to the World Series, then you give me car (some old beat up piece of crap car because you arent paying me that well lol,) then 100 telephone calling cards, and so forth.

OK, so I use the tickets, I hang the painting on my wall, I sell the stock and junk the car and telephone everyone I ever met in my life.

Do I owe taxes to the IRS, and if so, on what items and how are they to be valued.

Yes, taxes are owed on the fair market value of the items received as income.

Even though you do nothing with the painting but hang on your wall and look at it, and you have not put one cent in your pocket, you have realized a gain under US tax law.

Another member stated the law is different in Canada and tax would not be owed until the painting was actually sold. The IRS has a different standard and once you receive dominion and control over the painting, and have the ability to sell it, then you have realized a gain. Some exceptions exist such as when gain is realized on the sale of real property.

Take the telephone calling cards example. What was actually given to me in the form of payment? The cards in and of themselves have no intrinsic value. I cannot touch the hours of use I am entitled to have. Where do they exist?

They represent the holders right to access the phone network for X number of hours. Does that have a market value? Sure, just look at your monthly phone bill. Is the value diminished by the chance that the company issuing the phone cards could stop operation and my right to use becomes worthless? No.

Consider the Linden dollar. How does what it represents differ from the telephone calling card.

Where is the phone network located....is my obligation to pay income tax on the phone cards negated because I cannot see the network? No.

As far as whether any individual in SL has to report income derived from SL, the answer is that which lawyers use most: "it depends."

Each of us has to look at our individual income situations in SL and in RL. If you are unsure then ask your tax professional or the IRS...