Virtual Income, Land Barons, and the IRS

Katy,

I'm not arguing. I'm just concerned. I pay my taxes. At least I thought I was paying my taxes.

I am trying to grab onto the concepts here. Since the IRS apparently taxes "value", when do I become liable? Is it when I sell you an acre of land? Or is it only after I get the Canadians to transfer money to my bank account?

If the Lindens never get turned into US Dollars, then can I become rich inside SL without paying taxes? Can I live - legally - without ledgers or receipts, and without filing tax documents relating to real estate transactions? Is there such a thing as "real" estate in SL?

If I do convert it into Dollars, then do I simply chuck it in the pot with other "gifts" or money found on the pavement, and pay income tax on it?

I'm just not getting the basics here.

Sure, I only made a few hundred, and I assume that's below the IRS radar. But, I could very well make more some day. Is there a threshold?

Yes, I know some people are cleary across the threshold, but I admit to self-concern here. I frankly dont care about them. Here's MY question: What am I SUPPOSED to be doing?

Kathy, I explained all this earlier, Inworld is not Taxable as per the TOS that was mentioned.
However all transactions effected on a 3rd party site are taxable as they are based upon aggreements between you and those third party sites.
But in Essence the actual value of stuff in world is only a percieved value based on 3rd party site transactions. Nothing more nothing less.

Shadow.

Ahahah, APO good catch.



Yeah, riiiiiiiiiight. I should hotline that.

there are two reasons for this. the basics for sl type economies aren't well established. and the irs doesn't always follow what seems to be common sense.

there are tax laws and irs rulings about similar situations where value exists (as far as the irs is concerned) simply because people impute value to the thing (e.g divorce, probate, and barter). given that situation, it is quite probable that a similar situation exists in sl.

but most certainly, if you convert any of your sl holding into cash, it definitely becomes income. and the rule for the irs is "if you need to file taxes, list all of your income sources."

talk to a tax professional.

while i recommend listening to katykiwi on a first pass, asking for legal advice (and taxes are a legal matter) over the internet from people who have no legal oblifation to you isn't the best idea.

there are tax accountants and tax lawyers. the main difference between the two is that if you use a tax lawyer, lawyer-client confidentiality exists.

the simple thing is to claim it as hobby income and deduct your expenses. but please note the irs says, "A hobby is defined as an activity not engaged in for profit."

confused? talk to a lawyer.

some website that talk about hobby income:
http://www.irs.gov/individuals/page/0,,id%3D14477,00.html
http://www.wwwebtax.com/income/hobby_income.htm
http://www.kb.techknow-how.com/exports/partner_data/30/html/30-234881547.html

I heard the earlier explanation, and I thank you for it. I also heard several contradictory explanations from others. Or they SEEMED contradictory.

If it is as you say, then doesn't that make it hard to take deductions based on earned income? Does the 8 bucks I pay per month for a tier count as cost against the 300 bucks I got from Canada? Or do I just act like I "found" the 300?

I suppose the only logical thing would be to call HR Block and pay them to amend my tax return (which I've already payed for, filed, and gotten money back this year, by the way). Then I can pay tax on the 300. I'm not sure what rate, but what they hey. And I guess I'll just skip mentioning the tier costs.

Damn, this stuff agravates me.

Once I realize a gain from SL, I report it on my taxes because we are required to report all income from whatever source derived.

If you are making money in SL as a hobby, then you may not be able to deduct losses. The guidelines for reporting profits and losses from operating a business can be found on Schedule C and its instructions.

I report it because thats what I am supposed to do.

while the TOS may be usuable as an argument in a tax court for not paying taxes on virtual holdings, if the irs decides otherwise, you get to go to court. and you may end up owing taxes.

You cannot deduct "losses" from a hobby. But you can subtract "direct costs" from your gain. In other words, you can subtract the money you pay to Linden to play SL from the income you get by cashing L$ out of GOM.

I will go a step further, and say that if you use your computer and internet connection primarily to play SL, you can subtract the costs of those too.

What you can't do is subtract the direct costs of your hobby from the income generated by your hobby and come up with a negative number, and deduct that number. For tax purposes, either you made money on your hobby, or you didn't make money on your hobby. You can't deduct "losses" from a hobby.

"Direct costs" don't include rent, electricity, wages, etc. unless you can demonstrate that you actually paid these things and would not have paid them were it not for your hobby. In that case, your hobby is probably actually a business anyway.

As others have said, SEEK YOUR OWN TAX ADVICE. Don't believe any avatar.

Buster

Sorry Stone already talked to my Lawyers on this one. Being that SL is owned by Linden labs we pay them for a service. Thus as per their tos all holdings earnings ect. are for within the game environment thus nothing of real value.

The real value is conducted outside of SL via 3rd party websites. Thus, all transactions through a 3rd party website are viable transactions when conducted using Real World currency.

So, the only "Taxable" income is those gained or earned on 3rd party websites such as GOM or IGE.

Otherwise, if you make 5 million lindens and never cash them out to a 3rd party website you are not liable for thier worth period as they are considered ingame eminities.


To give a simpler example. If today I told you I have 9000 electronic widgets. And I told you that I got them from playing a game called Widget chase. Now, in the game of widget chase the creators do not advocate 3rd party website so any actions taken outside of the game is at the descretion of the players.

So now you want to get ahead and you offer me US$ to give you 3000 electronic widgets.
So I agree to it. Now Widget Chase the game had nothing to do with that deal and I made US$50.00 off of you. But I have to report that earning because I physically gained RL cash at the end of the transaction. But at no point did Widget Chase and its founders have anything to do with that deal. The value was based upon what they were worth to you to get ahead and the agreement we made outside of the game. Thus per law, cannot be taxed for an entertainment gain. Especially when Widget Chase developers are passing out the electronic widgets.

Clearer now??

Shadow

What Buster is saying here is also true, for example if a person makes 100 by cashing to GOM and they pay 300 per year for playing the game. The 100 is a wash.

100-300=-200

But you cant claim -200 losses as those were paid for a service.

Now, had that individual cashed out 500 to GOM

then

500-300=200 and you have a capital gain, thus, taxable.

This is why I had to pay taxes,

Shadow

add -- for most taxpayers --. Bona fide businesses would have to be careful about this. You could be deemed to be "sandbagging income" if you accumulate significant L$ and hold them over to future tax periods. Long shot, I admit.

i'm not going to argue the wisdom of your lawyers. it sounds like good wisdom in many regards.

i'm arguing the sometimes arbitrary nature of the irs and the tax courts. this issues has not be clearly defined as far as the irs goes. until it has been, all your lawyers are providing is an opinion of how the tax laws work, and it sounds like a good opinion. but i still wouldn't place any bets for the people with very large sl holdings. i might be willing to place a bet that small holders are ok.

the irs often doesn't follow what most people consider common sense.

I had this thought and was so entertained by it that I wanted to share it.

When a tax debt is owed and not paid the IRS will freeze assets such as bank accounts, and even seize property such as houses, boats, cars, Rolex....

Frozen assets are applied to the tax debt. Seized property is sold and the proceeds used to pay the tax debt owed.

I can see it now.

SL telehub land seized by the IRS and sold at auction to satisfy a more than 30K tax debt owed. Linden accounts frozen and the Linden dollars they contain sold.

What would be the last name LL would assign to the IRS agents in world? IRS? MenInBlack? Astalavista?

Seize and freeze baby.

This is probably why Anshe doesn't pull out her L$

It's kinda interesting, as it's an easy way to get the benefits of incorporation without actually having to incorporate.

- No liability (just a game)
- Leave your income in the incorporation (no taxes, hell no corporate tax!)

I wonder if you could sell your avatar at some point and just declare it as a capital gain.

Hmmm! (In canada we have a 500K capital gains exemption once per life per person)

Actually no Buster because its not the linden $ that has value.

See its the 3rd party agreement to trade it that adds value.

So if you play SL for 15 years and amass billions of lindens and never cash them out on a third party site you can never be held accountable for them on a tax audit.

however, if Linden Labs starts offering to sell Lindens for a set price...then that has just changed the whole venue.

I have run this scenerio through my Lawyer and through my accountant. Both in essence said the same things I have said.

Sandbagging only applys to commercial investments that have been transacted with RL cash.

The way you report Linden $ sales is called personal service agreement. As a personal service you agree to transfer x # of lindens from your account to another account on the same server. Thus, being paid for personal services nothing more nothing less.

Shadow

Just keep it simple folks thats why we have government jack asses for...to fuck it up with confusing double speak .

Shadow

Well, everything is debateable. It's quite possible the IRS will insist there is a market value to the L$ and therefore you have to pay taxes on it.

Plus, LL *does* endorse that market value whatever their so called TOS says.

I understand where your comming from Stone but I argued that point myself when speaking to both Attorney and Accountant.

The thing is in all legitimacy you cannot truly link the value of the US$ to the linden $ through Linden labs. Which would be inexplictly argued by any lawyer worth his weight in defense.

The Linking is done by 3rd party sites. Organizations disassociated from the creation and distribution of the Linden Currency.
Thus, by having that total disassociation Linden Lab has maintained the stance of entertainment value.
While the 3rd party sites are acting as brokers or Service agreement fulfillment centers.

The misconception that everyone has is the fact that we have assigned a dollar value to Lindens based on 3rd party site agreements.

When people understand that basic seperation then a clear understanding of taxation and tax laws can be applied. Otherwise we are all wasting our breaths.

Shadow

Wrong Blaze, they allow us to operate on free will and do not claim obligation to any transactions that take place. Thus they are seperated.

Again, based on this comment about the IRS claiming value then they would also have to impose regulations on trading and thus would have to recognize it as a currency
To recognize it as a currency it would not only have to go before the congress but Nato as well.

There are a lot more variables to this than you think hence why I said keep it simple or your heads will explode.

Shadow

Well, HR Block said not to worry about the $372 last year. They said that - for next year - I should track how much I pay for tier and other costs, though, since I think they intend to count them as costs against the money I get from the Canadians at GOM.

Their perspective was that it wasnt a hobby if I went about it as a business. And, if I spend American money to make American money, then I should declare both of those on my tax return.

I didn't try to explain to them that some of the American money I will gain originated with the Lindens giving me a weekly allowance

Pirate!

Duly reported sir! Now git yer as back to the mizzenmast! Taxes? How can they tax us at sea?

Mine comes from the fact that LL put a minimum American dollar price on land at auction. Whatever they feel about currency values, they have valued some of the land at a specific amount of American Greenbacks.

I have a nagging feeling that there is a significance to that act even beyond the implications of charging for private islands.

If LL marks one acre for auction at a minimum amount of Lindens, and then marks another acre at a minimum number of dollars, does this imply a recognized value comparison by LL between the dollar and the linden?

If those amounts are based on what LL sees as the market value of the Linden, then doesnt that imply their recognition of that as a measure of the value of these in-game items?

Understandable theology but can you turn around and sell your land back to LL for US$?

Nope can't do it. Argued that point too. The relevance of it all is when recieving money back from the said organization.
You can't trade Lindens into Linden Lab thus the Auctions are a completely seperate entity.
Yes percived value is there but primarly based on what people are willing to pay for that land.
However, in return you can't simply set a price on it and sell it back to LL can you?
If you could do that then there would be no seperation.
However since we cant even paying for land or land tier is considered part of paying for a service. Thus valuation of that service is of course determined by LL but a service none the less.

Shadow

there are a few places where ll has made statements about the value of l$ v. us$:
1) the desire to have l$:us$ exchange to be around 250:1
2) you can pay your tier fees with l$. fees which have us$ value.
3) ll has helped out gom in the past. this may count as support for the exchange.
4) ll specifically mentions gom and ige as places to get l$ for us$
5) the auctions are in l$ and us$

also, the problem of value may not be solely against l$, but also against land, code, texture, objects, and animations. that is to say copyrights. there have already been things from sl being licensed to first life, and possibly viceversa, if understand some of the trademark issues.

something still bothers me.

scenario 1:
personX dies and leaves personY all their SL holdings. personY sells these holdings for us$50k. irs taxes personY.

scenario 2:
personA dies and leaves personB all their SL holdings (equal in value to personY's former holdings). does personB get taxed?

the irs has gone from scenario 1 to taxing scenario 2 more than once (but not consistently).
and the irs sometimes uses this kind of "logic" to impute value in other contexts.

Thats where your still missing the point, the land money etc. doesnt have value till its traded.

Thus, if Person X never sought value in their SL holdings then of course when person Y cashes out Person Y is going to get taxed as the funds will be going in their account.

Along the same token if person Y never cashes out then Person Y is never taxed. Basically they are taxed by their action. Action being the method of trading funds out to a 3rd party site.

Shadow