If you don't cash out any of your L$, does it still count as real money?

http://www.irs.gov/pub/irs-pdf/p535.pdf

Not-for-Profit Activities
In determining whether you are carrying on an activity for profit, several factors are taken into account. no one factor alone is decisive. Among the factors to consdier are whether:

1. You carry on the activity in a businesslike manner,
   
2. The time and effort you put into the activity indicate you intend to make it profitable,
   
3. You depend on the income for your livelihood,
   
4. Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business),
   
5. You change your methods of operation in an attempt to improve profitability,
   
6. You, or your advisors, have the knowledge needed to carry on the activity as a sucessful business,
   
7. You were successful in making a profit in similar activities in the past,
   
8. The activity makes a profit in some years, and
   
9. You can expect to make a future profit from the appreciation of the assets used in the activity.
   

Prak, I think this is referring to real money. Not virtual money. Blaze was asking if he should declare his game/virtual money.

Hey, just had a thought. I wonder if they could tax my Space Invader score I had in the 70's. It was huge!

Oh wow, think they plan to tax on pinball scores too? where do you put that in a W2?

The taxman can kiss my fucking ass.

I made my million L$ before GOM even existed or it was possible to convert L$ to USD$.

I still have a lot of it left, cuz, well, it's just play money to me really.

And I don't give a stuff what anyone including the law says/thinks/does... the taxman can still kiss my fucking ass.

Some days I wish I was a taxman. * licks lips *

*huggles* I haven't seen you for ages! But when I do, you can kiss my ass too!

But I agree with what you said before - just because someone decides the L$ or your undoubtedly professional ass scratching ability or my dog's turds have a value doesn't make it so, no more than the opposing argument that just because the Lindens say it doesn't have a value that you can't assign one.

Which is why if the taxman did come calling I'd tell him to go fuck himself. Although with the amount of my salary he takes from me already, he's quite welcome to go fuck himself right now.

Interesting question and debate. I'm understanding the concept of "local currency" in relation to this but I still think it is unnecessary to declare your L$ to the IRS if you never cash out. I'm thinking of all the other games with active currency exchanges and the thousands of people who never even think of exchanging currency or know that such an option exists. Are they supposed to pay taxes on their WoW gold, EQ plat, SWG credits, etc.? Is the IRS going to go after some 12-year old kid who amassed billions of EQ platinum just from playing the game for so long? Sounds ridiculous doesn't it?

Perhaps SL should be considered differently than the rest, since there is more of an element of services and production involved here, and its more closely related to a real-world economic dynamic. But it still seems strange to me, if you consider an SL user who has no intention of ever cashing out or even care about $L -> $US exchange. Its like taxing their entertainment.

As for the "local currency" argument - to me that would imply that SL is recognized by the government as some kind of real-world locality or community. Even if a lot of forward-thinking or open-minded people like to think it is (myself included) - that is still a big leap to take for most people. Most people still have a hard time just believing that anyone would want to spend so much $US on pixels and imaginary items.

Yes, I think a large determing factor would be if you have converted L$ to USD, because then you recognize it has value.

If you never have, you probably could avoid paying taxes, though I'd check with your accountant.

Global taxing in SL is impossible - and there's good reasons for this...

Anyone in the world can 'play' in a 'game' (not getting into that debate again) like SL, but 'the taxman' is local only to a single country. Someone in the US earning money and being taxed on the earnings would be having to pay tax whilst someone else in Europe or Asia or wherever would not. Any worldwide agreement to tax on currencies held in a virtual world is going to be nigh-on impossible - or it at the very least going to take many, many years for them to agree upon. World peace would be easier

Therefore the only way for the US taxman to collect money from the entire population would be to force LL to collect it (as LL fall under the US jurisdiction), but this is in itself unworkable. I should think quite a few governments are going to feel their noses have been put out of joint by the IRS collecting taxes from non-US residents that they're not entitled to (or at least, that the other governments think they're more entitled to).

This leaves the only option available - that the IRS may decide to collect taxes from those who reside RL in the US, but that's as far as it goes. The rest of us may avoid it until our respective governments pick up on this.

HOWEVER, the chances of those governments bringing in provisions for taxing virtual currency is pretty damn small - the very cost of implementing/rewording the laws and administering the collection of these taxes would probably outweigh the profits to be gained from it by many times. It would simply not be worth their while (at least at this stage). And let's face it - who can honestly say that they think the government of their country is future-thinking enough to make provisions for this kind of thing until the issue is much, much larger?!

I think if you don't convert L$ to USD or pay for any services outside LL that normally cost USD with L$ you're probably safe.

Otherwise, you probably should declare.

What about if you convert L$ to USD to GBP and put it in your bank account and then pay LL with it, whereupon it gets converted back to USD, but shows up on my statement in GBP?

and then,

What about if you convert L$ to USD to GBP and put it in your bank account and then pay someone other than LL but in the US with it, whereupon it gets converted back to USD, but shows up on my statement in GBP?

and then,

What about if you convert L$ to USD to GBP and put it in your bank account and then pay someone other than LL but not in the US with it, so it doesn't gets converted back to USD, so shows up on my statement in GBP?

Remembering I'm in the UK of course.

Sorry. Just trying to establish when exactly I need to tell the tax man to kiss my ass?

Actually - having walked away from the PC and thought about this again I think we may be looking at this in entirely the wrong light...

LL have maintained that when you pay your monthly fees you are in fact renting/ purchasing data space on a server (Private Islands being a prime example of this) - the same thing applies when buying L$. When you create content LL are giving you this space in return for your efforts in creating the data that fills it. When you 'sell' content you are in fact exchanging control of the space it occupies with control of space that others have (in our case L$ - but just because we perceive this data as currency doesn't make it so - we could just as easily be exchanging primcubes). When you relinquish control of this space to LL (ie. 'sell' your L$) you are refunded in USD for control of the data space.

This is certainly one way to look at this - but there's no way of knowing for sure until we get comment from a Linden - they must have done this kind of research before starting SL as a business - surely? If not - maybe one of the big-hitters would like to comment... what, for an obvious example, does Anshe do tax-wise for the money she makes from virtual real-estate?

Pretty sure if you're converting to USD you need to declare, even if you're just paying your tier with it.

However, if you're breaking even, then there are no taxes to pay - right?

But if you converted 50% of your L$ to USD, I don't believe the other 50% are sheltered from taxes.

However, unless you're on the leaderboard for your L$, I really doubt it's an issue.

This isn't new territory - a lot of everquest/ultima gold farmers have been legitimately tax-reporting their income from virtual currency sales for years.

INAA ("I'm not an accountant", but I believe the established rationale works something like this:

The in-game currency itself is WORTHLESS play money. All participants have agreed as much in their terms of service. Therefore, nothing that happens within the confines of the game world (much of which is actually highly metaphorical and fanciful - a fact which is easy to forget when you're actually immersed in one of these virtual worlds) is taxable.

However, the physical action of transferring game tokens from one player to another in exchange for payment *is* a recognized chargeable service, even though the acknowledged value of the game tokens themselves is zero. You're actually paying a fee for the transfer of ownership, and NOT for the tokens themselves. Essentially, the $1 I charge you for each 250 linden dollars moved is a service fee. It's a payment you make to me in return for me going into the lindex site and pushing a bunch of buttons that moves 250 worthless tokens from my game account to yours. You're paying me to push the buttons, and not for the tokens themselves.

As such, the only taxable transaction is the one where you get paid real US$ for moving these worthless linden tokens around.... and your US$ transaction is the only action you have to declare. The in-game actions that won you the linden tokens in the first place are irrelevant. Or, looking at it from the common sense point of view: the tax man really doesn't care what happens in our pretend virtual world - they just (unsurprisingly) want their slice of the pie when any of the make-believe turns into real-world wealth.

Now I just have to think of a fancier way to declare "I pressed a bunch of buttons on a web page, and some guy paid me for it" as a description of the service I'm providing

So you're saying I can shelter my income, then?

That's cool because canada is going to be dropping their tax rate I think next year, so I'd rather pay taxes then.

And I'm saying this paragraph is incorrect. If I create something you want (goods, services, whatever) and you exchange something that also has value (USD, your services, IOUs, whatever), that is a taxable transaction, regardless of whether I exchange the widget you've given me for USD.

So, here are a few sample transactions:

1) I mow your lawn every week for a year, and in exchange you give me two dozen cookies each time.

2) Instead of mowing your lawn I create a photoshopped image for you. You still give me cookies.

3) I mow your lawn, and you give me a certificate I can use to get a photoshopped image from Joe.

These are all taxable transactions, by IRS rules.

And now, let's make the big intellectual leap:

4) I create a photoshopped image for you, and you give me a certificate I can use to get a photoshopped image from Joe.

Does (4) seem fundamentally different from the rest?

And, Kris, of course you can tell the tax man to kiss your ass. And, in exchange, he can take your house and garnish your wages.

Nicely put Shep. and whats funny is that if indeed we did convert our L$ into pie. Then the taxman really would want a slice of that pie. He would then exchange that pie for real money later. I know, it sounds bizzarre, but this is the way it works. Although I dare say that they would pass a law that would force us to convert the pie ourselves into real money.

The taxman just wants us to help pay to educate our children, and to fix them when they fall out of the tree. Or to defend them when an invading country decides they want some of our pie. Oh god, I'm rambling again...

Kris! the taxman loves you. He is your friend. Now bendover!

Tax law is the one area in US law where people are guilty before proven innocent.

If the IRS determines you are trying to 'hide' value, they will have it appraised and taxed accordingly. The appraiser would likely multiply your $L balance by the exchange rate, and call it a day.


Tax auditors are not interested in byzantine arguments about $L, and won't waste a second on it.

They are interested in collecting tax on your income, and will leave you to justify to the courts why you shouldn't have paid taxes.

After they bill you and take your check.


- Desmond Shang

Of course, there is the whole don't ask don't tell practical side of this which I think is fairly safe for the moment.

But theoretically speaking, yah you should pay.

I have to ask... why do you people even CARE?
Seriously. The IRS will not go bankrupt if you don't keep precise accounting stats on how much play money you're earning online.

Well, in my community they publish tax cheats in the newspaper.

Why wait? let me know if they use tongue, that may affect how adamantly I demand the taxman kiss my ass too.

lol. well, I wasn't gonna do it pre-emptively.

Me: Hey! Kiss my ass!

Taxman: What?!

Me: I said kiss my ass! You're not getting any cut of my Linden Dollars!

Taxman: Huh? What's a Linden Dollar?

Me: <explains at length>

Taxman: Ooooh. I see. Never even knew it existed. We'll be having a slice of that then! Thanks!

Me: Exactly! Now kiss my fucking ass!

Yes, I agree. I would think if any real accountant showed up they would concur.

The difference in 1/2/3 and 4 is that they have a quantifyable value. #4 is essentially worthless except to the 2 parties involved. Which is the same as $L's which are even stated to be worthless in the EULA.

Plus, FYI the taxman cannot take your house provided you live there and pay your property taxes. I know this as a former real life business partner of mine has owed $150,000 for 5 years now and has continued to live in his house and ironically do pretty well in business. How? By not paying himself a DIRECT INCOME which is generally (except in the case of MALICIOUS INTENT) the only thing the tax man can touch.