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

Unfortunately it goes on:



Which sort of suggests the magic happens when it is being converted to something else.

Furthermore, Publication 529 is intended to explain how to document deductions not assets. All of the paperwork is not required if you do not intend to deduct your losses.

If it is TRUE that casinos ONLY report cashing out and the IRS is fine with this, then I think that we can rest on that meaning that "in game meaning nothing until cashed out". If it is true when the game is Black Jack at the Mirage (which is probably millions of dollars or more a day so the IRS is definitely up on this!) then it is definitely true in an economy worth far far les.

I win!

U.S. case law shows that *unredeemed* slot card points can still be treated as a deduction by the issuing casino.

"In an order filed on September 26, 1996, the district court rejected the Commissioner's argument that the expense of slot club points is not incurred until the points are redeemed for a prize. Rather, the court held that Gold Coast had properly deducted as an expense the value of those slot club points that had been accumulated by members with more than 1,200 points in their slot club account. However, the district court disallowed Gold Coast's deduction of the value of slot club points attributable to members who had not yet earned 1,200 points."

In plain english, that means that by issuing "points", the casino can claim a business expense even if those points are never redeemed. This also suggests that those points are taxable (for every expense, *somebody* has to have a corresponding income) to the holder.

This whole statement is refering to actual money wagered and won.

I don't think this deals with the "chips held prior to cashing out" issue. If you feel it does, please highlight the specific line.

NOTE: All the games you listed allow cash bets in the Casinos I've been in.

Actually, although this is close, this is no cigar because the "every expense results in an income" argument isn't true whatsoever.

This is slippage/spoilage. This is an expense that doesn't correspond to income. (For other examples, think of a supermarket that has to throw out meat that has been around for a few days.)

The reason it is considered "spoilage" is because there may not be a user involved at all. The card could be lost or stolen or damaged prior to the user even knowing that he/she has even won.

Another reason it isn't necessary an income for the holding party is because the points given to individual users may not ever have a redeemable monetary amount. For example, the points can only be used for 1/2 price on drinks. You might say, "well that is worth half the price of the drink." Not true. Get the Sunday paper and check every single coupon in there, some of which give you even more than 1/2 of items. They all have either no value or 0.01 cents in value.


Thusly, it does make sense to give the casino the expense because they are incurring one whether it is used or not, but it does not indicate that the end-user has incurred a taxable event.

As further proof, I just asked a co-worker who goes to Vegas a LOT and he has never received a receipt in the mail for his "club card" of any type despite the fact that he has traded his points for 6 comp'ed rooms this year! At full retail that would be $600 to $1,200. However, when he actually wins big (he admits that he is still probably down overall) he is immediately given the tax information directly from the casino.

The case mentions that both sides in the dispute (Gold Coast Casino and IRS) stipulated a cash value of $0.0021 to each slot club point. In the ruling they were not allowed to take a deduction for any cards holding a balance below the minimum that could be redeemed (1,200 points). It would take almost half a million points to reach an equivalent of $1,000, which is the level at which most people acknowledge the IRS would become "interested".

I'd be interested to know how many points your co-worker has redeemed to get his comp'ed rooms. Did he *ask* for a receipt? I honestly wonder if the casino would issue one...

Hm, good point. He didn't ask. He said, he wasn't going to next time either

Ok, lets assume this is a true comparison to $L's in game. If so the following must be true:

- SecondLife corporate must count the $L's it issues to players via stipends as an EXPENSE. In the case of free accounts and prepaid accounts that means that SecondLife is REPORTING A LOSS on each of those sales! I find it hard to believe that they wouldn't get severely audited if that were the case. And given that there is unregulated gambling inside SecondLife I don't see that audit being a pretty one!

I'm assuming that SecondLife corporate is making no such deduction. IF THEY ARE, then I concede that everyone in game with sufficient $L's must report them in the year they generated them. But, I do not think this to be the case.

Heh heh ooooh score!

You can believe what you like, but the TOS states its worthless. It's like declaring Magic the Gathering cards on your income tax because some bozo will pay 200 bucks for one on ebay.

Ah, but 'printing' $L is not an expense at all!

Second Life allows *us* to exchange $L with *each other* but barely touches $L for themselves.

If I remember correctly, where they used to accept $L was:

1) virtual land auctions

2) paying tier

3) paying for avatar account fees

Is any of that possible any more? I just looked in my account settings and I can't find anything of the sort.


So... where would they take the charge? Nowhere. We however absorb what they do in the varying value of the $L.

They are precisely in the position of a corporate government.

I think this is needless complicated.

(1) If you have questions about whether something is taxable, ask a financial advisor or tax attorney. Period. They have the training (and the personal liability insurance) to give you an answer you can rely on.

(2) If for some reason you can't stand the idea of talking to an expert, and you're in the US, here's a rule of thumb: if you're making $US on SL transactions, that's income. The theory of L$ is irrelevant. You record your expenditures (your SL accout & tier fees, and L$ you buy outright) and receipts (US$ you extract via LL, paypal, whatever). Receipts - expenses = income. Report it as "miscellaneous business income" on Schedule C, and keep your records. Whether it's a short term capital gain, a gambling win, or whatever, it all gets taxed at the same rate: normal income. As long as you report it, the IRS is more concerned that you pay the tax on it than on which "non-wage income" box it appears in on your 1040. If you make serious amounts of US$, you'll probably need to file Schedule SE and pay self-employment tax as well, but in that case you really do want to have a tax attorney.

Note: I am not a lawyer, and neither are most of the people who've weighed in during this thread. The cardinal rule when you have a tax question is ASK A PROFESSIONAL.

Not all professionals are credible.

Sometimes it's good to have some background before talking to one.

True. However, they're generally more so than random forum pundits.

I would not include L as income and would think dumb to do so otherwise. From the little I know about property/ownership rights, you don't own the accounts, objects, and L and therefore shouldn't be taxed on what you don't own. You can use them and do what you like with them and are given power through LL to use the accounts, but ultimate owernship and control is in the power of LL(should say this somewhere in the user agreement that LL owns the accounts and not the users). The only thing you own in game are the intellectual rights which is the only thing LL says you own.

Here's an example to prove what I said.
If you have a avater with $100,000L and 100 objects and LL decides to terminate your account, does LL now owe you $100 000L and 100objects or an equivalent value? Of course not because you were never the owner, LL was. If you actually owned those objects then yes, LL would have to owe you those things or equivalent value upon termination of your account or you could sue them to get back what you own. But since that isn't the case, no tax because technically its not yours, and how can you be taxed on something that isn't yours.

So declare it as income only when you have ownership, which is when you transfer it into real currency. ie. USD. Or possibly if you give L and someone gives you an object instead of cash, then use the value of what you paid in L or fair value of the object(if it can be reasonably estimated) as income. But the main point is ownership = tax.

(Disclaimer: Im in no way a professional and should not be taken as one. Only used common sense to come to my conclusion and take what I say at your own risk)

Actually, that is an interesting point.

The fact that there is no way to safeguard your L$ does preclude it from really having value until it's actually converted into cash in your account.

If LL was FDC insured or if you had casino chips in your hot little hand, I could see how that might be different.

Exactly. It's a bit (not entirely, but a bit) like owning a stock or otherwise investing money in something: you are 100% exposed until you realize the income, at which point it's, well, income. Generally speaking, for this kind of thing, US taxes are assessed when the income is realized. Other countries may differ.

For example, in the US if you buy some stock, the value goes up, but then the company goes bust before you sell, you do not have to pay taxes on the value when it was high because you never realized the gain.

The simple "I put US$X amount in as an expense on day 1, and received US$X out on day 4, the difference being regular income realized on day 4" approach, while boring, is very easy to explain if you get audited, and is a direct parallel to other kinds of real/virtual/real conversions (like stocks or business income). When it comes to the US IRS, easy to explain is good, in my experience .

yeah that brings up another another interesting point, is lets say I had 5M L$.

There is absolutely no way I could sell that money at current market prices.

I dump that $5M, I'm going to depress the market, and how much? 10 cents? 1$?

Maybe I'll cause a crash and therefore I can only convert the first 1M and the rest 4M are worthless.

So what do I declare? It's an interesting question.

so why don't you give me all your L$ and declare it as a loss on your taxes. Let me know how long the IRS laughs at you plz

You declare what you were actually able to convert--that's what keeps the approach I described so simple. There's no "theoretical value" to that L$5M--there's only the US$ you put in, and the US$ you got out. The difference between the two is your actual income (or loss) from your SL activities.

Again, though, I'm not a tax advisor, so when in doubt, find one . But stocks and derivatives are much more complex than L$, and follow these same rules. There are cases where the IRS does assess tax on the fair market value of unrealized gains, but they are generally tangible things for which there is an open market. GOM and Lindex notwithstanding, there's no real open market for L$ in the same sense there is for gold or diamonds. Similarly, since unlike casino chips, Linden Labs doesn't promise to buy back L$, or assign a cash value (i.e., the L$ is play money), I'm not so sure that the casino analogy applies.