What will this do to our casinos?

I don't think they care much about the money you spend in SL. After all, they can't get tax money out of it.

But money you cash out? That they care about a lot. That they get to tax you on.

It's all about revenue. And when the gubment starts feeling left out, look out.

All your citation shows is that the speaker intends clarification, not taxation. His other statements clearly show that taxation of virtual economies is not terribly likely, because there's no foundation in the law to support it. In fact, virtual money is not currency, it's a number in a field in a record in a database somewhere, as has been repeatedly and irrefutably proven in discussions in the SL forums and elsewhere.

Citing the word of a single unqualified statement contrary to an overwhelming preponderous of direct evidence is not "proof", Ricky. It's simply an attempt to rationalize an untennable position.

The problem is, you're treating virtual transactions as somehow "special". They are, quite simply, not.

The only clarification needed is a statement like, "L$ are tokens representative of value and are used to intermediate transactions that, if performed directly, would be taxable. Therefore L$ denominated transactions are taxable". No new laws need to be passed. Simply a clarification that using an intermediary token as a chit in a barter transaction does not change the fundamental nature of the taxable transaction.

You may think there is overwhelming evidence, but all I see is a glut of uninformed opinions trying to contradict what qualified individuals are saying.

Which I'm sure LL would happily supply in lieu of a subpoena for said information. LOL

But the DoJ statement has an underpinning that goes beyond gambling. If I trade you a sheep for a cardboard box, according to the IRS it is a taxable event and I'm obliged to report the fair market value of the barter. Similarly, if I trade L$ for US$, a taxable event has occurred.

To date, LL, SL, and those who play it have been small enough to escape notice of the IRS. Should the DoJ make a foray into SL gambling, the IRS will likely follow for all transactions. This happened on the web already where the first web merchants didn't charge sales taxes as if they were exempt. Only when these transactions became big enough did the taxing bodies enforce the existing laws which were more than sufficient for the task.

When the IRS believes you owe them money, they are (almost always) right by definition.

A good deal of real money also exists only as numbers in a field in a database. Banks go to the Federal Reserve (in the U.S.) to convert database numbers into bills and vice versa. When you pay for something with a credit card, the credit card company doesn't mail bills to the merchant; the banks and credit card companies just agree on changes to their respective databases.

Not that it matters very much. Transactions don't have to involve currency to be considered taxable events.

As for what's been proven, legal issues are never proven, irrefutably or otherwise, in an online discussion forum.

*merges*

I concur. As highly unlikely as it might at first seem.

For true distortion and bias one must look to ... oh let's say FOX "News", any British tabloid or the National Enquirer. They are about even for accuracy, veracity and even-handedness.

Chellonia Regent*

*who's RL avatar is an atheist.

Having done taxes this week, I asked the tax accountant about SL earnings.

His reply was that online transactions are still a gray area and unless the check from Linden Lab shows your withdraw was reported to the government on the check stub, then there is no way the government knows you acquired it.

Since virtual land really doesn't exist, my tier can almost be considered a savings of sorts. If you don't take out more then you put in, it's kinda like a piggy bank on your dresser.

Linden Lab can have a TOS a mile long saying they aren't responsible for this or that, but if the tax man cometh he will be knocking on Linden Lab's doors not the residents, as far as reporting etc.

Your initial premise is false - a good deal of money is kept track of in databases as numbers, but in the end, when one of these transactions takes place, real money is taken from one person or company and given to another. A number indicating dollars is a tally of dollars in the real world. This is not true of a Linden. A Linden has no real world equivalent. It's just a number. You can't put a Linden in your pocket.

Your second statement is true - transactions don't have to involve currency to be considered taxable events. However, in order to be taxable events, it must be possible to assign a value in a recognized currency to the goods or services being exchanged. In the United States, this is still done in dollars, not game points, the last time I checked. That's why you're taxed when you cash your game points out and take a check from PayPal. That's when it becomes income, and that's your taxable event.

Is anybody really writing numbers in Lindens on their tax returns? If you're looking for an audit, I guarantee that's a fast way of getting one.

Your third statement is also true - however, a pragmatist sees the point where the rubber meets the road and deals with the issues at hand in practical ways. Trying to treat Lindens as real world currency clearly doesn't fall into this category.

I'm not ruling out the possibility that the United States government may wish to become involved in gambling simulations in virtual environments where it's impossible to tell whether the game points being gambled were purchased with dollars, yen, rubles, pesos, krone or francs. But remember that a Linden is just a number. Once that Linden is traded with another player, any connection to the original currency that purchased it is lost. It becomes an anonymous number, which is all it really is anyway. And also remember that there are a great many people with tens of thousands of Lindens who don't even have paid accounts. What currency backs those Lindens? Why, none, of course. What happens to game points when people just leave the game without cashing out? Does Linden Labs take them back? If they're currency, isn't that stealing? But if they're not, Linden Labs can safely return them back to the pool of Lindens used to maintain the economic simulation, or just hit the delete key.

Every thread on the threat of federal law impacting day to day transactions in Lindens directly is founded on the same misconception, that Lindens are money and not game points, arbitrarily created, tabulated and destroyed by Linden Labs.

A little common sense goes a long way.

Ginsu said:


"Linden Dollars are not money, they are neither funds nor credit for funds. Linden Dollars represent a limited license right to use a feature of the simulated environment. Linden Lab does not offer any right of redemption for any sum of money, or any other guarantee of monetary value, for Linden Dollars. (I recently addressed this in detail here.)

Linden Lab does not operate a designated payment system under the Act. The movement of Linden Dollars, like that of any virtual world asset, is a use of license rights in intellectual property."

Dream on sweetie. Sounds like an advocate trying to believe it's so, but it's hardly a responsible tax opinion, and the posting of it without proper disclaimers may violate Circular 230. However, in that it was given under pseudonym, you probably don't have to worry about being reported. By that same token, I cannot verify that you are an attorney.

Might want to think about it.

Oh, and here's another one for the dream on collumn:

"Linden Lab can have a TOS a mile long saying they aren't responsible for this or that, but if the tax man cometh he will be knocking on Linden Lab's doors not the residents, as far as reporting etc."

If the IRS comes a knocking, it may be on your door as well. You are under an obligation to report your income. LL is not under an obligation to report it for you.

I'm sure Linden Labs researched the tax laws pretty thoroughly before embarking on this venture - with nearly three million accounts now, they'd surely have hit the wall by now if they hadn't. Keep in mind that Second Life's been running for years now, and if license rights were currency, the whole house of cards would have collapsed years ago.

But you're completely right on the taxation point, Nigel, LL isn't responsible for reporting your income, you are, and when you cash out, it's those dollar bills the IRS will want a share of, and to ignore that would be at our own peril. Sooner or later, you have to convert those game tokens into money, and when you do, they'll want some of it.

This is a fairly naive statement. Businesses do things without performing due dilligence all the time. Just because a business hasn't been charged/shut down, doesn't mean they're not doing anything wrong and are in compiance with regulations.

And, for the record, the number "three million accounts" is next to meaningless. The vast majority of those accounts are either (a) throwaway accounts registered by existing users, (b) tried a few times and abandoned, or (c) have never logged in even once.

I won't get too deep into what my personal tax advisor said last year, but there was one key twist I think a lot of people in the United States don't realise right away.

Medicare/Social Security.


If what you are doing is joblike, you can't just randomly report and skip away without paying these.

The biggest 'red flag', I was told, was a fairly decent income but too little payments to medicare / social security and so forth.

If you don't make much off Second Life it's probably not a big deal, and your job will more than pay enough so as to probably not trip any flags.

But take as an example a college kid that does pretty well in Second Life - tens of thousands of USD per year, but has no job. Some pretty serious questions are going to be raised when the income is reported.

Arguably, if it was *investment* income and not joblike at all, then yes, you are off the hook for medicare / social security, but now you have to declare your income as investment income. A whole different can of worms there.

Oo. Good one, Desmond. I hadn't thought of that one either. I'll bet a lot of people haven't. Fortunately not many people make more than a few USD a month from SL, but for those that do...

It would only take one lawsuit, really - just one where the protections afforded a service provider on the Internat were somehow declared invalid in Linden Labs' case, or one where somebody had managed to prove monetary loss due to loss of service after getting over the impossible hurdle of proving that Lindens were currency.

It's a no brainer, really.

You're probably right about the three million accounts number, though. Further, LL uses a "number of users logged in in the past 60 days" number to measure their traffic, where the entire rest of the MMO industry uses a 30 day period for that, so the number is meaningless there too. Still, the numbers are surging - I saw that we had over 26,000 people connected simultaneously a day or so ago - and the members we have now aren't all the ones we had three years ago, old ones left, new ones arrived.

With those kinds of numbers, you'd think by now somebody would have launched a successful law suit against LL if their terms of service didn't hold water. Only one person has ever tried it, and his case is going nowhere fast.

So no, I don't think it's an unreasonable conclusion to draw from known facts at all.

The thing I find most troubling is that an attorney, acting under a pseudonym, posted what is clearly a tax opinion without the proper disclaimers and while clearly stating that he represents Linden Labs. Of course LL has to say a Linden is not currency! It's not in its best interest to say that it is due to all types of tax implications (sales tax, use tax, income tax, and it's reporting obligations related to all three). Imagine the increase in staff they will need if they are wrong!

Ginsu's post strikes me as questionable ethically. That's what I find troubling, and I surely wouldn't rely upon it for tax purposes. Please, if you have income from SL, get your own tax opinion from a duly licensed tax professional.

A) "As this Act was only recently adopted into law, I do not think its complete interpretation can be known. Nevertheless, I can give some early thoughts from the perspective of Linden Lab. As always, you should note that I am Linden Lab's lawyer and I cannot provide legal advice to you or to any customer of Linden Lab."

B) Circular 230 governs attorneys and other professionals specifically practicing before the IRS, not corporate "General Counsel".

He provided all the dislcaimer necessary.

"and I surely wouldn't rely upon it for tax purposes."
I think he made it abundantly clear that it was not intended as legal advice upon which to base tax decisions. He was simply stating Linden Lab's current position on an issue of great import.

It amazes me that so many people in so many different discussions think the executive team at Linden Lab are a bunch of nutcases. Go to lindenlab.com and read some of the biographies there.. these people aren't idiots.

Wrong. Here's how the courts are going to see the issue:

If in real-life I head down to the Bellagio in Vegas, I can buy $500 in Bellagio chips, a kind of token. These chips are good nowhere but inside the Bellagio. So one could say they're not a real world currency. But when I'm done betting, I go to the cashier, and I get real world money.

Lindens, you will contend, are nothing but a token with no real-world value. Although they have no dollar value printed on them, Lindens can be expressed in a real world US dollar value by looking at the Lindex. At this time it's roughly L266 to a US dollar. It's all documented.

I can buy Lindens with money, then I can go to the virtual casino. If I have a lucky night, maybe I double my money. I now have a bunch of Lindens, which you say are just a number.

However I can have those Lindens cashed out (by selling them to another member) for real, hard currency in my PayPal account. I can then go out with my PayPal MasterCard and buy a loaf of bread, a containah of milk, and a stick of buttah. It's one step away from real money.

eBay is aware of what's coming. You can no longer sell virtual items on eBay. All those people selling WoW items, gold, and accounts have been shut down.

What I'm saying here is that if you operate any kind of business on SL that rakes in a ton of money, get ready to pay taxes on it. This is an issue that will be decided by the courts over the next few years. If you operate a large casino, prepare for criminal prosecution.

Anyone who thinks they might be affected should stop listening to half-baked advice on these boards (including mine) and go talk to a real, flesh-and-blood lawyer. Preferably a tax lawyer. It will cost you a couple hundred bucks, (a few thousand Lindens, heh) for a lawyer's time. What might it cost you if you hide under the blankets and hope nothing bad will happen?

Nothing. The new law enacted in October 2006 making it illegal for banks and credit card companies to perform transactions to enable the use of online gambling sites does not apply to Second Life for six important reasons:

First, Second Life is not a gambling site. It's a game, a civic simulation, call it what you will, but the explicit purpose of Second Life is not gambling. You can create all manner of games of chance using it as a platform, but Second Life is not a gambling site as defined by this new law.

Second, the new law simply restates what the existing anti-gambling law stated, that it's illegal to host gambling sites in the United States, just as it's been for years, wherever any given state has declared it to be illegal (not all do, and those that do often don't do it consistently throughout their state). So that part of it hasn't changed - and since that's the case, if you think gambling in Second Life is suddenly illegal as of October, think again. Only the facilitation of online gambling by banks and credit card companies has been made illegal, and that only applies to sites where the sole purpose of the transaction is online gambling - horse racing, poker, that sort of thing. It certainly isn't subscriptions to multiplayer online games. It's all there in black and white.

Thirdly, the law does not apply to gambling all over the United States uniformly. It only applies in those states which have specifically made gambling illegal themselves. And within each state, there are designated areas in which gambling may or may not be legal! This creates an unnegotiable crazy quilt of possible application of the law, where it may be illegal to pay for gambling on one web site, but perfectly legal to pay for gambling on another one, even though the hosting companies may be a mile or two apart! On this basis alone, the new law could be virtually unenforcable, even if it actually did apply to Second Life as being a service set up for the sole purposes of gambling, which as we've already established, it doesn't.

Fourth, there are ways of getting Lindens even if you do not have a paid account. Those people who have unpaid accounts dating from before about June of last year are still getting $50 Lindens a week in stipend. You can camp and get Lindens. And since Lindens are just game points in those cases, paid for by no one (unless you count Linden Labs, who created them from nothing), no crime is being committed when you fritter away your Lindens at the virtual casinos, because the player hasn't paid any actual currency for those Lindens. One cannot determine which Lindens used for gambling were purchased with money, and which were simply given to the player as an enticement to spend time online.

Fifth, in Second Life those Lindens purchased with your credit card can be used for any services within the game you wish to pay for, including playing at a virtual casino. ANY services. The new law does not change anything about the status of the illegality of gambling, only the manner in which the consumer pays for it. So how is it that the government is supposed to prove that the Lindens you bought were all meant for use in gambling? How is the bank performing the transaction expected to determine this? That decision is often made long after the Lindens are purchased, on the spur of the moment. And because the law does NOT apply to the casino operators, NOR the players, but only to the financial institutions performing the transaction, no participant in Second Life has any liability under this new law WHATSOEVER. The only entity possibly endangered by this is the credit card companies, and the last time I checked, my VISA card still worked for paying my monthly fees and buying Lindens with.

Somehow, I don't think they're worried about it, and they're the only ones under any possible threat from the new law. And obviously, Linden Labs isn't worried about it, because the new legislation has absolutely nothing to do with them.

Sixth, yes, eBay is in the process of removing Second Life items from eBay, so you've got at least two things right (see below for the other one), but the reason has to do with eBay not wanted to assume liability for even implying that virtual goods or currency has any actual intrinsic value - they're protecting themselves from litigation from people who might try to claim they were fooled by eBay into thinking that because it was being sold on eBay, that it actually did have intrinisic value.

Think about that.

The eBay action has nothing to do with gambling, or having to pay income taxes when you get cash paid out to you from Linden Labs in exchange for your accumulated game points, so apart from supporting what I've been saying all along about Lindens and virtual goods having no intrinsic value, we can completely discard this reference to eBay as having nothing to do with the discussion.

You can engage in all the misdirection and handwaving you want, but you can't rewrite reality to suit your "sky is falling" hysteria. All you're accomplishing is creating a sensation out of nothing.

Any reader who does not believe that the new gambling law does not apply to them need only google it and read the damn thing for themselves.

As an addendum, you state very clearly: If you run a business and you rake in a ton of money, be prepared to pay taxes on it.

Anybody who ignores THAT advice should be braced for an audit from the IRS and most probably some very severe and unpleasant penalties. When you cash out your Lindens and get real money paid out from Linden Labs, that's income and there's absolutely no way around that definition.

I'm afraid this isn't true, or perhaps more precisely, it isn't meaningful.

What is it about "real" money that makes it real to you? The physical bill? If so, then that's wrong. If everyone, including all the corporations, went to their banks and started cashing out all of their checking and savings accounts, the government printing presses would have to work overtime to print enough bills. The bills don't all physically exist. That's why economists talk about the money supply in layers (M0 being physical currency plus Fed. Res. accounts, M1 throwing in checking accounts, and M2 throwing in most savings accounts and money market funds.

There isn't even any gold behind it, since the US is off the gold standard. So what's real about it?

Conversely, if Linden, or for that matter, anyone else wanted to, they could start printing their own Linden notes. It's perfectly legal. (Counterfeiting laws apply to making things that could be confused with bills issued by the government.) I seem to recall a town in New England doing exactly that, basically raising money for the town from the exchange rate. In fact, it might be a fun idea for Linden to do this, though it would be difficult to prevent others from counterfeiting their notes, or to make it profitable.

The only thing real about dollars is that the government agrees to accept them to pay off debts and taxes. Everything else is by mutual consent. Likewise, Linden Labs agrees to take Lindens in exchange for licenses, or to trade them for dollars.


The assignment of value is based on fair market value. The dollar is only the unit of measurement. You could take payment in Euros, if you wanted, but you'd have to compute equivalent dollar values. You can look up exchange rates, for either Euros or Lindens, from appropriate references.

Last I checked, it was just as easy to sell Lindens as to buy them. If someone leaves the game, it's not terribly different from someone abandoning a bank account that gets escheated to the government. Remember, there's nothing backing the US dollar other than the good faith and credit of the US government.


No. They're founded on the concept that the legal definitions are very complex, and there's enough about the Linden to make it plausible that the IRS would choose to treat them the same as any foreign currency. Remember that US dollars are also arbitrarily created, tabulated, and destroyed by the US government (both bills and virtual). The only non-arbitrary part about it is that the FRB has the good faith goal of keeping the economy stable, and that controls their decisions.

If Linden Labs were to act in a way that prevent the Lindens from having a stable value - say by reinstating and revoking stipends at random intervals, raising and lowering the exchange rate on their site randomly, flooding the SL market with free versions of popular objects, then that supports the argument that they're not currency. The fact that Linden manages them as currency supports the argument that they might be under the law. I think all the people taking this side recognize that it's an unresolved issue of law, and that's what makes it both difficult and risky.

Could you clarify this, because I'm a little confused? A red flag of what exactly? Questions about what? Are you just saying to make sure to pay enough social security tax when doing your taxes, or are you talking about something deeper than that?

Also, is social security tax part of what you're calculating on your 1040, or is it a separate thing? If it's separate, where do you pay that?

ADDITION: Man, I used to do freelance animation work so I totally should have known the answers to the last two questions. There's a form Schedule SE that you file with 1040 for covering social security tax on self-employed income.

You are absolute correct, anyone may create their own local currency - however, the value of the currency must be rigidly fixed to the U.S. dollar (Lindens aren't), they must have a minimum value of one dollar USD (Lindens can be exchanged at a rate of between about 265 to the dollar, up to 320 to the dollar, so they don't qualify on this either), and they must have an appearance dissimilar to a US dollar (Lindens fail on this test as well, since they have no appearance at all!). Therefore, under the law, a Linden cannot be a currency in any sense.



There is a rather large difference between a sovereign government backing a currency, and a corporation doing the same. Since a Linden has meaning only within the context of an online environment, it does not pass the test of being accepted by a community as a currency - since you cannot make use of a Linden except within the confines of a single online service.




These two paragraphs are harder to refute - if one simply looks at the seeming similarities between Lindens and money, much of the behavior surrounding them is the same. However, the fact remains that a simulation and the real thing are separate, elsewise we would not even have the word "simulation" in our language.

The Linden does not, in fact have a stable value. The rate of exchange is relatively stable over all, but there is no one-to-one correspondence between Lindens and any real currency in the world. Also, Linden Labs has, in fact, flooded the SL Market with free versions of popular objects in the past - some of the clothing now in the default library were at one time commercial products (see the archives for the strident complaints of the tradesmen so victimized) and they will probably do so in the future. There have also been accidents which have unlocked virtual items so that anyone could make copies of them, and this has happened more than once.

The underlying principle that a thing must have a singular and unique existence in order to be considered real is voided by these actions and accidents, and is the thing which all the arguments claiming that Lindens have intrinsic value ignore. In order for a Linden to have intrinsic value, that which you trade for them must also have an instrinsic value, and this is impossible in a cybernetic environment. All you have paid for is the right to play with the thing while online in Second Life, not the thing itself - you're not even allowed to move the virtual thing from one service to another, let alone have it sent to your house to grace your bookshelf, desk or mantle.

And of course, Linden Labs does manipulate the Linden supply arbitrarily to control and stimulate their economic simulation. They have said so in so many words over the years, often stating that keeping the economic simulation properly tuned is one of their main activities.

The final determining factor as to whether Lindens are currency is whether you can buy anything with them, and the answer is a flat "no", because they can't be used to purchase anything. You can exchange them for service or gameplay within Second Life, but that is not the same as buying something that our laws would recognize as a physical possession.

I'll grant that it is possible to make real world purchases from within SL - one maker of video cards was selling them in-game - this is only possible because the Lindens are periodically converted from game points into real money. The video card company has no interest in the Lindens themselves, because their business runs on dollars, not game points, since, once again, game points are not a currency, any more than X's and O's hand drawn on a tic-tac-toe board are currency.

I must congratulate you on your post - yours is one of the few lucid voices in this discussion.

You are absolute correct, anyone may create their own local currency - however, the value of the currency must be rigidly fixed to the U.S. dollar (Lindens aren't), they must have a minimum value of one dollar USD (Lindens can be exchanged at a rate of between about 265 to the dollar, up to 320 to the dollar, so they don't qualify on this either), and they must have an appearance dissimilar to a US dollar (Lindens fail on this test as well, since they have no appearance at all!). Therefore, under the law, a Linden cannot be a currency in any sense.



There is a rather large difference between a sovereign government backing a currency, and a corporation doing the same. Since a Linden has meaning only within the context of an online environment, it does not pass the test of being accepted by a community as a currency - since you cannot make use of a Linden except within the confines of a single online service.




These two paragraphs are harder to refute - if one simply looks at the seeming similarities between Lindens and money, much of the behavior surrounding them is the same. However, the fact remains that a simulation and the real thing are separate, elsewise we would not even have the word "simulation" in our language.

The Linden does not, in fact have a stable value. The rate of exchange is relatively stable over all, but there is no one-to-one correspondence between Lindens and any real currency in the world. Also, Linden Labs has, in fact, flooded the SL Market with free versions of popular objects in the past - some of the clothing now in the default library were at one time commercial products (see the archives for the strident complaints of the tradesmen so victimized) and they will probably do so in the future. There have also been accidents which have unlocked virtual items so that anyone could make copies of them, and this has happened more than once.

The underlying principle that a thing must have a singular and unique existence in order to be considered real is voided by these actions and accidents, and is the thing which all the arguments claiming that Lindens have intrinsic value ignore. In order for a Linden to have intrinsic value, that which you trade for them must also have an instrinsic value, and this is impossible in a cybernetic environment. All you have paid for is the right to play with the thing while online in Second Life, not the thing itself - you're not even allowed to move the virtual thing from one service to another, let alone have it sent to your house to grace your bookshelf, desk or mantle.

And of course, Linden Labs does manipulate the Linden supply arbitrarily to control and stimulate their economic simulation. They have said so in so many words over the years, often stating that keeping the economic simulation properly tuned is one of their main activities.

The final determining factor as to whether Lindens are currency is whether you can buy anything with them, and the answer is a flat "no", because they can't be used to purchase anything. You can exchange them for service or gameplay within Second Life, but that is not the same as buying something that our laws would recognize as a physical possession.

I'll grant that it is possible to make real world purchases from within SL - one maker of video cards was selling them in-game - this is only possible because the Lindens are periodically converted from game points into real money. The video card company has no interest in the Lindens themselves, because their business runs on dollars, not game points, since, once again, game points are not a currency, any more than X's and O's hand drawn on a tic-tac-toe board are currency.

I must congratulate you on your post - yours is one of the few lucid voices in this discussion, and you base your arguments solidly one upon another without engaging in the magical thinking that befuddles so many.