SL asset taxation `inevitable'

The question then becomes, how do SL business owners prepare for such eventuality?

http://news.com.com/2100-1043_3-6140298.html

Part of the issue would be cost. If LL has to issue 1099s to business owners, etc., then the cost goes up for everyone.

The most immediate problem, to me, is pitching more real life corporations to come to SL (aside from just having a presence on rented land.) If they purchase land, or conduct non-zero money transactions, then suddenly they'd have new liabilities to account for?

-peekay

Are there enough people making that much money for it to be worthwhile the effort of enforcing?

I can't forsee large RL corporations regarding SL as anything other than an advertising and marketing opertunity.

Gold farmers in WoW etc.. aren't US so would be untaxable.

The business owners in Sl are self employed, no need for SL to issue them 1099s. A shopping mall does not issure 1099s to the stores that rent space there. The same principle applys to SL and people who do business there. Should business owners report income from SL to the IRS? That is up the the business owner and how brave they feel.

I read that article yesterday. My feeling the whole time was that the reporter's use of the word "inevitable" was irresponsible at best, if not just a downright sensationalistic attempt to attract attention.

Is this a serious issue worthy of serious discussion? No doubt. Is any particular outcome "inevitable"? Not at all. There are a million directions the discussion could go.

There are so many different and equally weighty arguments about whether virtual items and virtual incomes are actually real, it could take years to settle the question, and by that time, the state of virtual worlds will have changed so substantially, the whole debate will probably have to be restarted anyway. I doubt any congressman wants to be the first to try to tackle the subject, especially given how ignorant politicians tend to be about anything computerish (and they know it), at a time when they've got much more important things on which to focus their limited attention.

I find it extremely unlikely that the newly elected congress, who will have to spend the next two years doing nothing but trying to assert themselves as worthy of the positions they won mostly just because the other guys lost, will allow themselves to get distracted by something like this. They've got an awful lot of big promises to figure out how to keep first. This new congress only exists because most Americans felt betrayed by the last one. If the new one doesn't deliver, they'll be out on their ass very soon.

Somehow I doubt "let's write laws to tax geeks for playing video games" is a sentence that's heard very often in congressional planning sessions right now.

If and when such a debate actually begins on the legislative floor, then we can start to panic. Until then, we can all be content to pay our taxes the way we always have, on what we actually convert to US dollars, and nothing else.

Our in-world assets are just bytes of data on a server somewhere that we don't control. They are meaningless in that they have absolutely no real world value.

Taxable income comes from us converting L$ to US$ and drawing it out of our accounts. This income *should* be considered a secondary income source and can be rightfully taxed at whichever appropriate rate exists. As with everything, its up to the account owner to report it or not.

Nothing needs to change. Virtual assets themselves are worthless. The government can keep their greedy grubby hands out of Jacques' pockets.

Taxation of assets, sure, but with taxation comes honest appraisal and expense reporting.

If your level 58 High Elf runs a high risk of being killed, well, he doesn't appraise very highly now does he? (can he submit the forms in Elvish?)


Or, say you have 10 regular sims here. That's 23400 USD a year in *payments*.

For grid access that currently is, well, let's be honest, kinda bad right now. Asset? Not hardly.



Also, most interestingly, taxation of virtual items would cause a total rewrite of the current terms of service. Can the Company lawfully destroy property that arguably, the IRS has a lien upon?

Or can the company lawfully and suddenly devalue, or destroy entire in-world industries by adding a new feature? Personally I think they can, and the IRS in-world item taxation argument is *very* weak.

Interesting times.

You're assuming a great deal, here, Peekay, as though a Congressional committee being assigned to look at the problem was any more than an excuse for congressmen and their families to get a free ticket into as many online games as they wish at the taxpayers' expense.

No MMO agrees that their in-game play money has any real world value, and in fact most (including Linden Labs) explicitly state that they guarantee no particular monetary worth for the game tokens they sell. Now, you can trade those game tokens in for a refund or to cash in your game winnings, but since they have no guaranteed value themselves, they're not money. You're not going to be taxed in-game, and you never will be.

The taxation takes place when you withdraw the funds and it becomes the real currency. That is the only taxable point in the process. If game tokens were taxable, every little kid would have to declare their Chuck E. Cheese tickets. In the article, the government appointee is ignoring this simple fact - and since the money is already being taxed, there is little incentive for the government to try to declare game tokens to be money so that they can try to grab the money further upstream than it already is doing.

You must also consider the source - the people quoted in the article as saying that taxation of virtual economies is inevitable are saying this as part of their book plugs, or burnishing their resumes as legal consultants.

The comments attached to the article you cite seem to be pretty much on the mark with their derision of the article itself.

Here's a consideration:

Yes, as the law already exists, US Citizens probably should report any "profits" from SL cash withdrawls as "secondary income". But technically, that applies to your $10 birthday check from your grandma, or the fair market value of your Christmas presents, or the quarter you find on the sidewalk, too...

For most of us, accounting for "SL Income" properly is a lot of effort for a VERY small amount of real cash, compared to RL income sources. If you're not earning a whole lot, it's unlikely to have much impact on your actual taxes, other than making your tax return a bogus and indecypherable mess.

Under existing US tax laws, L$ converted to US$ and withdrawn via PayPal or whatever may, and likely would, be considered income, BUT...

Can we then balance that with 'business expenses', such as:

Upload fees for content that was used to make what we sell.
Cost of other materials, such as pose balls purchased from other SL Players.

If I build a sim for someone else, and purchase L$5K worth of pose balls and L$10K worth of swimming pools, water slides, primswim water, fish, boats, and other content from other content creators, can I use that "Business Expense" to offset the profit that I recieve from building the sim? How can I "prove" those expenses are valid?

If I BUY a sim and build it up myself, isn't the purchase price and monthly maintenance fee "Businesss overhead", ande therefore a deductable expense, just like rent on an office building? Or deductable as a loss, if it isn't profitable?

Can a SM Dancer/Escort deduct skins, costumes, and pose sets as a "Business Expense"? Technically, a real world stripper can deduct the cost of costumes and clothes used just for her 'work'. (Though I'll bet most RL strippers don't report their tips from table dancing as income to the IRS.)

I think if the IRS does start going after this sort of 'income', I would agree that while the "assets" remain in-world, they should be considered to have no taxable value. After all, they cease to exist if LL pulls the plug on the asset server, and we have NO control over that data in that regard. Ditto for virtual property. If a private island owner stops paying for their sim, the sim goes off-line or gets removed, and the property owners are SOL. I seriously doubt the IRS wants to get into things like "Property Loss" reporting for lost value on virtual properties.

My suspicion is that when they compare the small volume of tax income they could gain to the cost to the IRS for extra work by their own employees to process it, that attempting to tax virtual assets and profits in-world would LOSE money for the IRS.

I've run a small self-employed business before, with all the appropriate US tax reporting. On small levels of income, it's often a huge headache for almost no impact on your tax liability. Honestly, the IRS people I have talked to hate deailig with small business taxation themselves.

You're mixing gross income with net income. There's no need for deductions on what you take out, because expenses were already paid for at that point. If you made $500, spent $100 on SL purchases, $200 on tier and cash $200 out, you can't deduct $300 in expenses from the $200 reported as income and end up at a negative income.

If you're accepting US $ for your services then SL expenses are already deductable from gross income, just the same way a web designer can use his or her webhosting bill as a business expense.

Very very well put.

To frame this more simply, trying to tax virtual economy simulations is similar in scope and value to not only splitting hairs, but sorting them by length and color as well. At the end of the day, all you have is a bag of split ends.

It doesn't matter if they agree with it, it has real-world value whether they like it or not. They can only say "we'll never pay you anything to cash it in for you".

This story is, however, stupid, because LL doesn't pay users, other users pay users. LL is more like PayPal than anything else, in this case.

Kitty:

In Real World self-employed work, if I spend $50 on raw materials to make one dozen custom-made arrows, and get paid $80 by you for the finished arrows, my taxable profit is $30, not $80, provided I can show the receipts for the raw materials purchases.

SL should work the same way. If I spend L$4,500 on pose balls for a club that I build for you, plus L$500 for custom texture uploads to build that club, and you pay me L$10,000 for the finished club, when I cash that out and get $36 USD, only half of it should be taxable, as the other half was my 'materials expenses'.

I don't think they'll allow people to duck around it that way forever. For example, you can't get together in the real world with a bunch of local businesspeople and employers and agree that you'll all be paid in poker tokens, but all the businesspeople will accept those as payments for goods too, and then at the same time write a statement on a piece of paper saying that they have no value, so that you don't have to pay any tax.

I believe there was even a case in the UK where a group were trying to set up a "kibbutz" - a small society without money, where everyone lived by exchanging goods and labour directly. But the taxman argued that tax had to be paid on the transfers of value that were taking place, and thus the kibbutz had to have money to pay the tax with. I believe the kibbutz was destroyed as a result.

If our in-world assests become taxable then LL would have a fiduciary responsiblity to guard them for us and make sure they are available to us at all times. An event such as the one we are experiencing now with major DB problems and loss of availablity would result in a massive tide of lawsuits. The legal issues presented to companies like LL and any other online game would be such as to destroy the market.

Why would this happen? I can imagine that it could simply be the same as it is now - even though LL can lose all of your items and L$ with no compensation, people are still prepared to pay for items and L$, and thus that limited service has value.

If you can be taxed for something and SL through negligence or any other reason deprives you of that asset they can be held responsible for it. The TOS and EULA would be trumped by the US body of law. Trust me, if this happens, lawsuits will ensue and the fallout will shake the pillers of the entire online gaming industry.

This thread is focused entirely at the US, but it should be put in a wider scope.

But first I would like to clarify something. A lot of confusion begins with the name "business". You only have a business if you have your company IRL. That means you have registered with your chamber of commerce, and have registered your company as such with your government's tax collecting institution. You will have recieved a VAT number at that point becouse you must add sales tax to anything you sell.

Usually governments have additional requirements to be recognised as a company, like being able to prove that you have multiple clients. For instance in the Netherlands, if you work for only 1 client, you are regarded as an amployee of that "client" (unless you have employees working for you, but then you also have to pay taxes for employing them).

If you have registered your company IRL as described above, you will be taxed as a company. That means you will have to pay sales taxes and taxes over your companies profit. Depending on the type of company the profit may not be your income (it is only the income of the company) and you have to pay additional income taxes for the salary that your company pays to you.

If you have not registered your company IRL as described above, then it simply does not exist outside of the simulator. In that case you will be taxed on your personal income.

Corner stone of our world wide (RL) economy is that you pay taxes to the country you live in. That means that someone who resides in the US pays taxes to the US government, and someone who lives in the Netherlands pays taxes to the Dutch government. A Dutch person/company selling something to a US persone/company only pays taxes in the Netherlands (the exception may be import/export taxes when goods cross over a countries border, but that is not the case with internet).

Linden Labs is a RL business, and they have this economic game simulator running that they call Second Life. Anybody can play in that simulator by paying Linden Labs a fixed amount of money per month and a variable amount of money for additional services. I leave L$ out of the equation becouse it simply does not exist IRL.

Any financial transaction (either way) is between you and Linden Labs. This is totally independant of what you do within the game simulator. If you have an officially recognised company you may be able to deduct the payments to Linden Labs as expenses if the services that Linden Labs provide are needed by your company. If you are taxed as a private person you probably cannot (in that case you are regarded as a consumer of the game, but rules may differ in different countries).

It may be the case that you have done very well in the simulator, and that can result in a payment from Linden Labs to you. This is regarded as Linden Labs paying you for the services you have provided to Linden Labs.

If you are taxed as a company then you may have to pay sales taxes over the amount that was transferred. Different countries use different rules regarding sales taxes over services provided over the internet. And your company will have to pay taxes over your companies profit (after deduction of the costs). If you are on salary with your company then you will pay income taxes as normal, becouse the money goes to your company and not to yourselve.

If you are taxed as a private person then you will have to pay income taxes over the amount payed by Linden Labs to you. The precise terms differ by country but usually this is referred to as "secondary income".

This also makes clear why the US government (IRS) cannot tax L$ transactions within the simulator:

- It does not exist IRL.
- Nothing is "owned" by the simulator players, Linden Labs can cancel your account anytime (read the TOS).
- They cannot apply sales- and income taxes to residents or companies in other countries.

The only thing that would be in the jurisdiction of the IRS is to investigate if US residents have neglegted to pay income taxes over the payments from Linden Labs.

Yes, except that the "something" you're being taxed on might not be "your L$". It might be "the service of allowing you to use that number of L$, including the stipulation that the service be withdrawn at any time". Or can't it be that?

I don't think we have anything to worry about. Existing tax laws already apply to income generated by playing online gaming, and there are lines in the U.S. tax forms for capital gains taxation already. Implementing a more complex solution where the value of the currency is arbitrarily defined by game companies rather than the United States Federal Reserve is not only unworkable, but would undermine the very definition of our national economy as well.

If game tokens were considered to be currency, then you could use Monopoly money to buy your groceries and pay your rent, and nobody expects this to happen any time soon.

Nothing to see here, folks, move along, move along. These aren't the droids you're looking for.

The standard rule is that you pay taxes in both the originating country and the country of destination if they are due for the kind of expense/income. The two countries may have signed a treaty that stipulates taxes are only owed in the country of destination, or that if taxes are due in the originating country, then you won't be due for another taxation in the destination country.

If a company in the US hires you for services then they are required to pay the IRS taxes for the amount due, just as much as you are required to report the income and pay your due where you live. Since you're in the Netherlands and they're in the US, there's a tax treaty and you would either go through the trouble to get the form from the IRS that shows you are indeed not to be taxed in the US, or the company pays taxes on it anyway in which case you'd file a tax return with the IRS stating that under the treaty you don't have to pay any US taxes and get a refund issued.

US $ transactions between residents (selling and buying L$) aren't revenue for LL, only the 30 cents for buying + 3.5% for selling is.
If cashing out L$ was seen as services rendered to LL then LL has to report the expense to the IRS (cost for them, income for you) and US citizens would need to receive a tax form to add to their own tax returns, which isn't the case.

You have said this many times, and it remains as much of a strawman now as it has in the past. Nobody is claiming that L$ are "real money" or "legal tender" or "currency". What L$ are, are tokens representative of value that are used as a intermediary for the transfer of goods and services between SL users.

What I create in SL is my IP. What you create is your IP. If I trade my IP for your IP, then by IRS rules (and those of most other countries), that transaction is taxable at the fair market value of the goods/services exchanged. Can you please explain how that transaction magically becomes not taxable if we instead use L$ as an intermediary for the exchange?

Do you know for a fact that is the case?

In most financial clearinghouses (which LL is acting as in their handling of the LindeX), the clearinghouse is the general counterparty to all transactions. That means that whenever you buy, you're buying from them. And whenever you sell, you're selling to them. How they match orders internally on their books is nobody's business. That is how I interpret LL's trading -- if I sell L$, LL is the one who is paying me. If I buy L$, LL is the one who is billing me. For all intents and purposes, I am dealing only with LL in my transactions and they are the general buyer and seller for all LindeX trades.

The question is, if your grocer and your landlord would allow you to use Monopoly money to pay for your groceries and rent - and if, in fact, all shopkeepers would allow this - can the fact that the money came out of a Monopoly set still save you from paying tax on those transactions?

No, I don't, but the other assertion doesn't really make much sense to me. If selling L$ falls under "services provided to LL" then it's wage, which is taxable and would need to be reported from LL's end.

If you're classed as an independent contractor on the books then no such additional reporting need be done, AFAIK. It's all up to you as the contractor to take care of your taxation responsibilities.