SL asset taxation `inevitable'

As far as I know, everyone making significant money from SL is paying taxes on it. Not to do so, would be tax evasion and a serious fine in the best case, jail time in the worst case.

The question we should be asking, should we pay state tax (or GST) on certain person to person transactions in SecondLife when we don't know the location of the virtual purchaser?

Is this inevitable that we will be required to? Not at all. Probable? Perhaps.

I doubt we'll see any sales taxes in SL in the foreseeable future. However, estate taxes are likely. The SL assets have an assessable value, and are taxable as such, if the estate value exceeds the standard exemption.

At one point I suspected that SL could be used to launder money and hide assets, but the relatively strict limits on currency exchange probably exclude any serious use that way.

By estate tax are you talking about the "death" tax or property taxes?

It's very simple, no magic involved:



This spells out very clearly that the Linden has no definable intrinsic value - it has whatever value Linden Labs sees fit to give it that day. This means that it isn't legal tender, and cannot be directly taxed.

It also clearly spells out the fact that your game tokens could go *poof* in the next five minutes, and you'd have no recourse, because by definition they're valueless.

You cannot be taxed in terms of something which has been agreed upon by all parties concerned to be valueless; further, this applies directly to you, because in order to play, you would have to have assented to the Terms of Service, or the system wouldn't even let you log on.

Your strawman is getting more and more tired, with each post.

Read my initial post carefully. I begain by *saying* L$ are not legal tender! L$ actually are "tokens representative of value that are used as a intermediary for the transfer of goods and services between SL users." A thing need not be legal tender to be taxable.

Now, care to try again to answer the question?

"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?"

For starters, money you convert from virtual to US dollars is already taxable. If you are not claiming it as income, that's between yourselves and the IRS.


Next, in a reply just about the article mentioned, it's one of the worst articles I've ever read. It makes no recognition of the fact that most MMO's retain ownership of their property. World of Warcraft, for example, states very clearly that you own nothing. As far as SL, Linden Labs owns the 'property' where you have your 'land, other assests, etc.' Regardless of whether you retain ownership of the 'land', all you are really doing is renting server space from them for 10 bucks a month, plus extra for how much space you need. There isn't anything tangible to tax.

I've seen so many false stories floating around just like this one, claiming similar things. A more likely scenario is seeing a bandwidth fee added onto your bill, but even that would be pushing the limit, since you already pay a bandwidth fee with your internet service provider. I'm in the US so I don't have extensive knowledge about it, but I believe some countries in Europe have a similar set up, where they are taxed for playing online games, by how long they play.


All that aside, no. You won't be receiving 1099's from the irs for your virtual property, you won't be paying land tax and school tax on it either. In fact, if any congressman has wasted his time on such a scheme, he/she needs to be removed from their position for wasting time. It would cost the IRS more to enforce and collect from such a system than they would ever bring in. In fact, people with virtual property would probably work out one heck of a tax deduction instead of paying anything. Imagine being able to deduct the cost of your island and tier fees.

Apparently you're not understanding the concept of game tokens.

You can't tax them, any more than you can tax Chuck E. Cheese tickets. They're worthless. They haven't got any value by any legal definition, other than as game tokens within the game, just as Chuck E. Cheese tickets can't be used anywhere but at the prize counter at the restaurant.

The taxable moment is outside the simulation, when you convert your winnings to cash rewards. Now that you're talking about real money instead of game tokens, it's taxable (and in accordance with the federal tax code, that's exactly what takes place).

I'm not making a "straw man" argument, as you put it. I'm simply reciting federal tax law. If you find a place on the 1040 for "game tokens", let me know.

So, you're saying if you and I exchange services (e.g. I do some dental work for you in exchange for you performing some plumbing repairs for me), then what is otherwise a taxable event becomes non-taxable if I pay you Chuck E. Cheese tokens to do my plumbing and you return the tokens to me when I do your dental work?

Completely absurd!

Can you at least admit that a service-for-service arrangement (dental work for plumbing repairs) is taxable at fair market value?

IRS page on barter income. No currency/tender/money need be exchanged for a transaction to be taxable. If we trade services it is taxable. if we trade services and use "chits" to keep track of who owes what to whom, it is also taxable.

QED.

If taxes happen and is required by law then it becomes money. One of three things will happen. SL turns into a bank, a stock market, or becomes a "product within a product".

Bank - SL stores your money and taxes it as savings would in a normal bank after you get taxed for earning it.

Stock market - L$ becomes the property of the US government and federally regulated. (don't even get me started on "drops" from games like Guild Wars if the government gets ahold of this option. You're uber weapon of ownership will become a +9 vs ogre blackjack after the "taxes" are removed.)

L$ becomes a new product as it is an item that now directly taxable and like a paycheck. If you went to work and your work lost your paycheck...you'd be more then ticked.

Now I say all this and laugh as I start to wonder where the tax starts. I have never cycled my L$ to do anything more then buy more clothes. Do I get taxed, does my friend who uses her L$ only to pay island tier and buy in world things, or does it happen when it hits the bank/paypal account?

I meant inheritance taxes.


Kalel, Ricky is correct here. It doesn't matter what LL says, L$ have value. And so says the IRS, although not officially. Yet.

But no, we won't see 1099's from SL in the forseeable future, and yes, the article was a bit hyperbolic. The article in the WSJ was more concrete, sorry I can't quote it here.

I suspect that at this time, any congresspeople who got serious about taxing SL in any direct way would be laughed out of office. The entire SL economy is about US$4M, which isn't really worth going after. And imagine running against someone who did that: the temptation to talk about their "trying to tax Monopoly money" would just be too strong to resist!

Just wait, though. The US government's ability to meddle shouldn't be underestimated.

But for now, hopefully the Treasury will take the relatively sane approach of only taxing on conversion to US$. Then again, when thinking about the current administration, "sane" is the last word to come to mind.

After having witness frustrations with "internet law" all but first hand (used to work at an ISP and my boss dealt with tracking "law breakers" I can say the fact that they are even concidering this shows they should not be underestimated. THEY NEVER LEARNED THE FIRST TIME! You can't tax a foreign company and since as others have said most farmers (and anche) are not even in the US.

This makes sense, if you take the statement out of context of the rest of the IRS rules as you have done here.

However, at some point the value of those goods or services must be assessed, and the only way of doing that is to convert the value into a standard currency in some way. In order to profit in any way by a barter transaction, the goods or services must have value in the real world. Since the goods produced cannot be taken into the real world, for taxation purposes they simply don't exist.

In order for taxation to take place, even on a barter exchange, you must be able to assign a value to that transaction. Since the value of a Linden is arbitrary, declared to be zero by Linden Labs and not defined by the participants in the transaction itself, the assessment of value cannot take place until actual value in sovereign currency is declared. And this cannot be known until you convert your game tokens to currency.

Well, Ricki's arguments have gotten a bit out of hand. He had me intriqued originally, but he has since gotten GAMES and REAL LIFE confused. Reign yourself back in from outerspace please! You don't tax on in-game services anymore than you do when playing Monopoly or any other game, computer game or not. It goes beyond reason to say so. Any congressman presenting such a fiasco would indeed be laughed out of his career.

On a side note, and the real reason I quoted you.. I would love to see the tax deductions that went along with being taxed for my in-game assets! Land fees, monthly game fees, let's not forget my new computer hardware and my expensive broadband....all of which are necessary to make the 2k linden I made so far...hmm...you know, this could really benefit us as gamers. Maybe we should push for our virtual property to be considered assets afterall!

Yes, your example is absurd, because the tokens have no fixed value.

Service for service arrangement is certainly taxable, though, you have me on that point. But in order to declare those services for tax purposes, you must estimate their value in the currency system in which you are being taxed. Game tokens are unusable for this.

You can easily estimate the market value of the services exchanged because *L$ have fair market value as decided by the consensus of the buyers and sellers on the LindeX*. A line in the Linden Lab ToS in no way changes the L$ from being tokens representative of value. How much value? Check the LindeX.

By your logic, since Canadian dollars aren't legal tender in the U.S., if we do business using CAD$, then the exchange is not taxable. CAD/USD exchange rates, however, are determined by market consensus, much like L$/USD exchange rates.

The bottom line is that when buying and selling items in SL, you are in fact exchanging services with other users. Whether in SL of RL, the exchange of services is taxable, and every time you set something for sale, you are placing a market value on your services.

Do you really fail to see that providing services in SL is still *providing services*? Does your time and energy somehow become not valuable because you are developing in LSL rather than in C++?

This is what the US government is talking about. Games are NOT like RL but they ARE becoming RL and thinking they SHOULD be taxed. As for laughing at people making laws...who said any internet law was rational. Look at all the illegal activity online. The US laws against it are laughable as 90% of "crimes" end in foreign lands .



Actually there is a cap on how much you can declare. My mother dealt with this when she tried to do it for her "online teaching" she did. You CAN declare it...you just might cap your declaring and still have to pay.

Gold has no fixed value either, but it's definitely valuable. Ditto for virtually any other property, commodity, or service you can mention. The only things that have a fixed value with respect to US$ are US$ and other currencies that are fixed with respect to US$. The lack of a fixed value is entirely beside the point.

You're correct that an assessment of value is necessary. However, that's easy to do using the current exchange rate. Right now according to LL exchange, US$1 is worth L$270. See how easy that was? Assessments are always estimates, not exact values. Only cash accounts have fixed value. If I trade my Cisco stock for a haircut, that's still income to my barber, despite the fact that its value fluctuates from day to day.

Ricky, I really do see your point, though, there comes time to consider this:




Presume that in 2010 a new video game, 2 player Donkey Kong Whomp-O-Rama, comes out on Playstation 7.

1) Brothers Jimmy and Mark, ages 9 and 7, play the game as Jimmyz0z and Lord Markoff.

2) To defeat the first level boss, they have to mine virtual coal and harvest virtual strawberries to bake a cake. Jimmz0rs is a coalminer character, and Lord Markoff is a harvester.

3) The two children play for hours, monotonously mining and picking. They exchange services after 3 days, each splitting 50% of their coal and strawberry reserves to make it to the next level.

4) They get really good, finish the game, and go to daycare.

. . . . . time goes by . . . . .

5) In 2012, Donkey Kong Whomp-O-Rama Gold goes online. Ages 11 and 9 now, Jimmyz0rz and Lord "K0ngwhomper" Markoff get the game from their mom.

6) They begin to play, now offering their leet mining and picking skills to other children all over the world. Often, they are paid in mithril bars for their services, which make the base armour for the higher levels.



So... just when did the services between the brothers become taxable? When were they not?

I agree fully, there are services performed - they meet the criteria of the IRS document best I can tell... but... didn't they always? Even when just playing, on a standalone system?



For that matter, I've provided services to NPC characters before, in Lineage2.

I helped a computer-generated elf-maiden once, in exchange for adena. She didn't report the transaction, nor were there receipts, though I was thanked profusely in automated text.

Makes for fascinating law arguments, doesn't it?

Just thinking out loud.

Hmm... SL may be a different situation, but MMORPG assets can hardly be taxed I'd think. I remember being banned from Everquest for a month, because I bought (not sold, bought) a Lodizal shield, a piece of armor, on eBay. SOE could have banned me and the seller permanently since we violated their EULA (TOS).

The EULA of a MMORPG clearly says that all you pay for is just the service, i.e. access to the online gaming platform. The sale of any virtual items - be it game currency, equipment or complete accounts - is strictly prohibited. All those items are property of the game publisher. Selling WoW gold pieces, EQ armor parts or CoH accounts on eBay is fraud, one could as well sell the Brooklyn bridge. A money transaction doesn't make an asset if one bought thin air.

It doesn't really matter how you look at it. Is your time worth any less playing pool, soccer, whatever you choose to do in your free time? Do you also add that to your taxable income as services exchanged?

"Bill thew me the ball, I threw it back. Estimated time was about 1 hour." What is your time worth for that hour? Are you the kind of person to claim that as services rendered?


You have to draw the line somewhere. Right now, I am paying to play a game. In that game, I do many things that mimic real life, but it's still a game. The line is drawn with items that stay in the game. If there is nothing to show for it, nothing tangible earned, it has no value.

Even in the case of Linden, it's not simply a matter of looking at the lindex. All that tells you is what other players are selling their linden for. There are several places you can buy Linden, they all have different prices. It doesn't change the fact that linens actually hold no value.
Think of it like baseball cards (for those that can't get the concept of SL only being a game). You don't pay taxes on the value of your baseball cards, you only pay when you cash them in.

Go to Vegas, buy into a poker tournament. (Is there sales tax?)

Play the tournament. (Are winnings taxed between hands? between games? What about moving up to the next table in the tournament with $5k of winnings from the previous games?)

Win the tournament. Are you required to forfeit a number of chips equivalent to the tax owed, no, you fill out paperwork reporting your winnings to the IRS when you claim the prize.

File your (quarterly) estimated tax return, declare your winnings... and your gambling expenses and losses (better have some kind of receipt for those too if you're going to try claiming them against a sizable winning), and, if you're very lucky, send a check to the IRS because you made a profit.

So... in SL... what counts as a taxible event?

Is there sales tax on tier?

People don't write C++ for "game credit", (not that I'm aware of).

As far as I'm concerned the taxable event that requires earnings records for reporting only occurs when 'fantasy' money is cashed in for 'real money'.

Rather like using chips in Las Vegas casinos.

The rest is just gambling and playing, which, yes, some people take very seriously and manage to live off of... but it's still gambling and playing.

(No, I am not a tax lawyer)

According to the official website of the US treasury,

"Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything This has been the case since 1933. The notes have no value for themselves, but for what they will buy. In another sense, because they are legal tender, Federal Reserve notes are "backed" by all the goods and services in the economy."

So what you're saying about L$ is equally true about US$. And has nothing to do with taxation.

The more important point is the one raised by Desmond Shang (and echoed by others) about where the IRS decides to sit on the slippery slope between a taxable event and "just a game".

Games with TOS that disallow trading aren't applicable here. L$ are exchangable for US$. Yes, the exchange rate varies from exchange to exchange, just as the exchange rates between US and foreign currencies do. That doesn't mean that income in those currencies can't be assessed a value.

As Ricky pointed out, barter is taxable. How to set the value? Well, you have to estimate. If the IRS doesn't agree with your estimate, that's your problem because unlike a trial where you're assumed guilty until proven innocent, with the IRS you're assumed liable until you prove otherwise.

Right. That's the obvious and reasonable interpretation. Until such time the IRS says otherwise. Which they might. Inevitable? I don't know.

The rest of the discussion is theoretical, not practical. Until the IRS says otherwise, of course.