SL asset taxation `inevitable'

Completely retarded. I am not going to pay the IRS taxes for owning a virtual castle or selling a virtual sword. They can ... my

Anyhoo...this will never happen. No way to enforce it. Or it will just turn millions of people into law-breakers. I would like to see someone knock on my door for property taxes from a virtual game.

They can discuss the finer points with my German Shepherd.

CNET QUOTE>>

Reader post by: Drew_G9
Posted on: December 8, 2006, 5:42 PM PST
Story: IRS taxation of online game virtual assets inevitable

First and foremost, let me pose this question:

Do I pay taxes on my Monopoly earnings? If someone lands on Park Place with a Hotel, do I send Uncle Sam a pink fifty?


My Response>>
Lol...

Right if you tax virtual assets, then you have to recieve that tax in the virtual currency. So, would the IRS then start their own Lindex?

What follows applies to U.S. residents.

If you sell Lindens and transfer the proceeds into your Paypal account, that becomes income and should be reported on Schedule C. I don't think LL is required to issue a 1099 -- that's for reporting payments made to you for services rendered.

If you report income on Schedule C, you can also report expenses you paid in order to earn that income. This includes your Linden membership charges, your internet connection, your computer, anything you bought to produce whater it was that earned your income (sortware, textures, etc.) even the office space you use for your computer. I'm pretty sure most SLers would show very little profit if they properly accounted for all the expenses.

If your business expenses exceed your business income, you can report a loss and reduce your entire tax liability. It would probably not be a good idea to do this the first time you declare LL income, but after a few years of profit, you could make a sound case for declaring a loss, say in the year you upgrade your computer system.

If the IRS challenges you for failing to report income, you have the right at that point to include additional information about expenses.

Unfortunately, cost/benefit analysis doesn't make a BIT of difference in whether the IRS seeks to enforce the principle of "income" (26 U.S.C. §61) on a particular industry. The issue is compliance.

If the IRS can get 100 people to pay up by going after one, then it will, even if it means the IRS loses money on that one case.

While most IRS employees I know hate the $200 cases, they do them because the bosses on high tell them to. The agenda will be set by Congress and/or IRS big wigs that do not have to handle the enforcement.

My own practice is to document every investment into SL via receipts and bank records. If my SL holdings are eventually valued, I'll have my investment in them (cost-basis) adequately documented.

Y'all, seriously, it's just a matter of time. He who fails to plan plans to fail. If your ducks are in a row when the IRS comes-a-calling, you'll be much better off that trying to reconstruct at a later date.

Several Years ago, Revenue Canada (Canadas Income Tax branch, Comparable to the IRS in ferocity, and pure evil) Decided that artists in Canada Should have all Newly created and UNSOLD works of art assessed for Value, and be forced to pay Income Tax on every unsold Piece. Thier reasoning was basicly, that the artist, by creating a work of Art that COULD be sold in Future for Money was basicly Printing Money. The Art WAS a Taxable asset. If one were GIVEN a work of art that had Monatary value, one would be forced to pay taxes on it as though it were a Cash Gift SO anyone Generating art should have to pay Taxes on it as though it were a monitary gain.

This was Not a Proposal, but an Actual Change to the Tax Laws that was put in Force.

The reaction of the Artists community was Immediate, and Vehement. The Majority of Canadas Big Name artists enacted an Immediate Moratorium on the creation of any new contributions to Canadian art culture. Painters, sculptors, Et Al Put down the Tools of thier trade, and ceased creating. One Promanant Vancouver artist went as Far as stating IF he was presented with an Intent to Assess his works for Tax Purposes, he would Burn the Lot before Paying One cent. It went as far as Him getting a bon Fire permit, and stacking over 100 paintings, and assorted Kindling on the beach and preparing to Burn it. a representative of Revenue Canada was present with Members of the RCMP prepared to arrest and Charge the artist, and sieze all his works If he set a torch to the Pyre. Needless to say, the media was liberally represented as well. At the Very last second, a Call came from the Minister responsible Setting the new tax Law aside for Further examination and Ordering the Revenue Canada agent and the RCMP to stand down. The new ruling was, within Hours thrown out completely. The decision was, that created assets were Not taxable Unless, and Until they were converted Into a recognized Real world Currency, or already Classified Taxable asset. If a work remained Unsold, it was NOT taxable.

Just so you see this type of thinking continues, Just two weeks ago there was a Ruling by Revenue Canada regarding Stocks in a Now Bankrupt Company owned by the company employees as part of a profit sharing plan. A few years back The Owners of the Comapny Knew the company was in trouble, so they arranged a series of deals that drove the appearant Value of the Company WAY up through the roof. they then sold the company. The new owners found out they held a house of Cards, and the company Folded and the Original owners had Taken up residence in countries beyond Canadian Jurisdiction. Now, for a VERY brief time shares in the company, held by it's employees Skyrocketed in Value from a Few dollars a share to Well over $600 a share. For four or five days, and long before the employees realized it, or could Cash out the stocks, some of them were worth Hundreds of thousands of Dollars.Of course, thier value dropped to Nothing when the Bottom fell out of the scheme.
NOW in steps revenue canada, and Gives Tax Bills to All these now former employees of the bankrupt company for Taxes calculated on the Highest Value of the stock before it went Poof.One person was given a tax Bill for over $300,000 for holding stock in a company where he never earned more than $40,000 a year. Now, two weeks ago, after years of court Battles, Revenue Canada Conceded it had NO right to Tax these persons on Unrealized Profits from the Stocks. The employees never got the money, so No taxes were owed.
Again regardless of the Once Value of the stock, the stock Holders were ONLY liable for any REAL Money they gained from Conversion of the stock.
Now, Unlike the art, who's Subjective value would have to be assessed by a tax Inspector (Who may or may not actually be qualified to judge the Value of Unsold works), the stocks had a REAL Concrete cash Value. the stock Holders COULD have had every dime of the Inflated value of the stock If they sold at the right time. But even with this More concrete value, revenue canada recognized it ONLY had the right to Tax it when, and if it became REAL money.

Now that is two Precidents under Canadian Tax Law that appear to protect those trading On Line assets. and in Both cases, it was ruled that those assets were Only taxable when the transactions were completed, and Real world Money was exchanged for the Unrealized value of the asset (Art, or Stock).

Canadian, and American Tax Laws are both Complex, and Very fluid. Things can change in a matter of Days But as it stands Now at least under Canadian Law, we Appear to have Nothing to worry about until we have Cash in Hand.

Angel.

Seems to me under US law, while an asset may have value (such as an in world creation) it doesn't trigger tax until it is involved in a taxable exchange (i.e. sale). So, creation of the asset isn't the taxable event (and that Canadian idea listed above was WACK!), so until you have Lindens in hand, there's no issue. That's where I think the curious issue lies: If Lindens have USD value (which they do, via the Lindex), then the thing sold has USD value, and the query will be whether the tax triggers upon the in-world sale, or whether to tax only the money as it comes out of SL as USD (or other currency, but, since I know only of US tax law, I'm talking of USD). Under pure tax theory, the time of exchange would fix the value, but the enforcement nightmare would make it a real biotch (that is a technical term, ya know, lol) to tax at that time (unless the IRS went in world, which is a scary thought). I'm betting it's when the money comes out (conversion from $L to USD) that tax would be assessed.

It's interesting to wrap your brain around. As I'm not profitable right now, I'm not taking money out of game, so I'm not very concerned. But, if I were taking money out, I'd be filing a Schedule C (as suggested earlier) and tracking all investments in world and out. I'd also pay attention to the capitalization rules, and make sure your deductions are not expenses required to be capitalized.

Income I make from SL, just like income I make from anywhere else, is money that I count as income when I file my taxes. Anyone who files their taxes honestly is already paying taxes on their SL assets, but only when those assets are converted into tangible revenue.

Very interesting post, Angelique. How terrible that would be for artists (not to mention others like crafstpeople and frankly anyone who makes things). Glad it was set aside!

Nigel's point is right on target -- fortunately, with exception for real estate, vehicles, and some luxury items, we're not taxed on what we HAVE, but rather what we EARN -- and also on sales. It takes a taxable event to apply the tax. This helps to avoid the kinds of situations like they had back in GB, where certain high-earning artists (like the Beatles) ended up owing more than their income. (Leading many artists to change citizenship, until the govm't figured out they were losing and fixed it.)

Anyway, for my SL, my taxes would be easy. I put no money in, so my basis is zero and any I take out would be 100% income. I doubt I'll ever take any out, though!

I'm continually astonished at how easily some people can take something out of context and champion it as a viable idea, either positive or negative, and get themselves all foamy at the mouth about it.

I'm glad to see cooler heads prevail.

At the time this was enacted Revenue Canada Hinted that it would probably be extended to other forms of Craft Production, possibly even including Unpublished Literary or Musical works, though they never elaborated on How they would go about determining BEFORE the Publishing industry what works were likely to be Money Makers (Governmental Greed in Action, isn't it Marvelous?).
As i said, the Backlash from the artistic community was quite decisive, and Had Revenue Canada NOT changed it's position it probably would have Ended creation of the Arts in Canada.

The case though WAS a valuable one in that it Did more clearly define under Canadian Law at what point an asset became taxable (and brought to a Finer point with the Other case i described). It would seem to me, as i said before, that as Long as ones Assets remained Unrealized (i.e. Remained Within the confines of Second life and it's related On Line trading assets) then they would remain Untaxable.

I also agree with Nigel that the Logistical Nightmare of reviewing every Linden Transaction taking place within the game environment, then determining which country's Taxation Branch had jurisdiction over Each individual Transaction would frighten off all but the most Fanatical Tax Auditor (I know there must be some of those deranged individuals out there who are still trying to think of how to do it, but i don't hold up much hope for thier success). The simple fact is, the revenues to be gained would Not justify (or for that matter come close to equalling) the expenditure necesary to collect it.

Angel.