Tax Season - SL Linden exchange to USD?

I'm a vendor in SL and get checks in the mail from Linden Lab on sales I make. Will I need to declare it to my accountant when doing taxes or does SL already take that out?

Yep. You must declare.

Yes, you must declare, but remember, you should be able to deduct any monies you put into sl to get started. And probably your monthly fee and land use fees as expenses. But, I would verify that with an accountant.

See your accountant.

I sure did, and yes, unless you are a self-reliant citizen of nowhere in Antarctica or something you better declare your income.

Expensing is valid for a business, but I'm not sure if you can easily show your deductions are valid for an unlicenced Second Life 'business'.

As i said on Page One, If it's one dollar, or a Million, it Has to be Declared on your Return, the Big Debate here is exactly when Linden Dollars Becomes Income.

Why don't we try a Simple Survey

A~Lindens are Income Period!

B~Lindens become Taxable Income when used in any trade Inside the SL Grid.

C~Lindens are Become Income when used in Trades Off the SL grid (Lindex or SLexchange or other system).

D~Lindens are Only Income when Converted to Real Cash Period!

This will give us a Baseline of peoples Beliefs.

I'm amazed that so far that we have not had a Rep from H&R Block, or some other Tax Preperation Company, a Tax Lawyer, or even a Rep from the IRS, Revenue Canada, Or the Inland Revenue Venture an Opinion here.

Angel.

And to Ricky and Nigel and the others, a friendly suggestion to state your opinion, and provide a link to your previous conversation in another thread in which you all very handily lay out your arguments, in the rinse/lather/repeat fashion. I think this is a healthy debate, but there's no reason to repeat ad nausium every point that's already previously been made into this thread Only a suggestion, do what you want... My thoughts are simple, non authoritative, and coming up..

I do work for a nationwide tax prep service. I would call them income only when they are exchanged for real cash. In my opinion, it sould be filed on a schedule C, so that expenses can be deducted. On the land use fees, that would only apply to land used for the business, "personal" land would not be an expense.

Opinions apply only in the United States, and lack commentary with regard to state tax laws:

A is incorrect, and here's why (Assuming you mean Lindens are TAXABLE income)
Linden Dollars have no more immediate value than do poker chips, or a pile of horse dropping. The former is the point I'm getting at. If you go to Vegas, and win a pile of poker chips, those chips are not in any way valuable to you until such time as you belly up to the bullet proof booth and hand them through that tiny little slot in exchange for their cash value. As long as you hold onto those chips in the form of .. well .. chips .. you may as well be holding onto a pile of horse shit, as far as the IRS is concerned. Until they are converted into taxable currency, they are in and of themselves not taxable. Lacking any specific provision in the tax code that says Linden Dollars are different, and are taxable, they are simply not, period. That's part of the task that Dan Miller and the other members of the Joint Economic Comittee are undertaking.. to look at this from the ground up to see just when and where legislation needs to be created to ensure the government gets their "fair" share. As it is at this time, currently, right here/right now, Linden Dollars are NOT taxable assets. They are simply game tokens with the potential to be turned into cash, and that potential is in no way guaranteed by Linden Lab per their Terms of Service. ToS could and should be phrased better to clarify this. Today, they say that Linden Dollars have no value. Tomorrow, they should say that there is no guarantee that they will have any value on Thursday.

B is a no. Simply because there is not currently any language in the tax code that says this is so. Trading virtual tit for tat is different from trading same in RL in that in real life, there is a direct and taxable monetary value associated with each end of the trade. In-world, there is not, for reasons stated in A, above. There is nothing in the tax code currently that says squat about what virtual game "assets" are or are not worth, period. Until that is codified, any argument that says they have real world, taxable worth is baseless.

C is iffy. It is unclear what you exactly mean. If the off grid trade results in someone adding cash to their income, then yes, it's taxable, and should be included in "other income".. in the same way that cash earned from that lemonade stand you set out in the heat of summer is officially taxable.

D is the bottom line, under the current tax code. If you collect Linden Dollars in world for your virtual creations, and you make the choice to convert them into real dollars, which by the way you are provided no guarantee to be able to do so, then yes.. that needs to be declared as income. That's a no brainer. The rest of the discussion needs to wait for the outcome of the JEC's examination of the issues. Nobody at this point can say absolutely what is and is not the case, until that report is completed, and until Ways and Means decides that THIS is the way we'll go with it. Expect that to be out by end of 07. Expect implementation and enforcement by IRS to take many more years.

Summary:
Nobody can claim this as their own at this point.. The jury is still out, in committee. Absolutely the only thing income earners can do at this point is to claim their cash earnings, at the point of exchange from Lindens to Dollars, as additional income and call it a day. If you're feeling bold, go ahead and net your income from your losses, but be prepared for a lengthy audit.

A=0
B=0
C=0
D=2

Great.
Keep going.

A.

The problem with a survey is that not all opionions are created equal.

Having said that, my vote is for an amalgamation of B&C. L$ are income as soon as they are traded for a service one could otherwise pay money for. That's the way the barter income rules work in most taxation codes, and there's nothing special about SL transactions that would negate that rule.

When you "buy" a skin/animation/script in SL, you are really trading a "limited license to use an aspect of SL" (as the TOS says) in exchange for "the right to use somebody else's IP". Since the "limited license to use an aspect of SL" can be purchased for US$ (via LindeX, eBay, etc.), and "the right to use somebody else's IP" can also be purchased for cash, the transaction is taxable. No need to wait until it is cashed out.

He's been doing this in thread after thread. Don't feed the troll, folks.

In tax law, there is income that is realized, and income that is recognized. It's when the income is recognized that it must be reported. That eases the enforcement burden. For example. When you win a $5 poker chip, technically, you realize income. However, if you play for a bit, and end up losing that $5 before you cash in, the income isn't recognized. It was realized, but not recognized. I know, too complicated. So, with the caveat that we won't know what the IRS will do until they do it, and with the caveat that this only applies in the US. Here are my opinions:

A - Yes. Earned Lindens are income. They are realized in world at the time of exchange (for reasons stated ad nauseum elsewhere). However, for enforcement purposes, I don't think they are yet recognized just by being exchanged in a transaction.

B - Yes. Earned Lindens from transactions in world are income (realized). However, I don't think they become recognized until they are withdrawn from the game (recognized). It's like poker chips that way.

C - Yes. When you trade Lindens you've earned, the income is recognized and must be reported. However, I think, just as with gambling winnings, you could offset your transfers in against your transfers out. However, you will report both, and will take a 2% AGI hit on the difference. You'd report withdrawals as other income, and then report the deposits as other deductions on a schedule A. You'll lose 2% based on your adjusted gross income (AGI), but you will have reported, and should be able to live through an audit (it won't be fun, but you'll live).

D - Yes. Same reasons as with C.

So, Nigel has spoken. The best advice is take all of this to your accountant and ask her/him what she/he thinks. Then make an informed choice as to how you will proceed.

Also, Angel, considering the depth of the conversation tax wise here, you probably HAVE had tax professionals offering their opinions via their in-world personas. However, until the IRS sets up shop in-world (perish the thought) no IRS personnel will be able to comment publicly.

Maybe I should open up an SL tax firm, lol.

Sorry, Kalel, but I could say exactly the same thing about you and your insistence that "only real US$ are taxable, so L$ are only taxable when they are turned into Cold Hard Cash".

Your opinion has repeatedly shown to be false, so now you resort to calling me a troll? Nice.

Troll; a newsgroup post that is deliberately incorrect, intended to provoke readers; or a person who makes such a post.

(Not a naked small person with green hair and a gem for a belly button)



P.S. Next topic!

QUOTE: "you may as well be holding onto a pile of horse shit, as far as the IRS is concerned." as a keen gardener in SL, they carry a significant taxable value!!!

Spoke with a tax accountant yesterday. Without doing any research, he seemed to think that only money withdrawn to PayPal would be taxable. I'm probably going to declare money withdraw to PayPal (less tier fees and USD invested) as taxable income.

I think that's a safe way to do it. I'm going to suggest a different mechanism to net the withdrawals against the deposits. This is what I do with income from another game.

I report the income as "other income". I then deduct on Schedule A as "other deduction" the expenses related to the income. There will be a 2% AGI limit, but it's the technically correct way to do it.

If you just net one against the other, you're avoiding the 2% AGI limit for hobby losses.

But, go with what your accountant says, in any case and THANK YOU for sharing this advice and for asking your accountant! Good job!

Blizzard began charging tax on World of Warcraft accounts a few months ago because it was State law in Massachusetts. LL does not charge tax for its service in Massachusetts. Some online music stores DO charge tax here. Sony does not for Everquest.

Nobody really knows what to do...not even these huge players with entire legal and tax teams...

Ok, Paring away the superfluous, and Interpreting Nigel and Ricky:

Ricky says B&C, since B is Deeper into the On Line experience than C, we can take it that C and D are a Given if B is selected, SO, Ricky says "B"

Nigel says roughly the same thing, but sets his level as C&D, Ergo, D is a Given, Nigel says "C"

Rockwell can clearly be Interpreted as "D" (With added authority from a Tax Professional)

AMW, colourful metaphors aside, also counts as a "D"

The Opinions now stand at:
A=0
B=1
C=1
D=4

Great.
Keep going.

A.

OK.. I might not really know what I'm talking about here, because I have my accountant deal with all my stuff...

I have a RL business. I have several independent contractors working for me. I have to send every one of them a 1099 at the end of the year for all of the money that I have paid out to them. This is what they use to file their taxes with. I am also not obligated to send anyone who made under $600 a 1099... although I'm told they are supposed to claim it regardless of whether they have received a 1099 from me or not.

Wouldn't Linden Labs be required to send out 1099s to people who made more than $600? I could be very wrong on this.. but wouldn't they need to send out some form of tax documentation to the people they have paid money to?

LL also doesn't charge (nor pay) the European value added tax for internet services, like Blizzard and SOE do. I'm quite glad about that, since otherwise I'd have to pay $228 instead of $195 monthly. Nonetheless it's a bit dangerous to offer internet services of any sort within Europe, without paying taxes to the EU customer's home country... "failure to register and account for VAT could render you or your company liable to criminal prosecution for tax evasion, money laundering, false accounting or similar offences". Well, I guess they can't pay attention to every arbitrary law in backwaters like Massachusetts or Europe

No. Linden Lab didn't employ/contract you... and the $600 didn't actually come from LL, it came from other (currency-buying) users of SL.

As far as the tax authorities are concerned, your earnings were made via self-employment.

Ah ok. I wasn't too sure about that. I just thought it might be similar. Thanks for the info

My Sisters accountant has deducted as expenses:
1) Island Purchases
2) All tier fees
3) All Membership fees


In world expenses such as buying landscaping objects, hosues, etc were not expensed other than the fact that the Lindens used to buy these items wasnt cashed out

Income was declared where US dollars HIT the Bank account or the paypal account.

Ermm.. they weren't my colourful metaphors.. as I prefix the statement with a QUOTE: as it was made by someone else... I just added the bit about being a keen SL gardener

However, I have been following and contributing to the various threads regarding this subject and stating that Option D is the correct one! When frustrated that many cloud and over complicate the matter, my Brit Humour takes over.

There are just far too many Taxation systems to be taken into consideration (and it's not just about the US IRS) SL is an international game, that the IRS could not tax me, or any other countries resdient, as they could not prove that transactions were carried out for and by solely Americans! In the UK, when you pay money into a gambling online 'game', the vendor applies no tax. When you withdraw your winings (assuming you have any), it automatcially keeps transactions for the full duration of your account, and makes UK tax deductions. If your payments exceed your winings, you pay no Tax etc.

As I have a record of all monies I have paid (account fees) and any monies I have withdrawn from the game (all via my paypal account), I can produce a balance sheet (profit/loss), assuming I have made money ( I would still declare expenditure, providing I can prove the money spent was strictly for business purposes, even if I didn't make a profit), I declare that on my Self Assesement form at the end of each year and pay any taxes due.

VAT would only become applicable if I reached a criteria of turnover of £45,000 sterling in any year, in the respect that I could claim back any VAT on expenditure, if the recepient/trader is VAT registered. If I am trading as an individual (sole trader/self employed) then there are other criteria that have to be met. If I trade as a registered company, then another set of criteria are imposed. This can and will only ever be dealt with via my own Goverments Taxation system. The only way this can be assessed, is when I actually make a withdrawl, transforming L$ into £'s (in my case), or convert L$'s into $'s and then £'s.

Our group, keep very clear records in different formats, along with the transaction history downloaded from SL's servers, to produce a detailed company transaction balance sheet. Including Client references for any works contracted, payments made to traders, scripters, vendors ingame, supported by emails identifying that we do have a legitimate contract that produces revenue. These are all stored on various backup servers across the internet.
Our only real concern is that there is no fool proof way, of proving that anyone we deal with (except RL compaines) actually exist, when considering the possibilites of tracing 'companies' and individuals for VAT purposes. If we do not get a VAT invoice, then we have to add VAT to our charges, otherwise we can become liable to pay VAT, if the provider of the 'invoice/receipt' can't prove they are a VAT registered company (almost impossible ingame trading). Taxation is not an issue for us as we already have implemented a system to cope with that!