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Why do I have to pay Secondlife's taxes?


LaBits
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I received a letter from Tila telling me I was so successful in secondlife that the State I live in requires me to pay taxes on all of the Linden Dollars that Secondlife requires me to Convert to Cash to pay my Sim Tier.     Ironically, Secondlife does not take Lindens for Tier payments and I have no Option but to try and make enough Lindens in Secondlife to Convert to Cash so Secondlife can take it.   More often than not, Secondlife is taking money from my bank account in real life to cover the Tier.

This is a problem for me and tens of thousands of others who are not making hand over fist in lindens and simply wanted to build and enjoy the game be it through small commercial venture, roleplay or casual Regions.    Now I am being told I have pay taxes to play secondlife and it was demanded I provide my social security number so a 1099-K form could be sent of my " Income " aka... converted lindens to pay tier - that I would then be Taxed on, or... Secondlife would put a hold on my Account.    I'd also like to mention how Secondlife/Tila take a percentage of the Converted Cash right off the Top and also a percentage of anything sold on Marketplace.     The annual membership fee has also gone up.

This is forcing me to release my few Regions one at a time because I can not afford transfer fee's all in one hit, I only have four sims, make that three I gave one away last night.  My sims are also grandfathered, I had them from Class 4, that is how long and how much money I've given to secondlife.

In short, Secondlife gets my Annual Membership Fee, A percentage of anything I sell in Marketplace, A percentage of converting Lindens to Cash because Secondlife only takes cash, And Region Tier Fee for Virtual Land in my case $681.00 usd every single month.       After all that, I am being taxed on $681.00 a month for converting Lindens to Cash to pay Tier Fee.

Also, two of my sims allow me to only pay $66.00 a month on the third - its not like I am making money here.

Why?   Why cant Secondlife just take lindens for tier instead of running its long standing base out?   Most of us are disabled and that is why we came here in attempt to be productive in some small way, to focus on something other than reality and hardships.   Why am I being forced to pay taxes on Fake Money that Secondlife forces me to sell to Pay them?

Why, why do i have to pay taxes on the game Secondlife?

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Howdy!  I have returned with an update, well overdue and I am sorry about that!  As someone else said, it took some wrangling of various contacts and experts to get a full understanding of the impact potential with this.

That said, as many know the prior 2021 Federal threshold requiring that you could be the recipient of a 1099 was set at $20,000USD and 200 transactions.  For 2022, the Federal threshold has been reduced to $600USD with no transaction limit.  This is quite the change from prior expectations, and it only applies to USD funds being withdrawn from Second Life to an external account.  Any L$ to USD exchange is not a part of the reporting if the USD remains on your account balance and is used to pay for land maintenance fees or for premium or anything else you want to spend it on as long as you don't cash out.

However, I also need to point out that the state or locale in which you reside may also carry further stipulations that will require reporting all the way down to anything above $0 and this as a variable has not changed.  Our recommendation is that you should always seek the advice of a tax professional, attorney or accountant about your specific situation ahead of time to understand what may be applicable to your situation.

I hope the information helps!
 

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I got that same letter.  It appears that after 12 years of owning my sims, I may have to shut them down as well.  I imagine many people will have to do the same.  In all the years I have owned sims, I never once took any money out, I just exchanged the tiers people paid to me for cash so that LL could take out their fees.  That's how I was always told to do it and so many times I have read that this is how it is done. Over the years I have put many thousands of dollars into the SL economy and have never taken a dime out.  Now we are being taxed for money that we never got any return on.  So many of us have been loyal to SL by investing our money, time and creativity, and now we will have to toss it all away because we had no idea that we'd be taxed on money that we never took out.  I have people relying on me in sl for things that I will now have to walk away from.  Am I wrong in my assessment?  Am I misunderstanding?  If anyone can explain what I can do to keep my sims, please respond.  How exactly does one pay for sims when you are penalized for paying in the only way I have known how to do it since I first started in SL?

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You're not wrong.

The solution to this is to sell your regions, cover the tax bill, and then enjoy SL by hanging out at someone else's place without any of the stress of trying to make this into a land based financial thing, (which as you're discovering) isn't viable with individual region pricing as it stands and the methods required to pay for those regions.

There are many things @Linden Lab could do about this, from dropping region pricing to allowing payments in L$ which they can sell back to residents on the exchange themselves. But we all know they wont do either of those things.

 

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8 minutes ago, Stevie Basevi said:

I got that same letter.  It appears that after 12 years of owning my sims, I may have to shut them down as well.  I imagine many people will have to do the same.  In all the years I have owned sims, I never once took any money out, I just exchanged the tiers people paid to me for cash so that LL could take out their fees.  That's how I was always told to do it and so many times I have read that this is how it is done. Over the years I have put many thousands of dollars into the SL economy and have never taken a dime out.  Now we are being taxed for money that we never got any return on.  So many of us have been loyal to SL by investing our money, time and creativity, and now we will have to toss it all away because we had no idea that we'd be taxed on money that we never took out.  I have people relying on me in sl for things that I will now have to walk away from.  Am I wrong in my assessment?  Am I misunderstanding?  If anyone can explain what I can do to keep my sims, please respond.  How exactly does one pay for sims when you are penalized for paying in the only way I have known how to do it since I first started in SL?

This was a gray area when Tilia became more visible -- a couple of years ago now I think. I could look it up but it doesn't really matter.  

My take on your description of events is that "now" any lindens converted to cash (even if not processed to Paypal) are being counted as income.   One important thing here (for the US anyway) is that while it is now classified as  "income", the tier each month is also a "cost" of you doing business.  So on Form C (most likely) the lindens you converted to dollars would be balanced by the cost of the tier and fees and you would not actually be paying any tax money to the US government. 

At least that is what I did when I was reporting SL income. 

 

You would still have the decision about giving your SSN to Tilia. 

 

This was always a possibility. I saw that long ago and stopped processing credit or turning lindens into USD.  The fact that LL didn't tell anyone this info  (at least this is the first I have heard) until AFTER the change had been made is pretty nasty. It isn't clear to me if this is actually a move that is REQUIRED BY US LAW or if Tilia is taking it upon itself to make this move "in case".  

 

Hopefully someone better with research skills  than I will know.  @animats perhaps who seems to keep up with this.

 

As an aside there was a time when Patch mentioned that LL might take lindens for land payment, but that of course didn't happen for the obvious reason of Money-Money-Money :D.

 

This does seem to be another very large nail in the coffin.  I am very sad but not a bit surprised. 

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Chic and coffee aren't wrong.  

You also need to ask yourself, if Linden Lab are holding US$ as income for other people (residents), how do they ensure they are not paying corporation tax on something that doesn't belong to them. They ensure the people demanding the tax know it doesn't belong to them.  That in turn leads down the rabbit hole.

If you are paying tax on US$ earnings from SL, make sure you computer, internet, electric and costs of decorating regions etc are all offset as costs.  If you are expected to account for tax on earnings, ensure you are offsetting costs.  

 

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25 minutes ago, Patch Linden said:

Howdy!  I just wanted to let you all know that I'm looking into this and doing some research.  I'll update with more shortly!

Hello and Thank you !  I just spoke with my State Tax Office and they have given me direction for resolve.  As in Hawai'i unless you actually get cash in real time to your bank or person, it is not considered Income.   I will be working with my State Tax Office for a clearer definition on this Issue in Secondlife in respect to my State and what is taxable.   

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10 hours ago, LaBits said:

Hello and Thank you !  I just spoke with my State Tax Office and they have given me direction for resolve.  As in Hawai'i unless you actually get cash in real time to your bank or person, it is not considered Income.   I will be working with my State Tax Office for a clearer definition on this Issue in Secondlife in respect to my State and what is taxable.   

can't it be it ís seen as income, because as soon you sell your L$ the dollars are stored at a real bank now... and it's real money (Tillia)?

Before the balance was in hands of LL .. it might be a difference.

And about deduction of costs, not sure how it works in the US, but in Europe you have to be a real registered business to do so. If you don't have that here, every sale of L$( above a total amount during a year) will be counted as profit for you, and costs are not seen.

Edited by Alwin Alcott
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I am going to try to answer this question for you.  I am very knowledgeable on this subject, as I run a fairly decent sized business in SL, and deal with taxes, etc.  However, keep in mind I am not a CPA nor a tax attorney, so this isn't any kind of tax or financial advice. Additionally, please keep in mind I'm speaking in the context of federal taxes, as I live in a state with no state income tax.

With that said, what Linden Lab is doing here is perfectly reasonable and expected except actually sending you the 1099-K this year (See final paragraph for details). For income tax purposes, the IRS does not care about L$.  What they care about is the USD you get from L$. It is this way, because the L$ exchange is the centralized exchange, and not a decentralized one (eg: bitcoin). When you sell L$ through the lindex and get USD in your credit balance, that is the point the money belongs to you. You have gained income from the sale of the L$. Afterall, you're getting that L$ from somewhere, right? This is the moment you have received income from second life for tax purposes and are then liable for taxes on that income. Even if you ran a region and accepted donations and then sold the L$ to make tier, this is still income for tax purposes. There are ways you can structure this to avoid it, but you'd need to talk to a CPA for that. And those reading this that feel that it's not really income, I hope the IRS doesn't come after you. :)

However, take my situation for a moment.  I run a business here in Second Life.  As such, I pay tier for several regions of mine that simply count as business expenses and in the end net zero tax liability.  If I sell $3000 a month of L$ for 10 regions and all these regions I have gained $3000 of income, but if all these regions are used for my business then I have a $3000 business expense and this gets claimed as such resulting in no taxes due.

The final part confuses me that you're receiving a 1099-K. It is my understanding, per the IRS rules, that you don't need to receive a 1099-K unless you have over $20,000 of income AND over 200 transactions.  However, this changes in 2022 taxes thanks to Biden signing the "American Rescue" thing or something in March 2021. This year, however, you shouldn't be getting a 1099-K unless you hit the 20k income and over 200 transactions.  Next year, though, you're really going to get *****ed, because you're going to get one from BOTH Linden Lab, as well as Paypal. Have fun explaining that one if you don't have some kind of tax representation. Then in 2023, you'll do your first filing with it.  That's probably what Patch Linden is "looking into", because you most likely shouldn't have gotten one of those this year.

Edited by Ravie Bunny
Clarification on the 1099-K thing I posted
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On 12/16/2021 at 11:31 AM, Patch Linden said:

Howdy!  I just wanted to let you all know that I'm looking into this and doing some research.  I'll update with more shortly!

Any word on this yet?  Getting close to decision time for some folks :D.  Thanks!!!!!

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On 12/21/2021 at 10:05 AM, Chic Aeon said:

Any word on this yet?  Getting close to decision time for some folks :D.  Thanks!!!!!

I submitted some questions and got a couple of responses that were a bit confusing to me.  I was told that if I had any more questions, to respond, which I did, and my tickets got closed.  I guess that was my answer.

 

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On 12/17/2021 at 7:24 AM, Ravie Bunny said:

because you're going to get one from BOTH Linden Lab, as well as Paypal

Tilia, which claims to be in the money transfer business, needs to get out of the Paypal kiddie pool and hook up to ACH and SEPA, like a real financial services business. Then they can just send money to your bank account.

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2 hours ago, Stevie Basevi said:

I submitted some questions and got a couple of responses that were a bit confusing to me.  I was told that if I had any more questions, to respond, which I did, and my tickets got closed.  I guess that was my answer.

 

Well so much for transparency and "heads up".  Hope it works out for you.   

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13 hours ago, bigmoe Whitfield said:

Sometimes linden time is like valve time and "soon" can be a while,  I'm going to also wager,  Patch has had to submit it to legal and the company accountants before replying.

true, but if so, it could be expected they know "why and how" .. and the info should be available at  Tilia's user info page.( don't know if it is)

Edited by Alwin Alcott
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It should be easy IF LL keeps track how many $ you put in and how many you take out. They HAVE all that data, they just need share that with Tilia.

ex: Within year you put in 30 000 $ and take out 20 000 $  then it isnt income but loss. You lost 10 000 $. So LL should report to Tilia that you didnt had any income. Actually - Tilia already knows that. They know all your transactions in and out. So you should get any tax demands only if your take out is bigger than input. 

If you take out more than you put in - then that is income. Max they can exclude from input is premium fee.

Here all this kind data must be shared to person whom it touches, person must get all info about their money on any given time person needs it or it is.....lets say very bad to company. So Tilia should send people not tax demanding papers but annual review how much person put in and how much they took out and what amount goes under taxes. So people then file that into their tax declarations. Here is that kind thing must.

Usually those annual reviews have all aspects so SL one should look something like this/more or less/ : how many $ came in, what deductions aka fees from it was taken, how many fees in general was taken in whole inworld from that person, how many $ was taken out and what fees was taken from that amount. All fees taken from lindends count too bc they are possible $. Person can declare them like personal investment to digital property.

Marketplace fees, uploading fees, tiers aso aso.

I fear that will make Tilia work hard to make it look proper and not shady.

Edited by Vihmakass
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2 hours ago, Vihmakass said:

It should be easy IF LL keeps track how many $ you put in and how many you take out. They HAVE all that data, they just need share that with Tilia.

ex: Within year you put in 30 000 $ and take out 20 000 $  then it isnt income but loss. You lost 10 000 $. So LL should report to Tilia that you didnt had any income. Actually - Tilia already knows that. They know all your transactions in and out. So you should get any tax demands only if your take out is bigger than input. 

If you take out more than you put in - then that is income. Max they can exclude from input is premium fee.

Here all this kind data must be shared to person whom it touches, person must get all info about their money on any given time person needs it or it is.....lets say very bad to company. So Tilia should send people not tax demanding papers but annual review how much person put in and how much they took out and what amount goes under taxes. So people then file that into their tax declarations. Here is that kind thing must.

Usually those annual reviews have all aspects so SL one should look something like this/more or less/ : how many $ came in, what deductions aka fees from it was taken, how many fees in general was taken in whole inworld from that person, how many $ was taken out and what fees was taken from that amount. All fees taken from lindends count too bc they are possible $. Person can declare them like personal investment to digital property.

Marketplace fees, uploading fees, tiers aso aso.

I fear that will make Tilia work hard to make it look proper and not shady.

You have to itemize where that $30000 went. If you spent $15K on non tier things, furniture, tips, animations, clothing, skins and what not, then that is not counted as non taxable money. If you put all $30K into tier, then yes you can claim all of it as a business expense as you are a "land owner" in SL. Tillia has no idea what we spend our converted L$ on. 

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