How does LL compute income?

[Jaylinbridges]

5 hours ago, Drayke Newall said:

Whether this threshold is the latest who knows as LL are notorious for not updating the wiki. A 2019 blog entry links to the wiki so I assume it is up to date since then. That said, per your question it is Gross not net. 

Assume anything from LL is out of date and inaccurate.  You are quoting old and now obsolete law, and no one should follow what you quoted, as it is obsolete.

Instructions for Form 1099-K (Rev. January 2022)

Payment Card and Third Party Network Transactions Department of the Treasury Internal Revenue Service Section references are to the Internal Revenue Code unless otherwise noted.

What’s New

Exceptions for reporting of third party network transactions. The reporting requirement for these transactions has changed from totals exceeding $20,000 to exceeding $600, regardless of the total number of transactions. See Exception for de minimis payments, later, for more information. Continuous-use form and instructions. Form 1099-K and these instructions have been converted from an annual revision to continuous use. Both the form and instructions will be updated as needed. For the most recent version, go to IRS.gov/Form1099K. Future Developments For the latest information about developments related to Form 1099-K and its instructions, such as legislation enacted after they were published, go to IRS.gov/Form1099K

https://www.irs.gov/pub/irs-pdf/i1099k.pdf

 

[Jaylinbridges]

4 hours ago, Jennifer Boyle said:

Thank you for that. It answers my question with fact, not speculation.

It tells me the threshold is so high that I can forget about it.

The threshold is $600 USD Per Year, and the Number of transactions no longer is revelant.  If you cash out a Total of over $600 USD/yr from Tillia,  it will be reported to the IRS as income, and you can't just forget about it.  Never assume an LL Wiki is up to date.

https://www.irs.gov/pub/irs-pdf/i1099k.pdf

Edited June 27, 2022 by Jaylinbridges

[Drayke Newall]

3 hours ago, Jaylinbridges said:

Assume anything from LL is out of date and inaccurate.  You are quoting old and now obsolete law, and no one should follow what you quoted, as it is obsolete.

Hence why I said who knows if the threshold was accurate or not as the wiki might be out of date.🙄 i.e. I answered the OP question as to being gross based on the wiki and not net and warned the thresholds may be out of date.

[Silent Mistwalker]

Thank you to all those who attempted an explanation. Over the years I've tried to do just that and I've gotten tired of repeating and repeating and repeating using different words and phrasing, yet most think I don't know wtf I am talking about. I just had to do the work every day for decades. It's not something easy to explain to a layperson. 

[Lindal Kidd]

8 hours ago, Theresa Tennyson said:

Your example would require someone to buy a massive amount of Lindens they have no immediate plans to use and sit on them, and then sell them to someone else at a later date. That's not the way people normally use online entertainment environments with microtransations. It is how people launder money, though.

Oh. Well, you may not have meant to, but you're calling me a money launderer. I'll give another example, my own.

Around 2011 or so, I bought most of the Masocado region from the resident who owned it. I paid about $700.00 as I recall, or about L$ 200,000. I didn't have that much in my account, so I purchased those L$ with $USD.

I set up a small rental operation there, about 20 units. It was never a huge money maker, but it did make enough that for years I had no need to buy L$. I had enough to pay the tier, my annual Premium membership, and support my shopping habit. I never took out any cash, though. And I always had a very hefty L$ balance, my "reserve fund". So, according to you, I was "sitting on them".

Around 2020, I got tired of the need to constantly redecorate the place for seasonal events like Halloween and Christmas and dealing with tenant issues. Also, it became harder to rent vacant units, due to competition from Linden Homes. So, I sold my land. I made a considerable profit, selling for about L$ 1.2M, or about $4,800.00 USD.

I withdrew the proceeds from SL in several process credit transactions, which actually spanned two tax years, because LL would not let me take it all at once. (I think that's another black mark against them as a "financial management company", and at some point they are going to get in big trouble with California regulators.)

LL reported my process credit transactions to the IRS, and I declared the money as income, and paid taxes on it. What I did NOT do was deduct the original purchase price, AND all the money I had spent over the years for landscaping, dance machines, radios and TVs, furnishings, and ads, or the value of my time spent running my little business, or the cost of computer equipment upgrades and a share of my internet connection costs. Partly because I didn't think of it, partly because it was such a small part of my overall tax situation...but mostly, because I didn't have supporting documentation on those expenses. I paid tax on the full amount...but if I'd had records, I could've paid a lot less, because I'd already paid tax once on the original purchase amount, and that, plus all the other expenses, could have reduced my taxable profit.

And, one more time, that is my point. If you are going to buy or spend more than a couple of hundred $USD worth of L$ a year, especially if you're running a business, even a little one, KEEP YOUR RECEIPTS. For everything.

Edited June 27, 2022 by Lindal Kidd

[Theresa Tennyson]

3 minutes ago, Lindal Kidd said:

Oh. Well, you may not have meant to, but you're calling me a money launderer. I'll give another example, my own.

Around 2011 or so, I bought most of the Masocado region from the resident who owned it. I paid about $700.00 as I recall, or about L$ 200,000. I didn't have that much in my account, so I purchased those L$ with $USD.

I set up a small rental operation there, about 20 units. It was never a huge money maker, but it did make enough that for years I had no need to buy L$. I had enough to pay the tier, my annual Premium membership, and support my shopping habit. I never took out any cash, though. And I always had a very hefty L$ balance, my "reserve fund". So, according to you, I was "sitting on them".

Around 2020, I got tired of the need to constantly redecorate the place for seasonal events like Halloween and Christmas and dealing with tenant issues. Also, it became harder to rent vacant units, due to competition from Linden Homes. So, I sold my land. I made a considerable profit, selling for about L$ 1.2M, or about $4,800.00 USD.

I withdrew the proceeds from SL in several process credit transactions, which actually spanned two tax years, because LL would not let me take it all at once. (I think that's another black mark against them as a "financial management company", and at some point they are going to get in big trouble with California regulators.)

LL reported my process credit transactions to the IRS, and I declared the money as income, and paid taxes on it. What I did NOT do was deduct the original purchase price, AND all the money I had spent over the years for landscaping, dance machines, radios and TVs, furnishings, and ads, or the value of my time spent running my little business, or the cost of computer equipment upgrades and a share of my internet connection costs. Partly because I didn't think of it, partly because it was such a small part of my overall tax situation...but mostly, because I didn't have supporting documentation on those expenses. I paid tax on the full amount...but if I'd had records, I could've paid a lot less, because I'd already paid tax once on the original purchase amount, and that, plus all the other expenses, could have reduced my taxable profit.

And, one more time, that is my point. If you are going to buy or spend more than a couple of hundred L$ a year, especially if you're running a business, even a little one, KEEP YOUR RECEIPTS. For everything.

Here's what I was replying to:

20 hours ago, Lindal Kidd said:

If true, this is terrible...and terrible accounting. I mean, look:

• I earn $1,000 at my job. My employer withholds $250.00 for income tax purposes.
• I take the remaining $750.00 and buy $L to play Second Life
• I play SL for the rest of the year, and only have spent $100.00 worth of my $L.
• So I take the remaining $650.00 out of SL.
• It gets reported to the IRS.
• ...and now I am taxed AGAIN on money that I already paid tax on.

Anyone who buys more than a token amount of $L had better be able to show receipts!

In your reply, you did not "only spend $100 worth of your $L." You spent almost all of it; however, it was replaced with different L$. You were running a business, which you acknowledge. This is fundamentally different from what you said in the post I replied to.

[Lindal Kidd]

It was more complicated, but not fundamentally different. I brought a large amount of L$ into SL, and "sat on it" (in the form of land and a reserve fund). Later, I took it out again (plus a profit, which is the "more complicated" part).

My original investment was not "replaced with different L$", the income went to offset expenses. Nor would it matter if it had been "replaced". The overall effect is the same: L$ in, L$ stayed in SL for a time, L$ came out, got taxed. I have no issue with taxing an actual profit. What I object to is taxing a withdrawal of funds which were after-tax dollars to begin with.

[Jennifer Boyle]

51 minutes ago, Lindal Kidd said:

And, one more time, that is my point. If you are going to buy or spend more than a couple of hundred L$ a year, especially if you're running a business, even a little one, KEEP YOUR RECEIPTS. For everything.

I seriously doubt that the IRS is interested in anything but RL currency transactions, i.e., what one paid Tilia (or a RL vendor of products such as textures that were bought for use in SL, or other RL expenses like Lindal mentioned), and what Tilia paid out. I can imagine the look on an IRS auditor's face when somebody started explaining that they spent some of the money on virtual land and structures for their SL business and spent some on personal expenses like a house, clothing, and tips for dancers, and presented SL transaction records. Oh, and the "money" was Linden dollars that have a slightly variable value in US dollars, and have no legal status as money.

[Phil Deakins]

I imagine that the tax authorities would only be interested in the amount of real money paid into SL and the amount of real money taken out, and they'd tax the difference if it's a profit. I doubt that any tax authority in the world would be the slightest bit interested in the details of what happened with the virtual money and goods inside SL. So, to only pay tax on the difference between the amount paid in and the amount taken out, evidence of both of those transactions would be needed.

Edited June 28, 2022 by Phil Deakins

[Innula Zenovka]

On 6/26/2022 at 7:08 PM, Jennifer Boyle said:

My understanding is that, when a resident has taken RL money out of SL via Tilia, LL annually reports the amount paid out to the concerned taxing authorities, although I presume that there is a threshold that must be reached for that to happen.

Is net or gross income reported? For example, if a U.S. resident pays in $3000 during a year and removes $1000, does LL report income of $1000 to the IRS?

I don't know but I would imagine that LL report the total amount paid out, and it's up to you to keep a record of your actual earnings and expenses in SL for tax purposes, along with all your other records of taxable income and expenditure in First Life.  

[Ayeleeon]

On 6/26/2022 at 2:28 PM, Silent Mistwalker said:

You are taxed on income, not profit.

If a business has 1000000 in sales, but has 950000 in expenses to make that million. The expenses are deducted and taxes paid on the 50000 profit. 

[Nalates Urriah]

On 6/26/2022 at 11:26 AM, Jennifer Boyle said:

In the example I gave, the resident actually had a net loss of $2000 for the year, even though gross income was $1000.

I've just read the first few posts and the information and opinions in those are based on horrible misconceptions.

People seem to have conflated the ideas of sales and income taxes. Sales tax (and VAT) is only on things SOLD. In the US a service is not a thing. So no sales tax, unlike some European countries that also tax services. A virtual dress is a  thing and sales tax applies. To simplify things, stuff in SL is sold for L$, which technically in many places is not 'money' so no tax. The tax is charged when the Lab sells us L$ as a gaming token (there have been court cases on whether L$ are tokens or currency and it is messed up and confusing. So I am simplifying.). Think of it as paying for things in SL with PRE-TAXED tokens.

When you sell something in SL for L$ you are being paid in pre-paid-sales-tax dollars. Saves you having to track your sales and pay that tax to your local tax_hat.

So, how does the IRS or your local taxing agency, know if you made money... income? The money you take out of SL is reported. But not all those dollars are taxable. But it is NOT the Lab's responsibility to track that. They only have to report what they pay you. It is your responsibility to define your tax liability. When you do your taxes you show your expenditures for your SL business and deduct that from the money paid you by the Lab.

We pay sales tax when buying L$. The Lab does not with hold income tax on RL cash paid to you.

So, in Jennifer's example you would show your $3k expenditure (actual receipts required) and $1k income (receipt provided and reported to tax agency by Lab) for a $2k loss, which would offset some of any other income you have.

Business and finances in SL works just as they do in RL, with a few simple twists to make SL life easier.

[Jennifer Boyle]

1 hour ago, Nalates Urriah said:

In the US a service is not a thing. So no sales tax, unlike some European countries that also tax services.

Thanks for the informative post. I do want to take issue with the statement above. I do not know about other jurisdictions in the US, but where I live almost all services are subject to sales tax.

[Rowan Amore]

1 hour ago, Nalates Urriah said:

In the US a service is not a thing. So no sales tax

That probably depends on where in the US you live.  In Ohio, there is sales tax on many services such as housecleaning and salon services.

[Nalates Urriah]

3 hours ago, Rowan Amore said:

That probably depends on where in the US you live.  In Ohio, there is sales tax on many services such as housecleaning and salon services.

Yeah, I forget it is state-by-state in the US,