Second Life - Tilia and U.S. income tax

[Mar Scarmon]

I own some rental properties in second life.  I live in the U.S. and am a U.S. citizen.   My monthly tier payment is $540 U.S. Dollars.  My rental income usually covers my tier payment, sometimes a little less sometimes a little more.  I convert the Lindens I receive in rent to Tilia dollars that then pays my tier.  I have never taken any money out of Tilia to my bank account, all Tilia funds go toward paying my tier to the Lindens.  My question is, will these transactions be reported to the IRS?  Do I need to report or account for them on my U.S. Federal Income tax forms? 

I heard today that the IRS is cracking down on on-line earnings like Paypal, Etsy, Venmo, etc.

Thanks

[LittleMe Jewell]

15 minutes ago, Mar Scarmon said:

I own some rental properties in second life.  I live in the U.S. and am a U.S. citizen.   My monthly tier payment is $540 U.S. Dollars.  My rental income usually covers my tier payment, sometimes a little less sometimes a little more.  I convert the Lindens I receive in rent to Tilia dollars that then pays my tier.  I have never taken any money out of Tilia to my bank account, all Tilia funds go toward paying my tier to the Lindens.  My question is, will these transactions be reported to the IRS?  Do I need to report or account for them on my U.S. Federal Income tax forms? 

I heard today that the IRS is cracking down on on-line earnings like Paypal, Etsy, Venmo, etc.

Thanks

If you get a 1099 form from Tilia or LL, then it is reported.

However, my understanding -- which may not be current -- is that the money will only be reported if you actually do a Process Credit.  That is why Tilia requires more identification info before allowing a Process Credit.  Since they don't require any specific documentation just to sell L$, then I don't think that counts for reporting it.

I have sold L$ before and never received any tax forms.

Edited December 8, 2022 by LittleMe Jewell

[Nick0678]

So basically you are.. making money only for Linden Lab, for free.

If you get taxed on that then we are talking about comedy.

[Mar Scarmon]

35 minutes ago, LittleMe Jewell said:

I have read elsewhere that the threshold to generate a 1099K for hobbyist sales using payment apps was $20,000 USD, this amount was reduced in 2022 to $600.  So my understanding is that if you earned more that $600 USD via SL or Tilia you will be getting a 1099K that you then must report on your tax return.   I have never taken a Process Credit which is the way you extract funds from Tilia to Paypal, but I guess we will find out soon whether it is any funds or only process credit funds.  I do recall awhile back getting an email from Second Life/Tilia requesting additional tax information.

 

[Rowan Amore]

On 1/19/2022 at 8:34 AM, Patch Linden said:

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!
 

 

[Mar Scarmon]

20 minutes ago, Rowan Amore said:

" it only applies to USD funds being withdrawn from Second Life to an external account. "

But; is Tilia considered a external account?

[Rowan Amore]

Just now, Mar Scarmon said:

But; is Tilia considered a external account?

No.  Cashing your USD balance to PayPal or Skrill is using an external account.

[Prokofy Neva]

14 hours ago, Mar Scarmon said:

I own some rental properties in second life.  I live in the U.S. and am a U.S. citizen.   My monthly tier payment is $540 U.S. Dollars.  My rental income usually covers my tier payment, sometimes a little less sometimes a little more.  I convert the Lindens I receive in rent to Tilia dollars that then pays my tier.  I have never taken any money out of Tilia to my bank account, all Tilia funds go toward paying my tier to the Lindens.  My question is, will these transactions be reported to the IRS?  Do I need to report or account for them on my U.S. Federal Income tax forms? 

I heard today that the IRS is cracking down on on-line earnings like Paypal, Etsy, Venmo, etc.

Thanks

My understanding and that of my accountant has always been that if you cash it out to PayPal, it is income that you must report. People often think that if they earn less than US $600 per month (or whatever the limit established) from any one employer, then they don't have to report it. But that's not the case; it's that the employer doesn't have to report it.

My question is different: if SL, and PayPal (which recently announced this) are now issuing 1099s, what about the fact that the employer may also issue 1099s? Then you might have 3 1099s on the same amount earned. Hopefully you aren't taxed three times but just pick one. I guess we are about to find out about all this.

[Ceka Cianci]

8 hours ago, Prokofy Neva said:

My understanding and that of my accountant has always been that if you cash it out to PayPal, it is income that you must report. People often think that if they earn less than US $600 per month (or whatever the limit established) from any one employer, then they don't have to report it. But that's not the case; it's that the employer doesn't have to report it.

My question is different: if SL, and PayPal (which recently announced this) are now issuing 1099s, what about the fact that the employer may also issue 1099s? Then you might have 3 1099s on the same amount earned. Hopefully you aren't taxed three times but just pick one. I guess we are about to find out about all this.

1099's are non employment income forms, so there really isn't an employer.. It's important to keep track of all your expenses and income.. the 1099's forms are only income that has been reported..

You have to watch the ones reporting the income as well to make sure that what you have and what they have matches up.. They could overshoot  you on income..

Anyways, the 1099 form you get from LL or tilla should be a 1099 Misc form. Where the one you get from Paypal should be a 1099 K form..  a lot is gonna come down to where things end up on the form and in what boxes..

Also it's going to depend on if anything new has been added for  those kinds of situations.. there are a couple of ways to deal with income getting combined into another form like a 1099k that may be grouping even more income from other payment types coming in to make up that income..

The worst case scenario would be having to write off the one from Tilla as an expense from the gross income.. but that will suck because it will show a larger gross income than showing it as the same income..

Hopefully they have it all worked out this year.. I mean they have 80k  new employees.. I sure hope they all aren't on audit duty.. hehehe

 

 

 

[Ceka Cianci]

On 12/7/2022 at 8:40 PM, Mar Scarmon said:

But; is Tilia considered a external account?

Tilla is pretty much handling the financial part of second life, when the money leaves them it turns into a payout which will trigger a 1099 Misc if it reaches the threshold..

 If it goes into paypal that would be dealing with a third party service and if over 600.00 will trigger a 1099 K form.

 

Remember, the government is doing all this to go after the rich and not the little guys..Because well, the rich is well known for all those 600 dollar or less transactions they be doin all the time.. hehehe

I've been listening to this guy since the covid shutdown back in 2020.. He's really good..

He has some good advice about what to look out for and some information about the 1099 k forms that people will be getting from their paypal  and other third party services..

 

Edited December 9, 2022 by Ceka Cianci

[Ceka Cianci]

I've been kind of keeping tabs on this.. I guess what's really going on is  The IRS was supposed to be getting it's budget increased dramatically, but actually is going to receive  even less that it got last year..

So there is a lot of political dancing going on with this new rule, so The IRS is postponing the 600 threshold rule until next year , because the politician are reworking the threshold, but since they are on vacation, they won't get back to work on it  until next year.. I swear, we must be in a simulation, because it all feels like a movie.. lol

The older I get the more I realize just how much of a cluster F we are living in.. hehehe

 

Aaaanyways, this might be good news for some of you.. Although  I would still watch yer backs and pay whatever taxes you need to pay, because as screwy as they are  today, they may just grandfather things backwards.. The ball of confusion  going on today is really spinning fast..

This guy explains it better without all the extra butter.. hehehe

 

 

[Paul Hexem]

Yeah, it's good that they're postponing it.

Leave it to government to pass a law about tax cheating that encourages tax cheating.

[Charlotte Bartlett]

It doesn't change your tax liability regardless of whether the 1099-Misc gets generated - if you cashed out, you have to report it.  I am also a little leery of the posted information via Patch as once in USD and in "Tilia" if that is used to pay for tier technically I would lean on it being reportable as income for tax purposes (and the tier fee put as a deduction).    However that's for LL/Tilia to figure out if they are appropriately tax positioned.  This is due to Tilia being a separate company/MSB too.

The one area it get's tricky is the Tilia 1099-Misc will include the fees they charged for process credit so you'll need to put those in deductibles so always download your monthly account summaries and track the fees so you can avoid paying taxes on those.   Typical IRS though as I am sure companies had geared up to auto generate at the 600 threshold versus the old 200 transactions and 20K threshold so you may still end up getting where companies can't roll back the change in time.  Either way your tax amounts will remain the same and you should report it all including deductions.

 

 

 

[Ceka Cianci]

1 hour ago, Paul Hexem said:

Yeah, it's good that they're postponing it.

Leave it to government to pass a law about tax cheating that encourages tax cheating.

They put the brakes on it right before the start of tax season.. Gee, I wonder if that's gonna cause any problems.. lol

[Ceka Cianci]

4 minutes ago, Charlotte Bartlett said:

It doesn't change your tax liability regardless of whether the 1099-Misc gets generated - if you cashed out, you have to report it.  I am also a little leery of the posted information via Patch as once in USD and in "Tilia" if that is used to pay for tier technically I would lean on it being reportable as income for tax purposes (and the tier fee put as a deduction).    However that's for LL/Tilia to figure out if they are appropriately tax positioned.  This is due to Tilia being a separate company/MSB too.

The one area it get's tricky is the Tilia 1099-Misc will include the fees they charged for process credit so you'll need to put those in deductibles so always download your monthly account summaries and track the fees so you can avoid paying taxes on those.   Typical IRS though as I am sure companies had geared up to auto generate at the 600 threshold versus the old 200 transactions and 20K threshold so you may still end up getting where companies can't roll back the change in time.  Either way your tax amounts will remain the same and you should report it all including deductions.

 

 

 

That's the best way to handle it all the time.. Trust your own records over  anyone else telling you what it is.. They sure won't show up and sit with you in an audit.. hehehe

[Kimmi Zehetbauer]

Cause of all the weird tax stuff the US IRS keeps coming up with is making it hard for companies to keep up with.

The IRS should have a simple form.

Line 1 - How much you make.
Line 2 - Tax: 30%.
Line 3 - Send that in!

[Ceka Cianci]

15 minutes ago, Kimmi Zehetbauer said:

Cause of all the weird tax stuff the US IRS keeps coming up with is making it hard for companies to keep up with.

The IRS should have a simple form.

Line 1 - How much you make.
Line 2 - Tax: 30%.
Line 3 - Send that in!

Wanna read something funny? hehehehe

The taxpayer's role is to understand and meet his or her tax obligations. The IRS role is to help the large majority of compliant taxpayers with the tax law, while ensuring that the minority who are unwilling to comply pay their fair share.

Think about this the next time you  call them on the phone.. Ring ring, ring ring, ring ring.. hehehehe

Edited December 28, 2022 by Ceka Cianci

[Lindal Kidd]

Except for the percentage, I agree with Kimmi. I think it should be more like the biblical tithe, 10%. But a flat tax won't fly, because it's viewed as "regressive".  Which simply means the rich can afford to be taxed more than the poor, and therefore should be. That sounds reasonable on the face of it, but I think it's fundamentally unfair.

But this is quickly getting us into threadlocking territory. The defining statement is the one by Patch: You don't pay tax or get a 1099 (any flavor) unless you do a Process Credit transaction.

[Serena Stroikavskoi]

It's going to be interesting for sure and considering they are estimated to hiring 80k over the next few years to audit, gonna be very interesting. With the last few years it's been brought painfully home the missed taxes they have not collected on smaller business transactions, i.e. swap marts, hobbyist, and custom work. I mean really even when it was 20K most rich people wouldn't even blink about paying the tax on that amount. Even gambling losses and winning have changed in the last few years on how they are reported and filed.

Just keep track of what you put in versus what you take out, as what you put in would be a business expense to offset. Keeping records of your output as well as any 'profits' and as long as your profit doesn't exceed the limit you'll do good. Also remember this isn't just SL, it's all cash apps and any money transport app that you may get one this year. 

REF: https://www.irs.gov/businesses/understanding-your-form-1099-k

[Ceka Cianci]

33 minutes ago, Serena Stroikavskoi said:

It's going to be interesting for sure and considering they are estimated to hiring 80k over the next few years to audit, gonna be very interesting. With the last few years it's been brought painfully home the missed taxes they have not collected on smaller business transactions, i.e. swap marts, hobbyist, and custom work. I mean really even when it was 20K most rich people wouldn't even blink about paying the tax on that amount. Even gambling losses and winning have changed in the last few years on how they are reported and filed.

Just keep track of what you put in versus what you take out, as what you put in would be a business expense to offset. Keeping records of your output as well as any 'profits' and as long as your profit doesn't exceed the limit you'll do good. Also remember this isn't just SL, it's all cash apps and any money transport app that you may get one this year. 

REF: https://www.irs.gov/businesses/understanding-your-form-1099-k

The threshold is still at the 20k for 2022 tax year to trigger a 1099k..Since they could not settle on a threshold in 2022, whatever they pass now will be the new threshold from 2023 and forward.. Still even if you don't get one, keep good records and  report your income because audits are no fun and going back  in years is a pain in the butt if you don't keep good records.

I did some looking into why they would need 80k+ new employees.. It looks to be an  over time plan for filling back up spots that have left and to filling spots that will be leaving..  Not only are they short staffed, but also plan on losing more in the future..

Especially in the last few years I remember them having to bring in temps and still being backlogged more than ever before.. With covid and the stimulus and all those on unemployment and who knows what all else, adding to things..  I guess back like 10 years ago they were at something like 116k employees and down  to 25k less and expecting around 50k more in the future to be leaving..  so an over time hiring plan does kind of make sense..

listening to social medias, they were making it sound like we were going to be bum rushed in one year with new irs employees, when it really seems like they are trying to fill the tank back up or keep it filled..

I know they have been slow as molasses in the middle of winter the last few years.. I guess we're gonna find out either way..

Just keep good solid organized records.. Don't depend on a 1099 to tell you what is what.. Those are meant to cover the butt of the one you are getting it from..

 

 

 

[Love Zhaoying]

I make it a point to never make money in Second Life, so I don't have to pay extra taxes! So far, this strategy has been successful. 

[Ceka Cianci]

22 minutes ago, Love Zhaoying said:

I make it a point to never make money in Second Life, so I don't have to pay extra taxes! So far, this strategy has been successful. 

Same here, I think I may have cashed out one, maybe two times at the most..  I could have really cashed out a lot in my early years, but the stuff i did in here paid for my SL and everything in it, so it didn't make sense.. I'd have to put more money in to pay for those things anyways if I wasn't making any money.

[Serena Stroikavskoi]

6 hours ago, Ceka Cianci said:

Same here, I think I may have cashed out one, maybe two times at the most..  I could have really cashed out a lot in my early years, but the stuff i did in here paid for my SL and everything in it, so it didn't make sense.. I'd have to put more money in to pay for those things anyways if I wasn't making any money.

Best way to go, I do the same and have only cashed out once maybe 10yrs ago. Now most of what I do is pay to play, what I make covers what I spend unless I want something extra then usually have to pay for it. Even when I make more I usually put it back in the SL economy somehow lol.

[Tech Robonaught]

Just some of my own observations:

PayPal tax reporting is required when the sender identifies the product as goods and services to the IRS. This requirement applies once you receive $600 USD or more from this type of payment. Although this transaction is reportable by PayPal, it's possible that the transaction is not taxable.

So is the "cash out" considered Goods and Services?  If yes, then who has the Goods and took benefit of the Services TIlla?

Also, in lieu of "panic mode" remember the reporting guidelines,

Who needs to file a tax return | Internal Revenue Service (irs.gov)

[Prokofy Neva]

On 12/28/2022 at 11:49 AM, Ceka Cianci said:

I've been kind of keeping tabs on this.. I guess what's really going on is  The IRS was supposed to be getting it's budget increased dramatically, but actually is going to receive  even less that it got last year..

So there is a lot of political dancing going on with this new rule, so The IRS is postponing the 600 threshold rule until next year , because the politician are reworking the threshold, but since they are on vacation, they won't get back to work on it  until next year.. I swear, we must be in a simulation, because it all feels like a movie.. lol

The older I get the more I realize just how much of a cluster F we are living in.. hehehe

 

Aaaanyways, this might be good news for some of you.. Although  I would still watch yer backs and pay whatever taxes you need to pay, because as screwy as they are  today, they may just grandfather things backwards.. The ball of confusion  going on today is really spinning fast..

This guy explains it better without all the extra butter.. hehehe

 

 

Again, this is about you as an employer not being required to report the amounts over $600 paid to contractors; it's not about me, as a contractor. I am required to report EVERYTHING. And they do audit. So if an employer didn't send me a 1099 because it was $549, *I* must still report it. It is regarding income cashed out to PayPal; not income on account at SL to pay tier or make purchases inworld.