Second Life - Tilia and U.S. income tax

[Prokofy Neva]

19 hours ago, Tech Robonaught said:

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)

I reported all cashouts from Tillia as income because it *is* income. And I paid tax on it. That's how it works in the real world. It's not my main income in life but still, it's income. Some big creators and realtors in SL who make serious money must also report it. Whether they do or not is their affair, and the IRS may or may not come after them. But don't assume that because you are small fry they won't audit you. I have been audited and requested to show every $50 translation and notarized diploma invoice let alone SL "winnings"--  to the IRS man. I  also worked in an office of a company that was audited. And the IRS guy said "We don't care that you lost this money or sent it somewhere and you don't know what happened; we care that you have a record that you did that." 

This strange quibbling over whether it is a "good or service" that has a label and a physical package is beside the point. SL rentals are server space rentals. SL content is content to enjoy while socializing virtually. They are both goods and services, even if intangible. There are all kinds of goods and services in the world and there is no way the IRS treats only those with a physical manifestation in the real world as taxable, and everything else -- a translation, a Tarot reading, career coaching and numerous other things as "not real" and "not a service".

[Ceka Cianci]

7 hours ago, Prokofy Neva said:

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.

I've said pretty much the same thing in almost every post I've made in this thread.. hehehe

I'll word it differently here.. If you are cashing out in second life, you are self employed.. Anywhere that you generate income from as self employed, keep track of your own records.. If you receive a 1099 Misc from one of the places that you generated income from and it doesn't match your records, go by your records, especially if the 1099 misc is less than you have recorded.. Because when it comes time for an audit, it's going to be just you and the IRS..

If it's over the amount you have recorded, double check your records and then get in contact with whoever sent the 1099misc.. if you can't work things out.. you pretty much better off paying the overage and dealing with them afterwards.. But fortunately for myself most times they are pretty much right on the money..

Anyways, I've never said anything about tier or anything going into the world being taxable.. that's all outgoing expense.. Only what you take out of the world and coming to you as income..

You'll generate a 1099 misc from each individual place you generate income from.. Then if you use a 3rd party service like a paypal, and you are generating income from multiple places places.. You'll get a 1099k from that 3rd party service with all those incomes combined.

So you need to keep good records  of every place that you generated income from, as well as keep good records from the third party services you use..

The 600.00 threshold  really is irrelevant when it comes to paying taxes and audit time as a self employed person..

 

Here is a crazy story that scared the daylights out of me and my husband.. 

We had to Re-file 7 years of taxes a few years back. The reason was, because we got a letter from the IRS saying that we hadn't filed our taxes in the last 7 years.. hehehehe

What had ended up happening is, the IRS lost 7 years of our records somehow.. Even though I had all of our records and proof of filing on our end, I still had to refile 7 years worth of our taxes all over again..  The really crazy thing is, We even got returns a couple of times.. hehehe 

I even showed them the records of the returns.. They said they can't find any records of it, so we would still have to file those years..

Fortunately, I never throw anything away and keep things put into their own file for each year.. That sucky thing was, all those years were  filed on paper and none were E-filed. So i had to hunt down the correct forms and redo 7 years worth of taxes, while also communicating with one of the IRS agents over the next 6 months..  We actually  kind of got to know each other a little , because we talked so much..hehehe

Anyways, it probably wouldn't have taken me so long if it was just us filing joint, but we also had a lot of self employment things to go back over as well.. I mean ledgers and every receipt..  that was the longest 6 months of my life..

We had a couple of the years that were still showing returns in the time period where we could get another return.. Those scared me the most, because because  we didn't want those to come back and bite us in the butt if they somehow found the 7 years worth of records and seen  they paid us twice.. So I insisted that they send us a record showing that they told us we had to receive those years of returns again..

I learned from that experience, to only trust my own records and never throw anything important away when it comes to tax records or any important records for that matter, because you just never know..

I have all my tax records, every little receipt and log, all the way back to when I first started generating income and having to pay taxes.. Thank the Universe that I did or we would have been screwed so bad.. hehehe

Edited June 3, 2023 by Ceka Cianci

[Ceka Cianci]

On 6/2/2023 at 6:06 AM, Tech Robonaught said:

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)

You can look at it this way to kind of get a better idea..  You generate  income from a business as a self employed.. In this case it's going to show that business as Tilla..

Any income from a business that you generate as self employed is going to generate a 1099Misc form.. Forget the threshold and lets just say, there is no threshold.

A 1099-Misc reports income from an individual business no matter the form of payment used, be it with a credit card or cash or check or whatever..

A 1099-K Reports bank card/payment platform income from all the businesses that you generate income from..

So if it went straight from tilla to your bank, that same income lands in less places.. Since you use paypal, they also record that same income from Tilla in the form of a Form 1099-K..

If you don't keep good records, you can end up getting taxed twice on the same income..but basically all that is happening is it's showing a trail from Tilla to you and getting recorded every place it lands along the way..

Also any charges you incur during that incomes trip to you is an expense..

 

 

 

 

 

 

[Ceka Cianci]

Updated for the 2023 tax year,

 

[PheebyKatz]

U.S. resident here, so YMMV with what follows.

If you buy L$, LL has to pay taxes on what you spent with them. After that, recirculating the virtual currency doesn't incur any taxation by the Fed, because taxes have already been paid on the real currency.

To use your L$ balance to pay for things shouldn't incur any Fed taxation, as it's all inworld currency that the real funds have been taxed on already.

Also, what I've not seen anyone talk about (doesn't mean they haven't, I realize) is whether one might claim their SL business as an investment of some sort, and weigh their investment to profit ratio and use those numbers to advantage. Especially if everything you put into your SL can be shown to be in some way related to managing your online business.

I'd be willing to go out on a limb and say that if you put a certain amount in, and get paid out less than you've put in that year, you could probably use that in some way to give yourself a tax break, even if it's a small one.

Theoretically, one could thoroughly enjoy a fun SL with a small inworld business on the side, and simply state that all of their inworld spendings and purchases with real money are for the sake of growing the business. Especially if they weren't really making any substantial profit off of it. Doing it all for fun, but claiming it as business expenses could be just the loophole for those who aren't made of money and could use a break.

Edited October 5, 2023 by PheebyKatz

[Ceka Cianci]

8 hours ago, PheebyKatz said:

U.S. resident here, so YMMV with what follows.

If you buy L$, LL has to pay taxes on what you spent with them. After that, recirculating the virtual currency doesn't incur any taxation by the Fed, because taxes have already been paid on the real currency.

To use your L$ balance to pay for things shouldn't incur any Fed taxation, as it's all inworld currency that the real funds have been taxed on already.

Also, what I've not seen anyone talk about (doesn't mean they haven't, I realize) is whether one might claim their SL business as an investment of some sort, and weigh their investment to profit ratio and use those numbers to advantage. Especially if everything you put into your SL can be shown to be in some way related to managing your online business.

I'd be willing to go out on a limb and say that if you put a certain amount in, and get paid out less than you've put in that year, you could probably use that in some way to give yourself a tax break, even if it's a small one.

Theoretically, one could thoroughly enjoy a fun SL with a small inworld business on the side, and simply state that all of their inworld spendings and purchases with real money are for the sake of growing the business. Especially if they weren't really making any substantial profit off of it. Doing it all for fun, but claiming it as business expenses could be just the loophole for those who aren't made of money and could use a break.

The main thing they are going to be looking at is the amount of taxes you claim to have already paid and the amout you owe. 

In sl what goes on inbetween the L's transactions won't matter..  

Just the taxes you paid when you bought the and the taxes you generated when you sold them..

The main thing to be careful of now is keeping track of the path and how many bounces the money takes to go from tilla to you.. Because each bounce that money takes will create a 1099 form.

You don't want to get confused and end up thinking you owe more than you do in taxea because of the extra 1099's generated on the same money.

Any charges that money incures along the way is also an expense.

I can't say it enough about  keeping good records, because it's really gonna be confusing for a lot that never generated a 1099 from using sl before..

Edited October 5, 2023 by Ceka Cianci