Do we have to filed Second Life earning on our taxes if we are converting out lindens to RL money?

[Lexi Zelin]

Do we have to filed Second Life earning on our taxes if we are converting out lindens to RL money?

[Cinnamon Lohner]

If you are generating income in Second Life, the correct answer is yes. 

Does LL file tax paperwork that identifies that income?  Correct answer is No.

Does Paypal file tax paperwork that identifies that income.  Don't know.

--Cinn

[valerie Inshan]

That's an interesting question. I can only speak for French law as an example:

First, as the exchange of virtual elements occur in the game, it does not seem possible to speak of taxable economic activity. However, revenues from the sale of virtual items in the real world are potentially taxable income.

Intellectual services (support in the game, powerlevelling ...) may be charged under the heading of non-commercial profits (BNC). It is a priori the most appropriate category but we can also consider a declaration of income from the game in the section of the Industrial and Commercial Profits (BIC).

The money from the sale of intellectual services could fall within the regime of capital gains. However, when the total annual sales of less than or equal to € 5 000, they are exempt.

The tax collection is based in France on the declarations. The tax proceeds to certain controls. It can request certain details with the publishers of trading platforms. Exchange information with the authorities of other countries are also possible.

Finally, note that all income must be declared and, when one leaves the game world's economy to get back into the real world, it is subject for declaration.

Now /me sits and waits with interest what other replies you will get for other countries.:smileywink:

[Rolig Loon]

Anything that you earn in SL is "play money" as long as it stays in SL.  As soon as you sell L$, however, you have received real income and are required to pay taxes on it, whether you cash it out to your bank account or not.  In practical terms, there is probably very little chance that the IRS will know about those earnings.  Linden Lab does not report them to IRS, because you are not being paid.  You are simply withdrawing money that you got from selling your L$ to other residents and have parked temporarily in LL's account.  (It's like cash that you receive for selling a used lawnmower at your garage sale.  You are supposed to pay taxes on that too, but chances are dim that the IRS will ever know if you don't.)  If you are withdrawing large amounts of money from SL, however, or are withdrawing money regularly, your visibility increases.  And of course, if you are ever audited, all bets are off.  The safe thing to do (and certainly the legal thing to do) is to report the income.

[Ceera Murakami]

Short answer: Yes, in any tax jurisdiction that I am aware of.

Long Answer:

LL can give you monthly statements for exactly how much real money you sent into SL (buying L$ or paying Premium dues) and how much you took out (cashing out).

PayPal can give you reports of how much you cashed out as well, and they DO report that income to the USA's IRS now, as I understand it.

Best bet is to treat income earned from cashing out via PayPal as real income, once it is in PayPal and able to be spent, or once any checks or other forms of payment received hit your bank account.

If you keep good records, you could concievably count some in-world expenses (like the land you use in-world to build products on, and texture upload charges) as 'expenses' for your business. Server space rental and cost of materials are valid business expenses in most jurisdictions.

It is unlikely that any real-world tax authority will care about resident to resident transactions in-world done in L$. What they want to know about is when real money gets to a point that you could spend it in the real world.

If in doubt, talk to a tax specialist in your country, who knows small business tax laws.

[PeterCanessa Oh]

What counts for tax depends on where in the world you are.

The UK Inland Revenue appears to take the same position as Rolig outlines for the USA IRS.  That is; while it stays in SL it doesn't count, when you cash-out to US$, GB£, etc. it counts as earned income.

If in doubt consult an accountant; we're not qualified to give professional financial advice (well, I'm not anyway!)

[Silks Ametza]

In the United States, if you keep the cash you gain from selling Linden Dollars (L$) on the LindeX in-game via your dashboard, no you do not have to report it. If you transfer it to your Paypal Account, yes you do depending on how much you earn. As it is, you can earn up to $2,399 per year per family member and not have to report it to the Internal Revenue Service (IRS)- once you cross over to $2,400 per year per family member, then yes you do.

Example- you have 1 avatar in Second Life and a family of 5 in the real world. You can earn $11,995 in the real world and not have to report it. Once you earn $12,000, then yes you do when you transfer what you sell on the LindeX to your Paypal Account. The current Selling Rate on the LindeX is L$256 per $1.00- So you would need L$3,072,000.00 to make $12,000 a year before you have to report it to the IRS in your income taxes.
Also remember, you can count expenses in your income taxes depending on what you do. A Disc Jockey (DJ) counts a Streaming Server, his/her desktop/laptop computer, his/her initial software purchases and music purchases as business expenses- those are deductions on your income taxes. Down the road, the DJ can deduct maintenance and upgrades to his desktop computer as expenses in addition to music purchases.

[Rolig Loon]

@Silks and OP --- That's not quite true, or at least it deserves a little clarification.  In the U.S., income is income, no matter how you earn it.  If you are paid $20  cash for mowing someone's lawn, it's taxable.  If you cash out earnings from SL, it's taxable -- whether it comes out as a payment to PayPal or as a wire transfer to your bank.  So, the importantr words are "cash out."  Your earnings in SL are not taxable until you remove them from SL.   You can sell your L$ and put the earnings in your dollar balance, but as soon as you pay them out of there, they are taxable.