Businessman Gets 4 Months in Federal Prison Partly for Failing to Disclose $150K in Income Earned in Second Life

Gregg Kaminsky, CEO at Atlanta-based Circlenet, LLC, was convicted last year of hiding money in a Swiss Bank and for failing to report nearly $150,000 in taxable income earned from business activities in Second Life; according to the Wall Street Journal, he was just sentenced this month to 4 months in prison, even while claiming “'there truly was some confusion' about whether earnings from the Second Life virtual world were taxable." Reading the Biz Journal report on this story, the harshness of the sentence is not primarily over the unreported Second Life based income, but the Swiss bank shenanigans. However, the US attorney who successfully convicted Kaminsky did announce this:

Sally Quillian Yates said this sends a strong message that "U.S. taxpayers are required to report all of their taxable income to the IRS, whether that income is earned in the real world or in a virtual world."

Emphasis mine, because it bears emphasis. Linden Lab has been cagey about Second Life economics in the last few years, but back in 2009, the company reported that 50 Second Life users grossed US$100,000+ each from the SL Economy, with the top entrepreneur cashing out US $1.7 million yearly. Linden Lab's Robin Harper explained the numbers to me in even more detail:

"[S]everal people/accounts are cashing out US$ amounts in excess of $1M per year (with the highest amount estimated at $1.7M), based on annualizing one quarter of data. Most of the top 10 are in the real estate business, but the group also includes a company that does events and one that designs virtual goods including shoes."

So thinking on the fate of Mr. Kaminsky, I hope they're all reporting their taxes!

It's amazing to think, not only 10 years ago, a well-known author couldn't pay taxes on his virtual income even when he tried.

Hat tip: Reddit.

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Comments

[Iggy]

If you cash out Lindens for anything other than paying tier or premium membership fees, they become real and reportable income. What is so difficult to understand about that?

Julian Dibbell made it clear back in 2006, in Play Money, that we could expect this one day. The IRS agent he spoke to mentioned that the sale of virtual items would be taxed as soon as the IRS figured out what virtual items were :D

I knew this day was coming, with the Feds scrambling for more revenue. Now it's here.

[Eddi Haskell]

Not reporting $150,000 is bad enough but my guess is that not reporting the money in a foreign bank account is what actually got Mr. Kaminsky put in jail. US law is very strict -- any US Citizen or resident who has over $10,000 in any year of funds in a foreign bank or financial institution must report this amount by June 30 of the following year. If anyone has over $10,000 in any bank in calendar year 2014 you must report this by June 30, 2015. If anyone is deliberately not reporting an amount as large as $150,000 this very well could result in a jail sentence and severe fine. This law is strict for anti-terrorism purposes and money laundering, and my guess is this is what got Mr. Kaminsky in such hot water, even though he probably can go home on weekends and he probably will have his sentence cut by 40% if he is cooperative.

[Ciaran Laval]

The jail time appears to be largely based upon him coming clean and still not declaring his SL income.That didn't go down well.

In a report I read he claimed that there had been some discrepancy as to whether income from SL was taxable, there should no longer be any sort of discrepancy about that.

[Sepp]

Of course income from any source should be reported to the IRS.

But with taxation of incomes from SL also must follow the possibility to make deductions for losses from doing business in SL.

[Anonymous]

I did a little bit of poking here, because these numbers didn't make sense. 140,000 DOLLARS over 8 years is nothing to sneeze at taking home from SL. It amounts to $17,500 a year, or $1,458 a month, which amounts to about 37,000 L$ a month.

Gregg Kaminsky's linked-in profile lists him as CEO of "CircleNet LLC". The website he lists is circlenetvirtual.com. He described his business as a major vendor network and affiliate system, which immediately had me thinking about vendor systems like JEVN or Caspervend - but I'd never heard of CircleNet before. WHO was big enough to make that kind of money in SL for the last 8 years, and I've never heard of them?

I had to go deeper.

The circlenetvirtual.com domain has expired, but the internet archive has a capture of the site from 2010.

http://web.archive.org/web/20100701073448/http://www.circlenetvirtual.com/about.htm">http://www.circlenetvirtual.com/about.htm">http://web.archive.org/web/20100701073448/http://www.circlenetvirtual.com/about.htm

On that captured webpage, circlenet talks about their ownership of the Pattaya Island sim, and they tell a story about how they got started in SL as a small company called Thailani.

A little inworld detective work turned up the fact that Pattaya Island is now owned by the "Twisted Orchid Fetish Club" group, founded by Kailani Ling. A little bit of searching turned up an inworld group called, Thailani Development", also founded by Kailani Ling.

Owner of Kinky-O.