Update: IRS Drops Second Life Content Creators' Tax Bill from $66,005... to $0.00

Last November, I told you about the tax problems of US-based SL entrepreneurs Washu Zebrastripe and Damien Fate, who got a freakout-inducing letter from the Internal Revenue Service, double-billing them $65K for their earnings from Second Life. But now there's good news on that front: Their IRS bill is now, well, nothing. (See photo.)

"After all the documentation I sent in," Erika tells me, "they say I now owe $0.00! Yay!!" 

To be sure, she sent the government a lot of damn documentation:

"A list of all received payments to Paypal, a list of payments to Paypal from Linden Lab, a letter explaining how to match the sent payments from Linden Lab to the exact time/day/amount received in Paypal, some documents related to a support ticket we sent to Linden Lab regarding the tax documents, and a list of my email addresses I use for Paypal so they know that it is in fact me that we sent the money to." (Whew.) "I cannot say that this was all needed, but I wanted to cover my bases."

This is a pretty time-consuming task, because just look at the Paypal payments they received in a single month:

"So this is a file that PayPal sends you along with your 1099k," says Erika. It lists all my received money, and from where. We can see that every single one on this snapshot is from Linden Lab."

Which also brings up some advice for content creators in Second Life she gave when they first got the dreaded $60K bill:

"Either make sure you pull out money from Linden Lab less than 200 times a year, or don't send your money from Linden Lab to PayPal." (Emphasis mine, because it bears emphasizing.)

And so now Washu and Damien, who are raising a family in great part from their Second Life-based income, are in the somewhat surreal position of having told the US government that they're being taxed twice on the real money they made from content which doesn't exist -- and the US government agreeing that their back tax bill shouldn't exist either.

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Comments

[Chuck Baggett]

Does the IRS get notified if you just cash out Lindens you bought to spend and aren't running a business?

[Shockwave Yareach]

Chuck - I would assume you keep track of what you pay in and just pay tax on the difference. That's how stock sales work.

[AITUI]

I am currently being audited by my home state in the USA. I have paid taxes on my income since 2007. Now, they are trying to make me prove that my virtual transactions, from anonymous users, were made *out* of state/country. If I can not prove this they are threatening to fine me 25% for negligence, 25% for late filing, and <1% per month. Isn't this just wonderful? /s

[Some Guy]

Nothing counts as a taxable sale until you sell linden labs your lindens and you cash it out. So you are selling to a US based company AITUI.