Back in March the IRS issued more guidance on virtual currencies in the guise of Notice 2014-21. The purpose of this notice is to provide some answers to frequently asked questions regarding virtual currencies. One of those questions for those of us who use virtual worlds is whether Linden Dollars are actually a virtual currency, the answer remains unclear. However over on Forbes Peter J Reilly blogged : Bitcoins Not Tax Fairy Dust – Second Life Still A Tax Haven?
Bitcoins are specifically mentioned in the IRS document, Linden Dollars are not. However it’s the scope of the IRS notice that makes some people believe that Linden Dollars do not fall within the tax bracket :
In general, the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability. This notice addresses only the U.S. federal tax consequences of transactions in, or transactions that use, convertible virtual currency, and the term “virtual currency” as used in Section 4 refers only to convertible virtual currency. No inference should be drawn with respect to virtual currencies not described in this notice.
The Treasury Department and the IRS recognize that there may be other questions regarding the tax consequences of virtual currency not addressed in this notice that warrant consideration. Therefore, the Treasury Department and the IRS request comments from the public regarding other types or aspects of virtual currency transactions that should be addressed in future guidance.
The part of the scope that Peter J Reilly feels leaves the Linden economy unmolested is with respect to payment of goods or services in a real-world economy transaction. This is not unusual, when I raised the issue of VAT within Second Life with the UK tax officials at HMRC I was informed that transactions that take place entirely within a virtual world are outside the scope of VAT, in other words, VAT did not apply to inworld transactions with Linden Dollars when I queried HMRC, which is just as well as Linden Dollar transactions would cause a mighty headache for Second Life merchants if they were within the scope of VAT.
However grey areas do remain and one can’t help but feel that things will change in the future.
One grey area is with regards to people who sell items that require an additional download or email. For example someone may well sell textures but then provide a notecard with details on how to download the PSD files from a website outside of Second Life, taking part of the transaction outside of the virtual world.
A similar issue could arise with the use of .dae files for use with Blender. Then of course there’s the issue itself that full perm textures can be downloaded and in some cases content creators give permission for them to be used in other virtual worlds. These grey areas seem to tread a very fine line regarding whether they are real world transactions as opposed to virtual world transactions.
However it appears to me, and this is my opinion and not based in fact, but it appears to me that the Linden Dollar in its purest form is outside of the tax scope. However as Second Life users have found out more recently, when they are converted to US dollars, it becomes a different kettle of fish. This is why people have been receiving requests for their ID and in some cases tax details. Linden Lab blogged about these issues : New Resource: Tax & Account Documentation FAQs
That document and linked wiki page provide you with general information but it is not Linden Lab’s job to help you with your tax affairs beyond the legal requirements Linden Lab themselves face with regards to collecting tax information etc.
The Linden Dollar and the LindeX are extremely valuable assets for Linden Lab, they could in theory extend them or offer similar functionality outside of Second Life. However that would raise the question again of what exactly the Linden Dollar is and if ever a decision is reached that they are considered a currency similar to Bitcoin, matters for Second Life merchants would become a whole deal more complicated.