The IRS, Linden Lab and Paypal Walk Into A Bar But Second Life Content Creators Aren’t Laughing

Linden Lab’s Tax and Account requirements have been baffling Second Life content creators and business owners for a while now. Initially Linden Lab were a bit slow with information regarding why they were sending people notifications that they had to file information. However Linden Lab got their house in order and provided a lot more information and these days they have some good resources.

Linden Lab are bound by US law to gather the required information. There’s a further issue for Second Life residents based in the USA :

Additionally, for U.S. residents with 200 or more transactions with a total amount in excess of $20,000 in a calendar year, we are required to file a Form 1099-K with the IRS reporting those transactions for that year.

Paypal are another payment processor, Paypal are also bound by the same US laws to gather information, as they explain here and this is where some people felt things may go a bit awry :

Under the legislation, we’ll report to the IRS the total payment volume received by US account holders whose payments exceed both of these levels in a calendar year:

• US$20,000 in gross payment volume from sales of goods or services in a single year
• 200 separate payments for goods or services in the same year

IRC Section 6050W applies to all payment processors, including PayPal. Our goal is to help PayPal sellers understand and comply with the new requirements.

This raised concerns on various Second Life related forums that there may be a possibility that an error could be made here, if a Second Life content creator who cashes out to Paypal filed a form for Linden Lab and Paypal, would the IRS miss the fact that it’s the same money. Surely that couldn’t happen? According to Hamlet Au over at New World Notes, it has indeed happened; Second Life Content Creator Couple Double-Taxed $66K by the IRS – Here’s How to Avoid That Fate.

According to the report in New World Notes, here’s what happened :

Here’s what happened: “When you work in Second Life you get money sent to PayPal. PayPal then sends the money to your bank account. Unfortunately, both LindenLab and PayPal reported my earnings for 2013 separately. Now the IRS thinks I made double because of both companies reporting my earnings.”

The unfortunate Second Life content creators involved in this affair are Washu Zebrastripe and Damien Fate, owners of the coldLogic brand in Second Life. This isn’t an small issue of a few pennies by the way, Hamlet Au reports that they have been sent a tax bill of US$66k, a bill they have already paid once according to the article. There’s a photograph of the bill on the article.

Hamlet’s advice on how to avoid this situation has sound logic, but isn’t something people should need to do :

For other content creators in SL, this suggests some crucial advice: “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.”

People should not need to worry about this, they should be able to file these forms and feel comfortable about it. Indeed Washu Zebrastripe and Damien Fate have complied with both Linden Lab, Paypal and the IRS and for that, they have ended up with a massive headache and worrying tax bill.

The potential for double taxation in circumstances such as this should not have been hard to spot. The money has just moved from one payment processor to another. Indeed this must happen with other payment processors who also allow people to cash out to Paypal.

What this really suggests is that if someone cashes out to Paypal, the information should be passed to Paypal to process the 1099K, not both companies.

I’m not sure what the root cause of the problem is, whether there’s some small print that people have missed, whether the Second Life content creators made an error, whether Linden Lab and Paypal should already be talking to each other or whether the IRS genuinely did not realise that there was the potential for an error such as this to arise. Whatever the reasons, it’s something that should not happen and I hope Washu and Damien resolve the situation soon without any complications.