On November 21st, I posted an article about LL requesting tax information from some customers. Specifically, people had started receiving e-mails from the Lab asking them to complete IRS form W9, Request for Taxpayer Information, which caused some concern and confusion.
As a result, on Tuesday 19th November, Linden Lab moved to try to clarify matters, issuing a blog post entitled Required Tax Documentation. This indicated that the Lab is required by the US Internal Revenue Service (IRS) to collect and retain either Form W-9 (for US citizens) or Form W-8BEN (for non-US citizens) “at certain transaction volumes”. The blog post also noted that those falling under the criteria who fail to submit a completed W-9 or W-8BEN risk having 28% of their gross amounts received withheld. Finally, the post indicated that the Lab is required to file Form 1099-K with the IRS for US residents “with 200 or more transactions with a total amount in excess of $20,000” in a calendar year.
While this went some way towards clarifying the situation, it still left a number of questions and concerns unanswered; one of these being what exactly constitutes a “transaction”, as I noted at the time:
Is it related solely to cashing-out from Second Life, or is it based on the number of user-to-user transaction through the LindeX (i.e. the number of L$ sales a person makes per amount of L$ they offer on the LindeX? Or is it somewhere in between?
Long-term SL user and LL customer Desmond Shang decided to try to seek further information and answers from the Lab. As a result, he’s posted a couple of useful pieces on the SL Universe thread where some of the discussion on the matter has been taking place.
In the first, he recommends that anyone with specific questions / concerns should contact Linden Billing, noting that they have been reasonably responsive. He also points-out that while circumstances will vary from individual to individual, depending upon a range of factors, those who might be regarded as a “hobbyist” in SL might be able to claim some relief on revenue they receive through the platform. In particular he suggests IRS Publication 529 Miscellaneous Deductions might be worth a read, together with Can You Deduct Your Expenses From a Hobby? from Nolo.com.
More specifically, Desmond posts the Lab’s definition of a “transaction”:
Transactions are currently defined as sell orders placed on the LindeX and applies per person not per avatar. How that order is filled does not currently impact the transaction count. For example, if you place a sell order for L$5,000 and that order is matched with three different residents while being filled, it counts as one transaction.
The Lab also note that IRS criteria on withholding taxes is only on the transaction count itself and is only required if they do not have a valid W-9 or W-8BEN on file.
The key points here remain that firstly, these requirements will not impact everyone in Second Life. Secondly, if you have received a request for tax information from the Lab, it is important you do not ignore it, as you risk 28% of your gross amounts received withheld if you do. This applies whether or not you are a US citizen.
Additionally, those who have received a request from the Lab and who have questions / concerns should consider: a) contacting Linden Lab Billing for further information / with specific questions; b) seeking the advice of a tax professional.