Linden Dollar: What it is, How it Works, Tax Implications

What Is the Linden Dollar? The Linden dollar is the virtual currency used in the online world, Second Life; and named after the game's creator, Linden Lab. Users of the Second Life, known as residents, can pay real money, in US dollars, to acquire Linden dollars. Because they can only be used inside of the Second Life platform, they are a closed-loop digital currency. Linden dollars (L$) can be used to buy, sell, rent or trade virtual land, digital goods, and online services. Linden dollars can also be exchanged for US dollars based on a floating rate. Linden Lab stops short of allowing this currency to be a full-fledged fiat currency or even a cryptocurrency. KEY TAKEAWAYS The Linden dollar (L$) is the virtual currency used within Second Life, an immersive online world. Linden dollars are used with the platform to buy and sell virtual goods, property, and services. They can also be exchanged with US dollars outside the platform, or for virtual goods and services within the platform, Linden Labs regulates their transfer and can exert full power over the value of a user's Linden dollars, even revoking them for no reason. Understanding the Linden Dollar Second Life was developed by Linden Lab and was launched in June of 2003. Residents of the program interact with others through avatars. Residents can travel around the virtual world, socialize and participate in various activities. In addition, residents can create and trade virtual property and/or services with other residents. The purpose behind Second Life is to allow users to become immersed in a virtual world through a user-created, community-driven experience. Linden dollars (L$) can be used to buy, sell, rent, or trade land, goods, and services. Goods include cars, clothing, jewelry, and buildings. Services include entertainment, camping, and wage labor. Linden dollars fluctuate in value against the U.S. dollar. Linden dollars can be bought using U.S. dollars and certain other currencies on the exchange service provided by Linden Lab. While the L$ is a floating exchange rate, the rate has remained relatively steady, trading between 240 and 270 per 1 US dollar over the past decade. The platform was designed for the dynamics of interaction to be quite similar to real-world experience, however, Linden Labs wasn't truly interested in perfect mimicry. In 2015, the GDP of Second Life economy was estimated to be approximately $500 million dollars with its gross resident earnings averaging $60 million. 1 Special Considerations Because Linden dollars has a determinable value in the real market, the Financial Crimes Enforcement Network (FinCen), a bureau of the United States Department of the Treasury, recognized Linden Money as a convertible centralized virtual currency in 2013. This means that there are tax implications for any transaction involving Linden Dollars. Not only has Linden Lab tried to reduce their own corporate liability, but they have also sought to limit the exposure of their customers to fraud. For all the company's good intentions, residents still have found ways to scam others within the Second Life platform. Linden Labs has, on occasion, promoted and attempted to manage the L$ as if it was legitimate independent fiat currency, it is clear that this is not the case. The company's own terms of service state that players have no financial or legal claim to their L$ which is a consumable entertainment product that can be revoked or deleted at any time without reason. No fiat currency will even make such demands of those who transact with that currency, because it would represent an undue risk of holding that currency. Virtual currency is not viewed as real money, but as property for tax purposes. Property tax laws, therefore, apply to Linden dollar transactions. A taxpayer is required to include the fair market value of any Linden money obtained when calculating his gross income. If the taxpayer used the virtual currency strictly for investment gains, any capital gains or losses from the investments made are taxed appropriately. Compete Risk Free with $100,000 in Virtual Cash Put your trading skills to the test with our FREE Stock Simulator. Compete with thousands of Investopedia traders and trade your way to the top! Submit trades in a virtual environment before you start risking your own money. Practice trading strategies so that when you're ready to enter the real market, you've had the practice you need. Try our Stock Simulator today >>