Can I make you some bucks?

how the net is transforming the way we work and earn

Should we tax virtual income? May 5, 2008

Paying Tax. Something everyone looks forward to. And who wouldn’t eagerly anticipate the day when their slogging earns them enough to have some of it deducted by government? I know I do – said with all the sarcasm I can muster.

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But it’s all part of the you-scratch-my-back and I’ll-scratch-yours policy. So I suppose I shouldn’t really complain. After all, my first pay-cheque (when I do receive it) might help improve something like the state of South Africa’s roads. Imagine a pothole-free South Africa – if you’ve ever been to South Africa you’ll understand? And all from paying your taxes? Wow, the Receiver of Revenue should pay me to work in their PR department.

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But I digress. The point is that we pay our taxes, well some of us do. Others, like Wesley Snipes seem to have better things to do with their money. He was recently sentenced to three years in prison for tax evasion. He isn’t the only one though. Richard Hatch , who won US Survivor in 2000, and Gordon Ramsay , celebrity chef, are two other celebs who have also been charged with tax offenses recently. In Ramsay’s case he was forced to pay a 450 pound fine for missing certain tax deadlines. When it comes to policing tax, governments are relentless. And so they should be, some would argue.

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Despite my cynicism, I do see how paying tax benefits the tax-payer. But what about income earned in a virtual reality world like Second Life? Should people be taxed on their virtual money and assets and if so how will governments regulate this?

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The Swedish government seems to think so. This officiousness shouldn’t surprise anyone after all Sweden was one of the first countries to set up a virtual embassy in Second Life.

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It would make sense to tax any virtual earnings which have can be converted into real-world income. This would affect Second Lifers like Anshe Chung who was one of the first virtual reality millionaires. She began selling custom-made animations in Second Life and used the profit to buy and develop virtual land as part of her Second life estate agency. Chung also owns several Second Life shopping centres and virtual clothing stores.

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And it’s because Linden dollar, the currency used is Second Life, and Project Entropia Dollars (PED), the currency used in another virtual reality game , can be converted into real-world dollars that there should be some sort of tax regulation. After all there are cases where virtual money has been converted into real-world income. Brad Welch is one such case where PED where used to pay for his $10,000 dollar hip-replacement surgery. There is also the case of Julian Dibbell who says in his blog :

On April 15, 2004, I will truthfully report to the IRS that my primary source of income is the sale of imaginary goods, and that I earn more from it, on a monthly basis, than I have ever earned as a professional writer.

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It makes sense to tax virtual money which is used as real-world income even if it was earned in virtual reality. But what the Swedish government is proposing is that even in-game transactions should be taxed. A statement they released says the following:

Transactions between participants in a virtual world, where the deal is about the sale of a “product” or a “service” against reimbursement in an internal currency, should be considered, according to the Swedish Tax Agency’s ruling, [actual] sales of electronic services, if the internal currency can be exchanged to a valid legal means of payment. If the internal currency cannot be exchanged to money, the transactions should not be considered [actual] sales.

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You’re probably thinking that that’s a summary of my ramblings. Well, not quite. See what this means is that you will be taxed on virtual money or assets regardless of whether or not you actually convert it into real currency.

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Think of the implications this will have for players of games like World of Warcraft (WoW). This is a massively multiplayer online role-playing game which involves fighting monsters, going on quests and developing the skills of your character. In order to progress in WoW a player can buy WoW gold or can exchange things like swords for things your character might need. Can you imagine being taxed for this? Or perhaps being taxed for all your virtual reality assets like your swords and castles?

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And if players are going to be taxed for their virtual reality assets what does that mean when the player dies? Will this player’s heirs be forced to pay estate taxes?

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The Swedish government is also trying to introduce legislation which taxes players who earn over a certain amount in virtual reality. According to a statement released by the Swedish Tax Agency:

The Agency also finds that a participant who, without carrying on a trade, independently and with certain permanence sells electronic services for more than 30 000 Swedish kronor [about 3 000 €], is carrying out an activity that is professional according to chapter 4, 1 §, first paragraph 2 of the value-added tax statute.

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Understandably, governments are worried that virtual reality makes tax evasion and money-laundering easier. Perhaps there is some need to regulate virtual reality money. But please, let’s be sensible about it. The you-scratch-my-back and I’ll-scratch-yours policy doesn’t apply if governments are going to tax players for virtual-reality assets which never leave the virtual world. Surely if anyone is going to be doing the taxing it should be virtual governments. But since there aren’t any , maybe it’s the job of companies, like Linden Lab and Mindark which created these virtual reality worlds.

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Consider this section of Second Life’s Terms of Service:

1.4 Second Life “currency” is a limited license right available for purchase or free distribution at Linden Lab’s discretion, and is not redeemable for monetary value from Linden Lab.

You acknowledge that the Service presently includes a component of in-world fictional currency (“Currency” or “Linden Dollars” or “L$”), which constitutes a limited license right to use a feature of our product when, as, and if allowed by Linden Lab. Linden Lab may charge fees for the right to use Linden Dollars, or may distribute Linden Dollars without charge, in its sole discretion. Regardless of terminology used, Linden Dollars represent a limited license right governed solely under the terms of this Agreement, and are not redeemable for any sum of money or monetary value from Linden Lab at any time. You agree that Linden Lab has the absolute right to manage, regulate, control, modify and/or eliminate such Currency as it sees fit in its sole discretion, in any general or specific case, and that Linden Lab will have no liability to you based on its exercise of such right. (My emphasis)

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With so much control over its currency, what really separates Linden Labs from a real world government? It would make more sense for these companies to decide how virtual money and assets are taxed.

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