I’m currently working on an academic paper which discusses the what is a virtual economy, whether those activities should be taxed, a how should they should be taxed. My current thoughts are leaning toward characterizing the realization events which give rise to tax liability as occurring when the income is withdrawn from Second Life, by converting the income form Linden dollars to real US dollars. I feel any other way would be unfair, because Second Life is owned and controlled by Linden Labs. Linden Labs could go bankrupt and take the income of their residents with them, and it would be unfair to tax individuals on money which they didn’t have full possession. Also, once the income leaves the virtual economy it gives the government something to attach, if need be, to satisfy any tax liability.
After all, the rights the users of Second Life and other MMOGs enjoy are a function of their Terms of Service agreements they enter into with the online game providers. As such, those rights are subject to that agreement, which include clause that allow Linden Labs to delete a users account for any reason, and in the event of dispute arising under the agreement, an arbitration clause.
So, in short, let the money leave the game before we worry about taxing it.
NEW YORK–If you are a hardcore player of virtual worlds like World of Warcraft, Second Life, or EverQuest II, IRS form 1099 may soon take on a new meaning for you.
That’s because game publishers may well in the not-too-distant future have to send the forms–which individuals receive when earning nonemployee income from companies or institutions–to virtual-world players engaging in transactions for valuable items like Ultima Online castles, EverQuest weapons, or Second Life currency, even when those players don’t convert the assets into cash.
Most governments are only beginning to become aware of the substantial economic activity in online games, but the games’ rapid growth and the substantial value of the many virtual assets changing hands in them is almost certain to bring them into the popular consciousness.
“Given growth rates of 10 to 15 percent a month, the question is when, not if, Congress and IRS start paying attention to these issues,” said Dan Miller, a senior economist with the Congress’ Joint Economic Committee, who is also a fan of virtual worlds. “So it is incumbent on us to set the terms and the debate so we have a shaped tax policy toward virtual worlds and virtual economies in a favorable way.”
Miller’s comments came during a Saturday panel called “Tax and Finance” at the State of Play/Terra Nova symposium, the fourth annual gathering at New York Law School of academics, lawyers, and other scholars to talk about the legal, social, and economic issues surrounding virtual worlds.
The panel was formed in the context of recent questions–first raised by author Julian Dibbel in his book Play Money and in an article he wrote earlier in Legal Affairs magazine–about whether the transfer of virtual assets, or players’ acquisition of virtual loot by, for example, killing monsters, creates taxable events.
“If you haven’t misspent hours battling an Arctic Ogre Lord near an Ice Dungeon or been equally profligate spending time reading the published works of the Internal Revenue Service,” Dibbell’s article began, “you probably haven’t wondered whether the United States government will someday tax your virtual winnings from games played over the Internet. The real question is: Why hasn’t it happened already?”
And while Miller’s committee began examining these issues in October, his comments Saturday suggested there could be wider future congressional oversight and a revised IRS tax policy. That’s in spite of the fact that Miller said his committee, and Congress in general, is not out to gouge virtual-world players.