Category — Virtual Property Taxation
In an effort to stave off a new form of money laundering, prohibited gambling and threats to the Chinese yuan (Chinese currency), Chinese Web sites have been ordered to limit the use of virtual money. Public prosecutor Yang Tao says “The QQ coin is challenging the status of the [yuan] as the only legitimate currency in China.”
Specifically, virtual money may only be used to buy virtual products and services the companies provide themselves, issuance will be limited, and users are “strictly forbidden” from trading it into legal tender for a profit.
QQ coins, issued by Tencent.com – China’s largest instant-messaging service provider – are the most popular form of online credits used by 220 million users. They are being used to pay for an increasing array of services including gambling, phone sex services and shopping online
Click here to read the article.
According to GameSpot, it won’t belong before the IRS starts taxing gains made while playing virtual reality games.
Dale’s Comment: I agree. If a school teacher named Ailin Graef (a.k.a. Anshe Chung in Second Life) can make $1,000,000 in real world currency by playing a video game, you can bet Uncle Sam, or in Ailin’s case, the Bundestag, will want a part of it.
Business Week and others are reporting that Anshe Chung, a Second Life character created by Ailin Graef (a teacher born and raised in China – now residing in Germany) has grown an initial $9.95 “investment” into virtual property worth and estimated $1M U.S. based on Linden’s most recent Economic Statistics.
She did this by buying large parcels of Second Life virtual real estate, subdividing, developing it (using Photoshop and other tools to add rivers, forests, mountains etc.) and selling off smaller plots to other Second Life residents.
Second Life’s in-game currency, Linden Dollars, can be converted into U.S. dollars.
Dan Bradbury writes an interesting piece in Backbone Magazine about the virtual goings on in MMORPGs and some of the legal implications. Among other things he discusses Mark Bragg's virtual property case and a virtual "mafia" of sorts in Second Life where users take it upon themselves to enforce the rules within the virtual world when no other recourse is available.
Source: Backbone Magazine
A spokesperson for he Australian Tax Office, in what is probably a world first, has said that if a virtual transaction has real world implications – if it can be attributed a monetary value – it attracts the attention of the Tax Office. In her words:
“The real world value of a transaction may form part of your taxable income, even if it is in Linden dollars,”
Australia seems to be heading in a different direction on this issue as the U.S. is based on Representative Jim Saxton has recently said.
Dale’s Comment: Frankly this makes complete sense to me. I see no reason to make a distinction between real-world revenue generated from virtual activities and any other income.
JEC Press Release The Chairman of the U.S. Congressional Joint Economic Committee (JEC), Jim Saxton, believes taxing virtual economies would be a mistake. The goal of a forthcoming JEC study is to head off any premature attempt to impose tax on virtual economies.
[November 9, 2006 Update: Despite heavy Republican House losses in the November 7 midterm elections, Rep. Jim Saxton held his seat and won for a 12th term.]
Gamer’s with Jobs has a very interesting article about a recent Eve Online virtual ponzi scheme where ‘Dentara Rast’, the gaming name of an Eve Online player, scammed 700 billion ISK (the in-game currency) from other players. Given that ISK is convertible into real-world currency, making his ‘winnings/earnings’ from the scam roughly equal to $81,667 USD, would the other players have an actionable real-world fraud claim against the player? Are his ‘winnings’ taxable by the IRS? If Dentara Rast does not convert his winnings into cash, are his winnings taxable on the same theory as unrealized capital gains from exercised stock option purchases? Does Eve-Online’s EULA, claiming ownership rights to all in-game property, affect the result given that ISK is bought and sold on e-Bay in contravention to the EULA? Or, does the voluntary participation of other gamers in the free-wheeling, unregulated, world of Eve Online, comprise implicit consent (as with a poker-player’s implicit consent to being lied to by another player that bluffs) to in-game fraud and other shenanigans that would be illegal in the real world? All interesting questions explored in this article.
The Entropia Universe bills itself as “the first virtual universe – with a real cash economy” (the Second Life operators may dispute this claim). It’s operator/developer, Mindark PE plans to introduce a real-world ATM card that will let players withdraw hard cash automatically converted from their virtual game treasury. Entropia runs on its own currency, Project Entropia Dollars (PED), that is explicitly backed by real-world dollars at a conversion rate of one U.S. dollars equals 10 PED.
Dale’s Comment: Video game universes are increasingly overlapping with the real world. The Entropia Universe’s use of a convertible currency raises obvious currency exchange, tax law and money laundering issues/concerns. What will happen to users’ accumulated currency when/if the Entropia Universe ceases to exist, or its Swedish operator, MindArk, ceases to exist or goes bankrupt? Will users have claims as creditors against MindArk?
The wildly popular Second Life MMORPG also allows users to use real currency to purchase virtual property. Second Life actually publishes how much real-world money is spent in the game each month. U.S. currency is converted to the in-game $Lindex currency and, through the games ‘Marketplace’ users can convert $Lindex back to real currency. As will be the case in the Entropia Universe, this “virtual” property has real-world value that, if stolen etc., may (should?) give rise to enforceable property rights in the real world.
See a related story posed on April 3, 2006, where a Chinese man was convicted of stealing virtual property and sentenced to a fine of 5,000 yuan (US$617). I suspect it will not be long before this type of case makes its way into Western courts.