Taxing Second Life [update 1]
by Zack Stern 
{ Oct 16th 2006 at 5:10PM }
The new Reuters Second Life branch reports on a Congressional probe into games with virtual economies like Second Life and World of Warcraft. Massive amounts of money changes hands in these titles; Second Life users spend up to $500,000 in daily transactions. The U.S. government has caught the scent of money wafting up from the internet tubes and hopes to get its share.Americans are already required to pay taxes on real-world earnings when they cash out of a game, but should they pay taxes on virtual, in-game profits? For example, citizens pay capital gains taxes on real-world asset sales -- profits from an investment over time -- but in-game capital gains policy and enforcement are unclear. Should you owe Linden Dollars to the U.S. government after selling Second Life property in-game, even if you don't cash-out to U.S. currency?
Should virtual worlds be governed by real-world laws, or are they becoming something closer to their own nations? If governments start taxing strictly in-game situations, will gamers deserve in-game social services and a virtual seat in Congress?
[Via Second Life Insider]
[Update 1: Thanks, Ish, for the capital gains lesson. Sorry for the mistake; the second paragraph is clarified.]
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Reader Comments (Page 1 of 1)
Vercin @ Oct 16th 2006 5:14PM
Yes, and they should get some of our Monopoly money, too, were we to pass go within the country's borders. Pshh.
TexRob @ Oct 16th 2006 5:15PM
39 days in a year eh? I wonder if Reuters in Second Life will edit their stories as well as that article.
$350,000 a day, or 13 mil a year is what I am referring to, for the less numerically adept.
crono141 @ Oct 16th 2006 5:25PM
I'll pay virtual taxes when they set up a virtual government and virtual hillary clinton is president.
fawazr @ Oct 16th 2006 5:28PM
It is a moral duty to pay taxes. It's unethical to horde one's own income for his self while remaining oblivious to his social burden. Through taxes, we are able to pay back interests on the very loans that fuel our economy.
Before you criticize taxation, think of the slippery slope into chaos its omission would invite. Our quality of life would plummet, our leaders would have no proper incentive to devote themselves to serving us, and the banks that supply our consumer appetites would suffer from massive losses and an inability to lend money.
Soldiers have died for the democraacy that America epitomizes. Taxation is a cornerstone of that democracy. As gamers, we should be more willing to pay what is owed and become more vocal in our support for these new taxes.
get over it @ Oct 16th 2006 5:32PM
wanting someone to pay taxes on a virtual property or earnings that can be gone just by flipping a switch or pulling a plug is asinine.
Sub @ Oct 16th 2006 5:32PM
Fawazr, that's fine and dandy, but we're talking about taxing games here.... It's absurd.
Stoli @ Oct 16th 2006 5:35PM
I think the government is getting enough of our money through taxes...but, if the sale is happening through an actual business (such as the company that runs Second Life), then sure, I could see taxation happen. However, if it's not (through random person, through an off-site transaction), then sure. I mean, they don't tax garage sales, and I don't seem to pay any taxes on eBay auctions...
IslandLife @ Oct 16th 2006 5:36PM
Thank goodness we don't have to pay taxes in my country, well except for import taxes, and those can get pretty steep sometimes.
Vercin @ Oct 16th 2006 5:38PM
@fawazr
Personally, I wouldn't mind higher taxes in general if we were to get some more useful programs in return instead of the inevitable fattening of politicians' or lobbyists' wallets.
But that's not the issue. Storyline or not, Second Life is a game. The government has no right to tax virtual currency. If one were to, at some point, sell the virtual currency or assets for real-world money, then they could tax the real-world money.
Say you own some property in Second Life that increased in value, and you paid a capital gains tax to the U.S. government. Then the company running the servers goes out of business or for some other reason shuts them down. Then you find you have paid taxes, REAL-WORLD money on an item that does not, and never really did exist. This doesn't even bring up the problems that would arise from trying to tax players from other countries or children that play to hang out with friends and don't have money to pay these sorts of taxes.
Like I said in the first comment, since Second Life and other MMO-ish passtimes are games, taxing them is akin to actually taxing Park Place or Oriental Avenue. Unless you sell your Monopoly money for real-world currency, I don't see how the government would have any right to tax it.
Franky Digital @ Oct 16th 2006 5:45PM
When virtual item and income becomes tangible, then I can understand some sort of taxing. As it stands now - which someone pointed out early - none of this exists. Therefore, taxing virtual goods as they stand now is absolutely ridiculous.
Marty @ Oct 16th 2006 5:47PM
What's the big deal about second life anyway? Has everyone forgotten about the most important life, their first?
crono141 @ Oct 16th 2006 5:49PM
@fawazr
So, according to you, we had no government or democracy in america until world war 1 (16th amendment).
Because until then, we didn't have income taxes in america. As a matter of fact, when they passed the constitutional amendment to tax us (because it took an amendment to make income taxes legal), they thought about making an upper cap of 2%.
They decided against it because "we would never tax the people that much".
If only that legislature had the forsight of the founding fathers.
So, in short, you are wrong. Taxes don't make a democracy, Democracy does.
Mr. Khan @ Oct 16th 2006 6:00PM
This is just part of the Government's recent attempts to intrude upon the experience of the Internet, something that they have no right to do, being that politicians are not elected with tech savvy in mind, and We The Tech Savvy People do not represent a large enough demographic to make our voices known
SL's 900,000+ users? a drop in the bucket in America's approaching 300 million
Hell, there are more Satanists in this country
The blurring of the lines between "virtual" and "real" is something politicians must avoid at all costs, because the Internet is virtually an untamed Zone still, and Congress could turn the 'net into a bureaucracy as bad as the DMV, or a zone as controlled as Six Network TV
End Rant
Dustin @ Oct 16th 2006 5:51PM
how bout we get enough room in our schools for the kids before we go taxing a video game.
Pince @ Oct 16th 2006 5:59PM
I can see how they have a confusing case before them, since the lines constantly blur between virtual and real money in a lot of games. But, the exchanges are still between things that are not money.
I am not too clear on tax law, lets say, if two parties, even two companies, were to exchange goods, but not money, could the government tax that.
That is, does the government put tax on exchanges wherein money is not exchanged, but two items that have a dollar equivalent are, in fact, exchanged.
I would assume the answer is no in most cases, unless there is a some corporate law that stipulated otherwise for certain cases.
So, anyways, my point is that, in this case, the government cannot tax the exchange of ingame dollars and other such transactions just as they would have a hard time taxing you for trading your charizard to Tommy for a Venusaur and a Blastoise.
In any case, I think I will be kind of pissed if the IRS starts hounding me for gp, gil, rupees, coins, and...um...shines?
Damn, I'm up to the 30% shine bracket.
Game Artist @ Oct 16th 2006 5:55PM
They can tax me real money on virtual income when they let me pay my real taxes with virtual money.
Ish @ Oct 16th 2006 6:00PM
"In another example, citizens pay taxes on real-world capital gains -- profits shown only on paper when an investment value rises -- but in-game capital gains policy and enforcement are unclear. "
Not quite. In the United States, unrealized capital gains ("profits shown only on paper") are not taxed. A capital gain is taxed only when an asset is sold. That is, if you own shares of a stock and the value of your holdings jumps $10,000, you don't pay any tax on that gain until you sell the stock. You could imagine the logistical nightmare if they taxed you based on just the value of the stock you held without selling. One year the value of your holdings could surge $10,000, and the next year it could drop $15,000, at which point you would have a $5,000 capital loss.
HotShotX @ Oct 16th 2006 6:08PM
The Tax system overall in America is rediculously inefficient, and needs to be replaced with the Fair Tax (No taxes other than a 23% Sales Tax)
The FairTax:
*Abolishes the IRS
*Closes all loopholes and brings fairness to taxation
*Ensures Social Security and Medicare funding
*Brings transparency and accountability to tax policy
*Allows American products to compete fairly
*Reimburses the tax on purchases of basic necessities
*Enables retirees to keep their entire pension
*Enables workers to keep their entire paycheck
www.fairtax.org
~HotShotX
doubtful @ Oct 16th 2006 6:12PM
Ah, the fair tax. A misnomer. It's unfair because it places a greater burden on the lower and middle class. Our tax system now is more fair. Also, to replace the current revenue, we'd need a sales tax of around 37%, not 23%.
Additionally, your (un)fair tax propoganda doesn't address the topic of the post. Would your (un)fair tax consider virtual transactions?
oe @ Oct 16th 2006 6:21PM
Until I can subsistence farm on my virtual property, it isn't "land" or "real estate" and should not be taxed as such.
No taxation without representation!
Are SL servers located in the US? I would think that would be an issue to consider. They should make a data haven. Or join one, or something.
Jason @ Oct 16th 2006 6:28PM
How about we all consider whether or not the existing income tax is being applied properly?
http://www.originalintent.org/edu/fedincometax.php
joe smith @ Oct 16th 2006 7:17PM
Seems straightforward enough. If you convert to real world money and realize a net gain, that is income and should be taxed.
J.Goodwin @ Oct 16th 2006 7:19PM
Ugh. Libertarians and Conservatives. You can't tell them apart sometimes.
===
Second Life holds itself out as being something that isn't a game. It uses real money, and that's the problem. Online gambling is still subject to US wire laws when people take part in it from within US borders, and mercantile transactions involving a sale to a US citizen are still subject to US tax laws.
In the very least, such transactions are subject to state use taxes, like anything you buy on the internet.
Beesnipe @ Oct 16th 2006 8:09PM
wow, someone bumped their heads.
* This just in. Goverment speculates on whiether or not to tax its citizens to dream whilst they sleep.
hawaii = lots of taxes that doesnt ever seem to pay for anything because we have to pay for stuff like student fee's for kids to go to school, and scool bus fee's for them to ride the bus.
...... I guess I kinda went on a rant.
Moogle @ Oct 16th 2006 8:21PM
Someone gave me the fairtax book to read. It makes me physically ill to read that tripe, and I have lost respect for the cognitive ability of any person that is convinced by the contents of that waste of paper.
Anyway, am I the only one who read <sarcasm> tags around fawazr's post? I found it humorous.
SpottedNigel @ Oct 16th 2006 8:32PM
It's going to suck if they start taxing my earnings in the Mushroom Kingdom. Hell, your REALLY screwed if you go out harvesting in the Green Hill Zone.
NoHitHair @ Oct 16th 2006 8:43PM
J.Goodwin:
I assume you're speaking about the difference between Neo-conservative and Libertarian, in which case, I can see where it's hard to tell the difference. Neo-conservatives base laws and regulations entirely upon opportunistic self gain and exploiting as much as possible as fast as possible. Libertarians are anarchists that didn't like being branded with that taboo connotation even though they know they are, thus they too are endlessly selfish and idealistic. Libertarians also have a party religion, that of Ayn Rand, and anything she writes is considered gospel. Moving on.
The article in question:
I think there's something very important that hasn't been addressed regarding taxing MMOs: how exactly would the conversion rate work? Many MMOs are predicated upon a system of player-run economies and it's indicative that these would change drastically and daily depending upon who's running the show. For example, Blizzard systematically annihilated server-specific economies in World of Warcraft by allowing transfers, creating a "global" economy almost overnight. What exactly is supposed to happen in those situations?
This is clearly more taxation without representation where all those forced to pay will never see a dime of it used on anything that's even slightly relevant to the taxed.
fawazr @ Oct 16th 2006 8:57PM
thanks, Moogle, for appreciating my calculated absurdity. Like pigs in a blanket, if you wrap any vile piece of mental rubbish in a flag dipped in blood, it suddenly becomes pallatable.
It scared the shit out of me when no one else saw the sarcasm.
Scutpuppy @ Oct 16th 2006 9:02PM
HotShotX (#18),
"The Tax system overall in America is rediculously inefficient, and needs to be replaced with the Fair Tax (No taxes other than a 23% Sales Tax)
The FairTax:
*Abolishes the IRS
*Closes all loopholes and brings fairness to taxation
*Ensures Social Security and Medicare funding
*Brings transparency and accountability to tax policy
*Allows American products to compete fairly
*Reimburses the tax on purchases of basic necessities
*Enables retirees to keep their entire pension
*Enables workers to keep their entire paycheck
www.fairtax.org"
Wouldn't a flat income tax be easier? A sales tax is inherently biased against the poor (although the reimbursements would take care of that to some extent). But do you think the government can determine what is a necessity and what isn't?
With a flat income tax, the IRS wouldn't have to be abolished (it would be political suicide to do so).
TeddyN @ Oct 16th 2006 9:37PM
I wish the government would seize the opportunity- not necessarilly of just taxing, but of using virtual economies to test real-world tax policies. For example, assuming you're in a virtual world where there are a lot of dealings with real-world money, the government can have a set of taxes reflective of what it would be like in the real world. But from there, they can test stuff out: cutting property tax, raising the upper band tax, having a flat tax, etc etc... With the near-instaneous speeds of implementing virtual ideas compared to real-life ones, it would be easy to change the tax policies for brief amounts of time in order to test them out, without the government loosing too much money.
Conbus @ Oct 17th 2006 5:48PM
Taxation without representation, last time a group got behind that idea, a revolution began. ooooooooooooooooo
bm @ Oct 17th 2006 3:01AM
@fawazr:
And it *should* scare the shit out of you, because the reason people didn't pick up on the sarcasm is because wiews like that are in fact rather common in real people, horrifying as that fact may be. Though I'm sure you know this.
voodooboo @ Oct 17th 2006 4:29AM
I guess they could always move the servers offshore... or to somewhere you don't pay tax...
Additionally, does this mean if the 'Virtual' now has a taxable value, we can report online item theft or anytime we have been abused to the Police?
Psaakyrn @ Oct 17th 2006 5:21AM
I think the problem comes with giving virtual money RL value, so this should not affect WoW at all (since converting WoW cash into RL cash and vice versa is illegal to begin with). There's nothing inherently wrong in this, since it technically counts as a profit if you earn virtual money which can be legally converted into legal money, even if you do not use such functionality. (it's the same as paying road tax on the car you bought, even if you plan only to show it off in your garage).
To draw an analogy, it's like playing with off-shore stock exchanges: Even though it may not affect your local currency monetary value, you still are earning moneraty value, and thus is taxable for them. In summary, if the virtual currency can be legally converted into monetary value (and thus be given monetary value), it should be taxable, even if you do not plan to convert it ever.
The easiest way to deal with this though, is for SL to offer an automatic tax calculator for online transactions, and use a portion of your profits to pay for taxes directly WITHOUT going through the hassle of cash conversion.
The Origin Of Species @ Oct 17th 2006 6:43PM
I think that it's perfectly fine to tax virtual things. Taxes make the world go round and although it may seem odd to put a tax on virtual things, real money is being made by these companies.
It doesn't matter if you make your money in the real world, or in cyberspace, the government has a right to put a tax on it, as you are using their money.