Crafting Real Tax Policies For Virtual Worlds (What's 7% of Magic Chainmail, Anyway?)

When you purchase something in the real world, you pay tax on it. That’s the way it goes. However, what happens in virtual worlds? Sometimes people use real money, such as in Second Life, to purchase virtual goods and services someone else created. In other situations, though often against the company’s will, game items or currency are sold outside the confines of the game system. Now, when we talk about this kind of thing, it’s easy to imagine that the items we’re referrring to add up to small change, but some people make over $20,000 a year in virtual worlds, a few much more, and they aren’t taxed. At least not in the States… for now.

The U.S. is currently looking into taxing virtual economies, whereas in other countries, like Australia, taxing has already begun. The Swedish government opened up a virtual embassy in Second Life and is planning to tax the virtual world income of its citizens. China is already worried that virtual currency is destroying their real world currency. The whole thing is a confusing mess, but a paper highlighted by Terra Nova looks at precisely this situation, and tries to make sense of how virtual tax could work.

Professor Leandra Lederman, head of Indiana Law’s tax program, has written an interesting paper discussing the various shady areas between tax law and virtual worlds. Logic would dictate that anything earned in a game, which isn’t real in many senses, shouldn’t be taxed. Where things get complicated is when people can pay real world money in exchange for those items. Now, of course, it would make sense to tax someone for selling items in a virtual world for real world money, but where do we stop? That basically puts a value upon everything dropped in a game, which leads to a giant headache and bad news for MMOs. That’s where people like Lederman can help, by exploring the different possible foundations for virtual tax law.

The notion of taxing virtual items is very complicated, and a lot of abstract wording stands in the way of a simple system. For instance, in World of Warcraft’s End User License Agreement (EULA), there’s specific language that notes that all items in the game belong to Blizzard, thus anything a player has belongs to them and thus can’t be sold for real world money. Though that’s true, does the time put into getting those items have a value? It’s a rather tricky question that doesn’t yet have an answer, but, believe you me, if the IRS can tax something, they eventually will.

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