Has the Time Come to Start Taxing Online Game Currency?

Sunday, March 04, 2012
If you’ve been making out like a bandit playing Farmville or Second Life or any other online game that awards prizes in the form of virtual currency, the IRS may want to talk to you.
Although the idea of taxing virtual currency may seem to make as much sense as trying to tax people’s winnings in the board game Monopoly™, tax experts are now saying that a virtual income tax may be in our future. The reason is that virtual currency, unlike Monopoly™ money, has come over the last few years to have value in the real world of dollars and euros. Online auction sites let people bid on real world items with virtual currency, and sites like eBay treat Second Life as a real merchant, allowing users to exchange its virtual “Linden dollars” for items they buy or sell.
Thus virtual currency can be exchanged for items of real value, including actual currency, and this is a big business, with estimated global profits of $14 billion a year. China already taxes the virtual currency of Internet users, the U.S. Congress has looked into the idea, and in 2009 Sweden’s Financial Supervisory Authority granted a banking license to a subsidiary Swedish virtual game developer. As AllGov reported almost two years ago, four players of Second Life sued the game’s creator, Linden Labs, for taking their virtual property. Taxing virtual wealth may just be the natural next step in the ongoing “virtualization” of society.
-Matt Bewig
To Learn More:
Virtual Currency in Virtual Economies: Income Characterization Issues for Social Media Companies (by Jim Carr, Jason Hoerner and Carlos Kaplan, Tax Notes International) (pdf)

Second Life Players Sue over Illegal Seizure of Virtual Property (by David Wallechinsky and Noel Brinkerhoff, AllGov) 


hypatiaa 11 years ago
you'd have a point if you were talking about vat. only problem is, the us doesn't have a national vat. it's true that vat has been collected from some second life residents, and this is something of a bookkeeping nightmare as it is impossible to determine who needs to be charged vat. (so they end up overtaxing it, even on transactions to residents of other countries that should have been vat-free, and this sets up an unfair advantage to those players who live in countries that don't collect vat - like the us, heh.) usa already taxes the income made from sales of game currency. china apparantly wasn't. so this comparison doesn't fly. are you suggesting that you should tax the game currency before it's been sold? how would you know if its income or not before conversion into cash? most players in second life are *not* making an income - most players buy the currency and then buy virtual items with it, most players who sell virtual items in second life don't make a profit that can cover their ingame expenses either - so it's not cashed out most of the time. there's a small number of players who do nothing but trade on the currency exchanges, but these people are certainly not representative of most of the player base. linden lab is not forthcoming with how much of these currency sales are from them to players (printing it out of thin air, which is the risk of virtual currency as you should know), or are player to player, at least over the exchange they run. as whimsy said, farmville? you can't cash out of games like that. in fact, zynga filed for a patent on this. it's not a big jump from taxing the points in games to taxing other sorts of "virtual currency" - such as frequent flyer points before you used or sold them. (which would be a lot easier to assess than the nebulous value of game points - as frequent flyer miles are tied to real prices of airline tickets) currently, they are taxable only if you convert them into cash, and not before. same as game currency. be careful what you wish for. scrip is scrip, it doesn't matter if you got it in a game or got it from an airline.
Whimsy Winx 11 years ago
1. second life is a virtual world, not an online game. 2. any money earned from virtual buisness in second life over a certain amount is to be reported to the irs, just like any other business on the internet, once it's cashed out of second life. 3. zynga games like farmville is money in, and it stays in. you can't cash out of those. trying to tax games like that is like trying to impose a tax on a bonus you get while playing pac man. 4. sites like ebay which offer lindens (the virtual currency of second life) are posing as banks, and inworld banking is not allowed by second life's tos currently. they should be reported to linden labs, and not trusted. there are legitimate sites that do allow a second life residents to exchange their real life money for inworld currency, and also cash out, just as you can do on the second life website. again, someone who is earning virtual income in second life, should be treating their store as they would outworld and be reporting taxes, just as they would if they had a website selling goods, and services. you should try being more transparent by doing your research, but you could also try by naming your site to something that doesn't imply you are affiliated with government, or an extension thereof.

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