Taxing Your Virtual Profits – It’s Coming…
August 4th, 2007 by Benjamin Duranske
Hat tip to ‘Nobody Fugazi’ over at Your2ndPlace who linked to this article from The Independent this morning. Summary: the UK’s HM Revenue and Customs department has started investigating people who are making money in Second Life and not paying taxes on the profits. From the article:
According to Blick Rothenberg, the London-based chartered accountant, the Revenue has become concerned at the growing number of people who are using the game to trade virtual items for real money, generating profits without paying any tax.
“There is no doubt that HMRC are looking at this and trying to decide how to tackle what could be a considerable loss to the Exchequer,” said Matt Coward, a senior tax partner at Blick Rothenberg.
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18 Responses to “Taxing Your Virtual Profits – It’s Coming…”
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In the US, income tax is based on anything that is income. So all the real life profits that I transfer out of the game, I count as gross income. I’m fairly certain it is similar in other countries.
The interesting point is whether at the point someone pays me in-world if that counts as an income event. That is what many people are arguing about now. I count it as not an income event due to the fact that the Lindens have some control over the balance. When I transfer it out of Second Life, I have control over the money and then I claim it as income.
I read the Independant article. It mentions that Xenon can monitor web trades but a SL bot is not the same as a web bot. Additionally, if you follow the realization event as exchanging the Lindens, then you can defer capital gains for a long time when you transfer land, a business or other goods. (Although, it would be interesting to see how a Gorean slaver claims his income when he sells slaves.)
Hi Jessica – Good questions. I’m not a tax lawyer (anybody out there want to chime in?) but I’d think that holding the assets in-world would mean they weren’t taxable, if for no other reason than because the Linden Lab’s TOS essentially says they have no value. It’s a pretty new area so I doubt there’s any guidance from the IRS yet (which appears to be running a fair bit behind the UK on this) but I’d think you could at least argue that.
As for the role-playing Gorean slaver… I’d advise him to be somewhat circumspect in the “occupation” field. Maybe “Sales” would be smarter.
I think someone earning income from the “sale” of “slaves” would essentially be acting as a talent agent for actors (willing participants portraying slaves). But what do I know :)
I suppose it’s like these upstanding citizens of Eve Online, who would say they were “Investigators,” or something.
http://3dgpu.com/forums/lofiversion/index.php?t5260.html
Skip to the .jpgs for some fun reading. This links to images, because I can’t find a link to the original story anywhere. But wow it it interesting — and a lot more RL lucrative than what most people pull out of Second Life. Any article where the phrases “her vacuum frozen corpse was scooped into the cargo bay” and “$16,500 USD” appear on the same page gets me clicking.
I don’t know. It seems rather ambiguous. I think that there are a plethora of business models – some of which have not been created yet, so classification for taxes is somewhat odd.
In the case of retail within Second Life, for example, it is a sale of copyright license most of the time – if copyright is to have any teeth within Second Life. So that would make the income be from *self-publishing*. So, technically, one would be an independent publisher.
I don’t know enough to comment about Gorean slavers, but – assuming that the slave and master are consenting, the Gorean Slaver is providing a service. In a very specialized way, it’s matchmaking. No one is actually bought or sold; in fact – slaves in Second Life probably are a true ‘fictional currency’, as they are a currency within a work of fiction. What is roleplay in a virtual world but fiction? Hard to say.
What I find particularly interesting, and which I alluded to in my entry, is that the WSE in SL is actually based in Australia – so they have to report income to the Australian government.
I think it is time to declare SL a territory of the USA. As a resident and land owner in SL I get taxed directly $72 every year and $885 every month for my virtual property. Granted that doesn’t get me very good service from the territorial government (Linden Labs) but what do you expect from so new a territory. As a resident of the territory of Second Life I have no representative in the US Congress and am exempt from US federal income taxes just like the residents of Puerto Rico and Guam who are also US citizens.
As most of the residents of SL are not US citizens it is up to them to deal with their respective governments about their legal status as expatriate tax paying residents of the territory of SL.
Since this is legal issue that impacts a virtual world I expect this to generate a vigorous debate among the legal experts who visit this BLOG.
Rick – Interesting idea, and definitely the kind of thing I think is a good topic for debate, but I just don’t see anything like that happening any time soon. There are some really good ideas floating around on how virtual spaces ought to have their own set of rules, outside of the rules of the state or country that they’re in, but they all seem really far fetched to me, from a practical standpoint.
I read a the idea somewhere (sorry to whoever’s this is, I just don’t remember where I saw it) that LL drop server farms all over the place and label the associated regions by government. Want U.S. rules? Those apply in U.S. servers. Want Antigua rules? Set up shop on one of the islands associated with the Antigua server farm. In a sense, if virtural world interactions get standardized somewhat, that will occur anyway eventually.
The only sane solution is for those who convert their Lindens into first-life currency in quantities greater than they have done the other way around should be taxed on that margin profit just as any other income, but not to have to pay taxes to national governments in respect of assets held purely in-world: any such system would be grotesquely inefficient and oppressive of both individual liberty and economic productivity.
I think the idea that virtual worlds are their own nations is just silly frankly. I wrote an article on it back in June: http://forge.ironrealms.com/2007/06/07/nations-that-are-not/
Benjamin: Setting up servers in other places won’t do it. The US claims the right, routinely, to regulate the behavior of US-based people/entities when they’re operating outside of the US.
As long as Linden and/or the individuals that control it wish to enter the country, they’re going to, at some level, be subject to US laws.
Note, for instance, that setting up their servers AND being organized as a company elsewhere AND not being citizens of the US did not help David Carruthers (http://en.wikipedia.org/wiki/David_Carruthers) who was arrested on a transit flight to Costa Rica via Dallas (where he was arrested) because his company had accepted online wagers from US citizens.
–matt
matt – good point on the fact that LL management/business operations are in the US and that’s going to prevent them from acting like, say, someone who runs a gambling web site in Antigua. Besides David Carruthers, I’m fairly sure I’ve read about other people getting grabbed by US agents when changing planes and things like that too. I knew there was something fishy in that theory but hadn’t thought it through completely. That’s definitely the problem, of course. Thanks for the comment.
What about publishing standards for interoperability with the Second Life grid and letting completely foreign operators build transparently accessible server farms governed by their own local laws? LL would still be selling subscriptions to US citizens, but it hardly seems any worse than Qwest selling internet access to US citizens who use it to bet on sports on foreign sites. Do you see any problems there (aside from the obvious business concerns, etc.)?
Another thought…
If money is passing over geopolitical borders… which it is… where does that leave all of this? Linden Lab pays taxes (we assume), but do other Lindex exchanges?
@6: Rick, if you want to declare SL a territory of the United States, then you’re expecting Linden Lab employees to be ambassadors on behalf of the United States.
You’re also opening up a can of worms – and quite likely creating fractures in virtual worlds. Where that can be avoided, it should.
It seems rather lazy and perhaps even irresponsible that virtual world law is not involved in internet governance. While internet governance legalities may not be as exciting as some may wish, well – most of the world lives outside the United States. As intenet penetration increases around the globe, the case for a US control decreases daily – if you believe in democracy. And the majority of SL users exist outside of the United States.
And as far as that goes, legal precedents exist where the location of where the content is viewed is where the laws are applied.
I keep saying internet governance over and over. I don’t see why anyone would avoid those issues, since virtual worlds obviously inherit from the technological and legal base.
Benjamin: Gwyneth Llewelyn has a recent article about exactly that: see here.
Thanks for the link, Ashcroft. That’s what I read that I was thinking of earlier, I believe. Hat tip to Gwyneth. It’s a good article.
Ashcroft & Benjamin: from Gwyneth’s article:
“Alas, Second Life is not the “Internet” — not yet. Technically, from a legal point of view, it’s a service provided by a Californian company, even if well over 95% of its users are not in California. Still, since Linden Lab is bound to remain in San Francisco for quite a long time, they have no option but to comply with local, state, and federal laws.”
While it IS a service provided by a Californian company, that service extends beyond the borders of California and the United States. That makes it subject to international law.
Nobody – I think you’re on to something here, but I want to get the terms worked out. Is your point that Second Life is basically a browser, albeit for a very limited part of the internet? In other words, it’s just a client-side application?
If that’s what you are saying, then it leads to the conclusion I think you’re drawing: that international internet-specific law/agreements ought to apply (though that raises another question — *what* agreements, domain dispute rules, etc.?)
Can you nail down the specifics on this so we’re talking the same terms?
The argument I think you’re going to end up dealing with here is that the server side stuff isn’t open, so *that* is a Linden Lab service (more like the old proprietary AOL or Prodigy services) at least for now.
Why do some people want taxes paid?
To who?
For what?
So that more education and health care might be funded?
Or, so that armies can go out killing?
Or, so that nuclear bombs might be built, or nuclear power plants?
You know what? I figure something out lately.
Electricity is the main problem in our society nowadays.
Get rid of electricity, and alot of the current modern troubles lessen quite dramatically. Cars won’t be able to start without electricity, and that industry can just go away.
Not as much ‘need’ for oil, if there were no electricity.
People fighting over oil, is immature, you know.
Why not just stop using electricity, and humble yourselves?
If the governments outlawed electricity, then I would consider paying them some taxes, maybe.
But, seeing as how they are currently intent on increasing electricity, then I see no reason to give such corrupt people any monies.
There is only a small percentage of electricity usage that might be somewhat justified for using electricity, I think.
Computers would just go away, without electricity, and that might be good.
Electricity is the ‘LIGHT’ and the ‘POWER’.
It is a religion.
Don’t try and tell me that people who worship electricity are not religious.
Sounds like a God to me: ‘LIGHT’ and ‘POWER’.
Did you know that Jesus is the ‘LIGHT’ of the world?
‘POWER AND GLORY’
That’s surprisingly on topic, for religious spam.