October 23rd, 2007 by Benjamin Duranske
Though it is widely understood that profits made running a business that deals in virtual goods or services are taxable, tax agencies have not yet seriously pursued enforcement, and there is an open question regarding when these profits are taxable. Two recent presentations suggest that enforcement is getting incrementally closer, both in the EU and the United States, and more interestingly, both commentators suggested that profits may be taxed even before they are converted to “real” currency.
First, Second Life’s ‘Tax Anderton’ (in real life, a member of The Chartered Institute of Taxation in the U.K.) participated in a Q&A on U.K. tax law. Rivers Run Red has made an audio recording (.mp3) of the event available, along with a summary (.pdf). The presentation is U.K. specific, but covers a wide range of topics. ‘Anderton’ said that though there is no case law or code that directly addresses the question yet, existing laws clearly require users to pay tax on profits that they withdraw from virtual worlds, and may also require payment of tax on profits that have not yet been converted to real-world assets. ‘Anderton’ said that though it is a gray area, “if I were a betting man, I’d say that case law is more likely to decide that regardless of whether you’ve actually made a conversion [to real currency] it will be liable to a U.K. tax.”
Second, Bryan Camp, Professor of Law at Texas Tech University, recently discussed taxation of virtual world commerce with more of a U.S. focus as part of the Metanomics speaker series in Second Life. Camp, like ‘Anderton,’ opined that profits made in virtual worlds could be taxable even before they are withdrawn as dollars. Camp’s suggested that in-world currency may be seen as analogous to barter credits, although he also offered an alternate interpretation and did not come down definitively on either side of the question. He observed that the easier it is to buy real goods with virtual currency (e.g. order a real life pizza) the more likely the IRS will see exclusively in-world profits as taxable. A video recording of Camp’s presentation is available on the Second Life Cable Network.
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