Congress Investigates Virtual Taxation

Russ Pitts

The Boss of You
May 1, 2006
Congress Investigates Virtual Taxation

According to Reuters [], the Joint Economic Committee of the United States Congress is set to begin investigations into online economies, and possible taxation of virtual worlds.

?Right now we?re at the preliminary stages of looking at the issue and what kind of public policy questions virtual economies raise ? taxes, barter exchanges, property and wealth,? said Dan Miller, senior economist for the Joint Economic Committee. ?You could argue that to a certain degree the law has fallen (behind) because you can have a virtual asset and virtual capital gains, but there?s no mechanism by which you?re taxed on this stuff,? he said.

At issue is the subject of property ownership in online environments, which is a question that has been raised from an intellectual property and fair-play perspective, but until now has been ignored by the federal government, which considers the right to sell property, conduct business and make money "taxable privileges."

?Ownership, property rights, all that stuff needs to be decided. There?s just too much money floating around,? game designer Sam Lewis, who trained as an economist and has worked on games such as Star Wars Galaxies, said in a telephone interview. ?The tax laws don?t know how to behave because these are virtual items: ones and zeros on a database we?re allowing you to play in,? he said.

And game companies, and in some cases, private firms playing the game economies as a kind of futures market have been taking advantage of this lapse in oversight. According to Cory Ondrejka, CTO of Linden Labs, who spoke on the panel "The Future of Virtual Worlds" [] at this years AGC, the economy of Second Life generates approximately $12 million in "Linden Dollars" per month, which is then translated into $1.7 million in "real currency" through barter and currency exchange.

To put that in perspective, if accurate, the above quoted figures would make the economy of Second Life slightly larger than that of Costa Rica.

When asked about the "risk" of government intervention in online economies at AGC, Ondrejka replied "It's not a risk, it's a certainty. [Right now] the reaction of the FBI, IRS ? is 'Whaaa?' Which is good. We're expecting the 'Whaaa?' to be a 'Hmmm' in a couple of years."

According to Dan Miller, that perception is entirely accurate. ?I found that talking about this issue with some of the other economists on the committee, they are not really familiar with what a virtual economy is. The idea of Second Life or World of Warcraft or some of these other synthetic universes, they have trouble wrapping their head around it. So there?s an educational hurdle to overcome here,? he said.

There has been no official announcement as yet of any impending legislation.