Taxing a virtual world

In most, if not in all virtual worlds there are transactions happening. People buy or sell mythical swords for unimaginable prices, virtual real estate is bought by a person and possibly rented by another, clothes are bought etc. Most of these transactions are unregulated. Unregulated in the sense that it is unclear whether the persons involved in the transactions are eligible to pay taxes to a national tax authority.

The object involved
To make an example of the virtual real estate in Second Life. The first question to be asked is: what is the object involved. Is it just “ones and zeroes” in a computer? Could it be computer data? Is it possibly some form of a virtual house?
The reason for asking these questions is because the classification of the object involved makes a world of difference on the type of tax involved. In The Netherlands there is a different tax regime for real estate than there is for any regular object like a DVD, a pack of cookies or a television.
One could argue that virtual property, like the virtual real estate is merely “normal” property, in which case it would fall under the normal tax regime of daily items.

Which nation

The second question which arises when thinking about the question of taxes in virtual worlds is the question which country would be authorized to tax the inhabitants of the virtual world. The US IRS (Internal Revenue Service) has claimed that they are looking into taxes in Second Life[1]. When trying to contact them about this, the person who spoke to us didn’t know where to find the information..

This “I don’t know exactly” attitude is common and understandable among the tax agencies. They are facing a new world which is all around the globe, where international transactions happen every day and they are unsure how to deal with this.

“Government: Keep out”[2]

As Sonia Arrison mentions in her article on Second Life and Virtual Property Tax Law: “Second Life is a game where people go to escape the real world”. With this she is makes a very strong case: people log in to Second Life to get away from their daily real-life lives. In the game they do not want to be confronted with paying not so virtual taxes to any government for the virtual property that they buy.

Anonymity

An extra issue is that the anonymity of the Internet, and with that the virtual world makes it nearly impossible to get a good fix on who is the seller and who is the buyer. Governmental agencies have the ability to find at which computer a person is by the means of the IP-address but this does not make the task of finding and taxing the right person any easier. For a nation who wishes to tax their own inhabitants it will be a lot of work to see whether the inhabitant of their country who was involved in the transaction was be the buyer or the seller, to then find the IP-address, then the person involved and then tax him.

Conclusion

Due to the huge amount of work, the enormous complexity of the virtual world and the internet, the transnational character of the transactions and the uncertainty of the type of object involved it is unlikely tax will be introduced to any virtual world in the near future.

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[1] Newspaper article on taxes in Second Life: http://money.cnn.com/2007/03/02/technology/sl_taxes/

[2] Sonia Arrison – Second Life and Virtual Property Tax law: http://www.heartland.org/policybot/results/20790/Second_Life_and_the_Virtual_Property_Tax.html

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