This morning I had a very interesting talk with Dan Miller, Senior Economist at the Joint Economic Committee of the US Congress. Dan has previously talked about the taxability of virtual wealth, on a panel at State of Play, and to reporters. Now the JEC is trying to stay ahead of the issue by laying out the arguments against real-world regulatory intervention by the IRS and others (like the SEC)—before regulatory bodies take official steps (like issuing regulations or interpretations) that are difficult to reverse.
My hope with this post is to spark comments that would help the JEC identify the most persuasive arguments for and against keeping regulators out of the innards of virtual worlds. I know Dan will see your comments, because he told me that he views Terra Nova as required daily reading—some comfort to those who have read arguments that TN is no longer relevant.)
Here are a few of my own observations:
First, according to Dan, issues of particular concern to governments are the taxability of virtual world wealth and the possibility of money laundering. I believe both of these are best dealt with at the bright-line interface between virtual and real worlds: the exchange of inworld currency for dollars, Euros or true digital currency. The transfer of inworld to real-world currency is like a narrow pinhole connecting real and virtual worlds, and that is where to set up the auditors. After all, virtual worlds are vast, confusing places, and I don’t think anyone looks forward to reading or writing private letter rulings on the appropriate cost-recovery schedules for investment in warhammers and beds with built-in animations.
I see little reason to have regulatory intervention inside VWs to combat terrorism or organized crime….it is hard to see anyone accepting Lindens for an AK-47 or a mafia hit. I see more sense in saying that income earned in a world like Second Life is taxable….after all, it is possible to have tax liability for goods and services received, as in barter or game shows. However, if I win a car on a game show, it is indisputably my car. But land in Second Life really still belongs to Linden Lab, so I don’t think residents ownership is secure enough….until they actually convert their wealth into assets that aren’t subject to arbitrary confiscation or nonperformance by Linden Lab.
I wonder how far one could push the common notion of virtual worlds as “other lands.” Under US law, corporations operating businesses outside the US don’t typically pay taxes on overseas profits until they repatriate their earnings. Analogous reasoning would suggest that US taxpayers aren’t subject to tax on their virtual world profits until they repatriate by converting into currency of value in the real world. Too much of a stretch?
Finally, how about the question of whether businesses operating within virtual worlds should be subject to real world regulations governing banking, exchanges, commodities and futures contracts….or even antitrust laws (Anshe Chung, watch out!). In addition to arguments emphasizing that VWs are games (whatever that means), or are somehow so different as to make traditional regulation inappropriate, let me add this one: Virtual worlds have the promise to allow laboratories for testing the effectiveness of any number of regulatory and policy actions. Does eliminating a capital gains tax actually increase investment? Are insider trading rules good for investors? If regulators will leave these worlds alone, we can find out!