Consensus

A couple of weeks ago, I was reading Benjamin Duranske's excellent virtual-worlds-and-law blog, Virtually Blind, and came across the following remark:

Most writers, including VB’s editor, take commodification and subsequent legal intervention as a foregone conclusion at this point.

This got me thinking: the first State of Play conference was in November, 2003, and since then the arguments have settled down considerably. When we do get legal intervention, it will be far more informed than it would have been 5 years ago.

I'm wondering, though, what degree of consensus there is out there with regards to how the law "should" treat virtual worlds?

For example, it seems fairly clear now that game-like worlds (such as WoW) are a different kind of animal to non-game worlds (such as SL). People may disagree in the details (for example how much of a defence a developer has to maintain in order to keep their game-like status), but there does seem to be a consensus that supportive legal intervention aimed at one kind of virtual world could hurt the other kind.

What other broad areas of consensus are there? I don't mean what should there be, I mean what are there? Can we say things about virtual property, player rights, IP, or any of the other big issues, that even people on opposing sides of an argument can agree on? Or is everything important pretty much settled now and we're now just arguing about who gets the CD collection?

Richard


Comments on Consensus:

Wolfe says:

The only one I heard about is when the developer claims that the user is making an investment with the option to withdraw into RL currency. I guess this translates into the product is safely in "game territory" as long as the market is an emergent propertly of the design rather than part of the design.

Which means EQ2 might not be safely in "game land".

Posted Feb 18, 2008 4:44:55 AM | link

FlipperPA Peregrine says:

While I agree that being able to exchange an in-world currency for a real-world currency is an important aspect of separating "game" versus "platform", I think the ability to create content within a world is a more important one. You won't hear a story any time soon about a WoW using suing another in any kind of intellectual property claim, yet these things are happening in virtual worlds on a regular basis. In the Rase Kenzo/Thomas Simon case, his defense (as lame as it was) was that "it is only a game, you can't sue someone over a game." He was mistake, but his attitude represents a fair segment of the virtual world's population, that doesn't really grasp I.P. rights or the difference between "game" and "platform." While in WoW you can play a rogue thief without causing real-life harm to another individual, being a rogue thief in SL does cause real-life harm to others.

Posted Feb 18, 2008 8:36:43 AM | link

Edward Castronova says:

The law should treat open and closed worlds differently.

Open: SL, Habbo, PE, etc. These worlds create all kinds of economic tie-ins so that value jumps back and forth across the membrane with ease. Interoperability is a good thing for these worlds. Given that, there is no difference between in-world and out-world economies. Efficiency demands that these worlds be treated as an extension of the real world, and taxed/regulated accordingly.

Closed: LOTRO, WoW, EQ, etc. These worlds require a strong membrane. They abhor interoperability. Gold-for-dollars is an anathema. The entire value proposition rests on their differentness from reality. They should not be taxed or regulated at all. Rather, the law should support the membrane at all costs.

The underlying economic mechanisms and incentives are largely the same in the two cases. What is different is the use of the space.

Posted Feb 18, 2008 9:37:05 AM | link

Mike Sellers says:

Ted: Gold-for-dollars is an anathema.

I think maybe your bias is showing, and that this view traps "closed" worlds in a particular moment in time.

What about game-worlds like Puzzle Pirates where you can buy in-game currency for dollars, or many (probably most) Asian closed fantastic worlds that have similar micro-transaction models? This is a trend that is clearly gaining steam in the US as well. Does anything but a pure subscription model result in a world becoming "open" in your view?

Or is the significant 'membrane crossing' when you bring in-game currency back out, such that gold becoming dollars is the thing that makes a world "open" in your terms?

And, to Richard's original question, is this the way things should be, or the consensus of the way things are?

Posted Feb 18, 2008 11:12:13 AM | link

greglas says:

Well, as the author list here knows, I'm going to be writing a book about Virtual Law over the next year, so I guess I should chime in... :-)

R> Can we say things about virtual property, player rights, IP, or any of the other big issues, that even people on opposing sides of an argument can agree on?

W/r/t virtual property, I think there's much more legal consensus now than in 2003 about the "legal reality" of virtual property, i.e., that an interest in a data structure *can be* a legitimate property interest. That was basically the main point of what Dan and I said back in 2003, and at the time, I think we agreed it was less controversial than it seemed. What is being worked out is line drawing, which is what we didn't really do, and part of what I hope to do with this book.

W/r/t player rights, no -- I don't think there is much consensus, at least not much more than we had in 2003. There really haven't been any major cases on abstract virtual world "rights" and part of the game/platform line is a critical issue there, in my opinion. The consensus now is, I think: 1) standard consumer protection, privacy, etc., law applies on the Internet (no surprise there) but, 2) the game/platform line is going to be important with regard to the viability of participant/user claims.

W/r/t IP, which is where I live (mostly), there has been an awful lot of writing and interesting work over the last 4 years, by professors and students. It's hard to sum up, but on copyright and trademark, the question of copyright law's application is still very murky imho, especially w/r/t to user generated content. The question of trademark law is, in theory at least, not very difficult, but will be very fact specific. That's essentially what we say here.

Personally, I'm fascinated by the question of user-generated content, but as I explain here, I'm skeptical of whether the market is going to embrace UGC as much as I would wish. If it doesn't, many of the most interesting potentials of virtual worlds won't be realized, but many of the IP problems with be avoided as well.

As to other things, here's the draft table of contents for my book on Virtual Law. (The published book might diverge from this.) As you can see, the other legal issues that I'm investigating have to do with speech, games, contracts, hacking, and governance. (If anyone thinks I'm missing a major topic, please tell me now.)

On the issue of games & law, I think there actually is a certain level of consensus, though I don't think most legal commentators have appreciated the complexity of law's relation to games and sports. The focus of much legal commentary on Second Life, rather than other virtual worlds, may have something to do with this.


1. Introduction
2. What is a virtual world?
3. Laws of Speech and Simulation
4. Game Rules
5. Contracts
6. Virtual Property
7. Hacking and Cheating
8. Cyberspace and Law
9. Intellectual Property & User Creativity
10. Virtual Communities & Governance
11. Future Frontiers

Posted Feb 18, 2008 11:45:27 AM | link

Dave Rickey says:

I think the only thing we have clear agreement on is that game worlds, with their emphasis on unreality, should be treated differently than "metaverse" worlds, with their emphasis on property rights and explicit support for conversions between real and virtual value.

I think (IANAL) that worlds that allow "piercing the virtual veil" with conversion of value both in and out will wind up getting regulated much like exchanges and other financial institutions (which means all kinds of laws from fiduciary to discrimination will apply), while those that do not will be treated more like professional and semi-pro sports, as long as the rules of the world itself are followed (ie; no hacking/phishing/etc.) the courts will not get involved. Still open to question is if conversions of value *into* such worlds (pay-for-stuff business models) will get different treatment. Or if the "gray market" of taking value out will become an explicit black market, and how "official" gray markets such as the Sony Exchange will be handled.

In the "metaverse" worlds, all laws that could apply, will apply (with the usual questions of jurisdiction raised by the internet in general). In the "detached reality" worlds, only laws concerned with fair business practices and preservation of the "virtual veil" will apply.

--Dave

Posted Feb 18, 2008 6:06:18 PM | link

Dan Miller says:

Richard articulates what seems to be the consensus here of a key point regarding the legal treatment of virtual worlds:

it seems fairly clear now that game-like worlds (such as WoW) are a different kind of animal to non-game worlds (such as SL)
While this distinction may seem obvious to readers of TN, I personally do not think the issue quite as clear cut. Take the tax treatment of a virtual world like WoW versus SL. According to the consensus, WoW is a closed system, and therefore should be treated differently from SL. But all here know that there is robust commercial activity in gold farming and power-leveling. Yet if a WoW player manages to sell his character, gold or items for US$, does he not have real-world (and hence taxable) income? And if an SL resident, who only participates in SL for personal entertainment, sells her home but keeps the gains in-world, then has she not had a clear, easily-measured economic gain? Of course, the intent of the taxpayer is irrelevant to the taxability of her SL income. And the fact that WoW's EULA prohibits such commercial activity is also irrelevant (Al Capone was first big conviction came from on tax evasion, not the legality of the income).

The distinction between WoW and SL may seem obvious, but by my last count there were around 200 virtual worlds. If WoW and SL capture the essence of two ends of the spectrum, then what of worlds that don't neatly fit into this black and white dichotomy?

Returning to the tax question, should the IRS issue a separate ruling for each world, declaring in-world income as either taxable or not taxable? Such a course does not seem feasible administratively. Perhaps the better course to follow is the money -- the exchange of in-world currency or items for U.S. dollars may be the appropriate trigger for the tax question.

Let me be clear: I am not arguing for one treatment or another, and I am certainly not advocating taxing virtual worlds. I am merely asking questions. In addition, I am simply posing my own personal opinion, and would welcome any comments, criticism, questions, etc.

Of course, the tax question is but one aspect of legal treatment of virtual worlds. But the resolution of tax issues could well have an impact on other legal aspects.

Remember too that the likely end-point for many of these questions won't necessarily be a well-informed policy-maker, or even the legislature. Many of the relevant disputes will likely be resolved by judges.

Posted Feb 18, 2008 7:37:41 PM | link

Candy says:

@ Dan Miller:

I think your "follow the money" instinct is the most effective way to deal with many virtual world legal issues — especially tax. Categorizing worlds based on the intent of users during play, on "type" of world, on the world owner rules, on the realistic nature of the in-world activities and so on would be unmanageable and simply too subjective.

So, when a user cashes out play money for real money or sells a virtual object for real currency, he or she has accrued taxable earnings. Perhaps, just the receipt of virtual objects that have assignable real currency values within the world (i.e. x amount of Lindens) could also be considered a tax event but that would be rather unruly for the IRS.

The U.S. Supreme Court has found that the proceeds of illegal activity are taxable. Thus, it does not appear as though it would matter whether the accrual of wealth were condoned by the world owner.

Since I enjoy agony, I will express the likely highly unpopular opinion here:

Certainly, I would rather not pay taxes of any kind. But, to the extent we, in the collective, have to pay them, I think that REAL virtual world commerce should be taxed.

By that, I mean that if someone is running a Second Life business and making $1,000 (of real currency) a month from it — that person should be paying tax on it. People have to pay tax on the proceeds of an eBay business or on other "do it yourself" activities, and an online activity that is solidly translatable into to real cash profit is not any different -- in my opinion.

Posted Feb 18, 2008 8:50:21 PM | link

Peter S. Jenkins says:

@ Dan:

The Al Capone analogy is very apt. Imho, the EULA ban on RMT may turn out to be equivalent to the short-lived 18th amendment (the only US constitutional amendment that has ever been repealed).

Posted Feb 18, 2008 9:21:35 PM | link

Thomas Malaby says:

Hear, hear, Dan. I personally do not think we have a consensus around TN to make a hard and fast distinction between "social" world and "game" worlds. For me, that distinction has always obscured more than it has revealed, since it is the gameness of our lives that leads us to find all kinds of virtual worlds compelling. That said, I do acknowledge the possibility that, for the purposes of developing government policy, such a distinction might be a useful way to proceed, if only for pragmatic reasons. I had read Richard's statement as pointing more toward the latter rather than the former, but it could be read either way.

Posted Feb 18, 2008 11:45:25 PM | link

Prokofy Neva says:

I don't know about games in South Korea, or IP battles in closed games. But I don't think anyone seriously worries that "the law" is going to fail to make a distinction between closed games and open worlds with RMT, or that we have to incite governments to uphold "the membrane" (do we want them to jail gold farmers for illegal gold farming?!).

There may be lawsuits *related* to games and game loot or levelled characters if they come to be seen as something to settle in a divorce suit, let's say, but golf clubs could fall in the same category. It's not terribly interesting as a topic.

Virtual worlds are different, but I don't think you can accurately say that law *intervened* yet in Second Life. It didn't. What has happened is in the case of "ageplay," the media covered the sensation of the story, and law enforcers felt they had to take a look, they asked some questions, they poked around but they didn't launch any kind of full-scale investigation (that we can tell) let alone prosecute anyone. Ditto the stories with casinos, and again with banks -- the fear of prosecution caused the development of a policy as a prudent business action -- limiting liability to litigation. BUT there was no intervention. What happened then was the company, Linden Lab, developed a policy against "ageplay" just to prevent any kind of legal intervention from happening, and also banned casinos and unlicensed banks.

The same could be said about the copyright cases such as Stroker Serpentine's against Rase or the Bragg case that sought, aside from other things, to establish the "authenticity" of virtual land and caused Linden Lab to reduce the rhetoric on their web site about virtual land, implying it was valuable like real land.

But in this case, Bragg settled with LL out of court. Can you say the law "intervened" in this case? No, two parties that attempted to get the law to "intervene" settled out of court. This isn't any kind of judicial ruling or precedent; it's just a settlement. We're not building some kind of virtual world case law here -- yet -- these are just interesting precedents only of a rhetorical nature to discuss on blogs.

The tax officials from the US govt and Congress as well as various tax lawyers who have held seminars in Second Life are seeing all of this very unambiguously: the taxation event is the moment of cash-out, full stop. The home in Second Life worth a $1000 US isn't valued until there is an attempt to sell it and cash out the proceeds; then it becomes taxable. Game gold sure is taxable if you sell it on the Internet and make a profit, it's like selling anything else in any kind of business, no matter how informal. Cashing out is cashing out; any government is going to take interest in it at that juncture.

So I do think that there's an over-dramatization of these issues and a misplaced hopefulness of the relevancy of lawyers on Virtually Blind and other blogs. Users will need accountants, not lawyers.

Posted Feb 19, 2008 12:28:33 AM | link

Kenan Farrell says:

Let's not forget that the U.S. market for synthetic worlds is still relatively small in comparison to the Chinese market (over 40 million users). Even South Korea currently has a larger online gaming population than the U.S. Given the international aspect of most synthetic worlds today (and increasingly so all the time), the U.S. community needs to pay more attention to international social/legal decisions on these issues. Synthetic worlds simply can no longer be treated as isolated realms...they are perhaps the most advanced experiment in globalization to date.

Posted Feb 19, 2008 2:16:15 AM | link

Richard Bartle says:

FlipperPA Peregrine>While in WoW you can play a rogue thief without causing real-life harm to another individual, being a rogue thief in SL does cause real-life harm to others.

What if someone set up a game world within SL, building their own WoW clone using SL prims on an island they bought especially for the purpose? Presumably, they could allow people to play the role of rogue thief in that small subset of the overall virtual world? They could also say that their game sub-world was meant for role-players and ban RMT involving any of their in-game objects.

The problem here for legislators is that SL here is acting as a platform as well as a virtual world. Using Ted's "interration" idea, SL as a whole would not want to be interrated, but the sub-world built within SL would want to be so.

The converse also applies. For example, suppose that a mini-game in WoW involved gambling with chips bought with real-world money. That mini-game could not be interrated because of the real-world laws that apply to gambling - the "it's just a game" rule of thumb is no defence because all gambling games are "just a game". Therefore we could have an interrated virtual world, a small part of which wasn't interrated.

The clean solution here would seem to be to have one or the other. If you use your virtual world as a platform for sub-worlds, then whatever regime applies to the overall platform applies to the worlds that use the platform. Whether that's the ideal solution is another matter, of course.

Richard

Posted Feb 19, 2008 3:17:25 AM | link

Richard Bartle says:

greglas>I think there's much more legal consensus now than in 2003 about the "legal reality" of virtual property, i.e., that an interest in a data structure *can be* a legitimate property interest.

Yes, I think you're right. We may still be debating who owns virtual property, but the notion that it can usefully be regarded as real-world property seems bedded-in.

This may not stand up to deep scrutiny, of course. A unique virtual hoverboard that I have created is actually merely one end point of a huge web of inter-dependent pieces of code and data, almost all of which was created by other people and took them much longer to create than it took me to build my virtual hoverboard. Nevertheless, the notion that something virtual can't be property (by virtue of its being virtual) is no longer contentious.

>There really haven't been any major cases on abstract virtual world "rights" and part of the game/platform line is a critical issue there, in my opinion.

We don't need a major case in order to reach a consensus, of course, but having one might help in identifying what the consensus is.

>The consensus now is, I think: 1) standard consumer protection, privacy, etc., law applies on the Internet (no surprise there)

Yes, that would seem to be the case. Whether it should always be the case or not is a different question, which might require changes in legislation (for example is it possible to opt out of your right to privacy if you value your fun from a game more highly than you do your right not to have your conversations recorded?).

>I'm skeptical of whether the market is going to embrace UGC as much as I would wish.

I'd like to have all options open. Developers of virtual worlds don't want the IP of user-generated content so they can exploit it, they want it so they can't be charged royalties for using or reproducing what someone has created in-world. If there were were some safe and reliable way round this without taking full IP (creatively applying "fair use" provisions, for example) then they wouldn't care whether users had IP or not. Indeed, they'd probably be pleased if a player made money in the real world from content that player had created in the virtual world - just so long as the developer still got to use it in-world, in videos, in screenshots and in advertisements. Oh, and they need to be able to destroy or change it on a whim, too...

>If it doesn't, many of the most interesting potentials of virtual worlds won't be realized,

I agree, but if it did come along then we could lose other interesting potentials. The developer needs to be able to decide which way to jump before opening their doors to users; that way, we can have both.

>The focus of much legal commentary on Second Life, rather than other virtual worlds, may have something to do with this.

This would be dangerous for the likes of WoW if legislators spoke to the wrong lawyers when seeking advice. Likewise, asking players of WoW what laws they want could result in laws that squeeze the oxygen from SL's lungs.

Richard

Posted Feb 19, 2008 3:42:43 AM | link

Richard Bartle says:

Dann Miller>According to the consensus, WoW is a closed system, and therefore should be treated differently from SL. But all here know that there is robust commercial activity in gold farming and power-leveling.

Yes, but then there is also robust commercial activity in supplying performance-enhancing drugs to athletes, many of which are perfectly legal for almost any other purpose (drinking 3 cups of coffee a day, for example). That doesn't stop there being a consensus among athletics governing bodies that performance-enhancing drugs are a bad thing which should be outlawed; nor does it prevent real world governments from supporting this attitude.

>Yet if a WoW player manages to sell his character, gold or items for US$, does he not have real-world (and hence taxable) income?

Yes, albeit obtained (by the rules of the game) illegitimately. The player can be taxed; the player can also be kicked out of the game.

>If WoW and SL capture the essence of two ends of the spectrum, then what of worlds that don't neatly fit into this black and white dichotomy?

What worlds don't fit neatly into it?

Well, there are some such as Project Entropia, which try to have a SL economic model in a game world. My own opinion is that they've let too much reality in, and were they ever obliged to defend their game in court then the best they could hope for is that only the gambling laws applied. However, I'm not a lawyer and few current lawyers are gamers, so who knows what could happen? Whatever, given that the arguments supporting special treatment for game worlds all rely on there being a seal between the game world and reality, and that this game world revels in breaking that seal, it would appear that they might have to find a new defence if they wanted to benefit from an "it's just a game" defence at some point.

Other game worlds that breach the boundary are those that use microtransactions, such as Puzzle Pirates and Achaea. These are on much firmer ground in terms of being just games. Yes, they're games in which players can buy a gameplay advantage from purchasing objects, but they don't condone (nor necessarily even allow in code) the transfer of virtual objects between players for money. In other words, you can't cash out. RMT occurs one-way between player and developer, but not between players. Developers will sell you stuff (and pass the sales tax on to the revenue services) but you never sell them stuff and they don't support your selling stuff to other people. The amount of reality let in to the virtual world, while perhaps too much for the sensibilities of players who don't like being lorded over by richer people, nevertheless does not itself puncture the game/real dichotomy. That said, there may be some fuzziness, for example if you buy something for $10 and then O patch the game so it's now nowhere near as effective as it was when you bought it, "it's only a game" doesn't look like it's going to stop me having to give you a refund.

The other main approach is where the virtual world is a closed game world when the developers say it is, and an open, RMT-enabled world when they say it is. This is what Sony do with their Station Exchange. Non-SE servers forbid RMT and can be lumped in with WoW as definite game worlds; SE-enabled servers support RMT and offer a service which enables users to buy and sell virtual goods and currency in complete safety (from each other - Sony takes the hit when there is fraud involved). These SE-enabled servers, although identical to non-SE servers in every other way, nevertheless have the same problems that Project Entropia has: they themselves open the door to reality and profit from it, therefore they can hardly use "it's just a game" as a reason for players not to pay taxes on goods acquired in-world. Again, the best they can hope for is that a nice judge regards virtual objects as poker chips that can be cashed in and out but have no monetary value in themselves (until the day someone buys a real-world car with them).

There are also the hypothetical worlds-within-worlds I mentioned a couple of posts ago, which may be real at the platform level but game at the sub-world level (or vice versa).

So yes, there are some cases in between SL and WoW, but they can still be placed into a game/real category on closer inspection; quite what the criteria might be would indeed be up to judges and legislators, but the basic principle works.

>Returning to the tax question, should the IRS issue a separate ruling for each world, declaring in-world income as either taxable or not taxable?

We're back to "should" again, but to answer the question: it doesn't have to, no. You could make the assumption be that any virtual world above a certain hobbyist size is indeed regarded as having all its income taxable, and then make them apply for (using Ted's word) interration if they want the special protection of being a game world. I'd prefer game worlds to be the default (because, after all, they are the default!), but I can see why revenue officers might want it done differently.

>the exchange of in-world currency or items for U.S. dollars may be the appropriate trigger for the tax question.

You might have consensus there if "exchange" means "exchange between players". Developers of virtual worlds that use microtransactions already pay tax on the money they accrue that way, without (they would argue) necessarily undermining the integrity of the "gameness" of their world. It's when players (or developers) buy things from players that matters take a different turn.

Richard

Posted Feb 19, 2008 4:32:29 AM | link

Ace Albion says:

Richard, I don't know if people role playing in SL should cause a big problem. Taxation wasn't on our minds in my student days when we live role played Vampire in the upstairs rooms of pubs, in the real, taxable world.

Posted Feb 19, 2008 4:59:45 AM | link

Clement Song says:

Taxation on user income from virtual worlds could be a non-issue in China. In Feb 15th 2007, Chinese government issued a notice on further strengthening the control of online games and gaming cafe in China. In this notice, for the first time, Chinese government gave its opinion on virtual currency -
1. Strictly control the total amount of game currency that a game operator offers for a particular game, and the amount of game currency gamers can buy for a particular game
2. Strictly differentiate the virtual trading from real trading in a e-commerce transaction. Virtual currency cannot buy real world goods.
3. When a gamer redeems the game currency, the total amount of real currency redeemed cannot be higher than what the gamer originally put in.
4. Cannot resell virtual currency.

Like pretty much all other policies and laws in China, there is a lot of room for interpretation. I think some of these are intentionally vague.

Can users legally make real world money from providing services in virtual worlds in China is still a big question left to be answered.

Posted Feb 19, 2008 10:54:05 AM | link

Kenan Farrell says:

Clement-

China was somewhat forced to take a firm stance on virtual currency. The increasingly popular QQ coin (from Tencent QQ, popular Chinese IM/gaming/chatroom/dating software...with 160 million users!) was showing signs of inflating the yuan because the QQ coin is being used in online stores in exchange for real items.

Even the most optimistic of us don't think that the L$ is going to be used by anywhere near 160 million people or have a comparable impact on the US$ anytime soon.

Could you post a link to that Feb. 15 notice? Thanks.

Posted Feb 19, 2008 11:44:54 AM | link

Darryl Woodford says:

R> ...That doesn't stop there being a consensus among athletics governing bodies that performance-enhancing drugs are a bad thing which should be outlawed; nor does it prevent real world governments from supporting this attitude.

Is that really the same thing? In this case, athletics bodies are imposing sanctions on athletes that are in addition to the law of the land. The sanctions may or may not be a case of restraint of trade (something Dwain Chambers may well be challenging the British Olympic Comittee on), but that's neither here nor there for our purposes.

Surely however that's a different topic from saying that World of Warcraft is a game, it's a "closed system", and thus the monetary authorities shouldn't tax it, or the legal authorities should not intervene if somebody uses an exploit to steal your one-off sword which retails on eBay for $2000.

In the first case we're adding additional trade-specific sanctions, in the second we are (probably) trying to overwrite the law of whoever has juridstiction.

Posted Feb 19, 2008 12:40:55 PM | link

greglas says:

And most governments don't support cheating in games either, right? I think that was Richard's point. The state can step in to prevent certain markets (e.g. markets in illicit substances) as well as to support markets. The presence of a market does not always require that the state recognize a legal property interest in the commodity that is exchanged in the market.

Posted Feb 19, 2008 1:53:25 PM | link

Darryl Woodford says:

Certainly in the US, something is taxable even if it is not legally recognised. Proceeds of crime are supposed to be declared, and for example with online gambling, whilst the activity is (supposedly, though rarely enforced) illegal, people do declare the income.

My point was that in the case of performance enhancing drugs, it's not the state stepping in to provent the market, it's a seperate body (e.g. British Olympic Association, Major League Baseball) enforcing regulations that are stronger than those enforced by law.

Posted Feb 19, 2008 2:28:46 PM | link

greglas says:

>> Certainly in the US, something is taxable even if it is not legally recognised.

True, but the point is that neither the fact that it is not legally recognized as an interest nor the fact that it is a type of thing that is sometimes traded in a market of some sort suffices to make the receipt of that thing subject to taxation. See, e.g., intimacy.

On the other point, I think Richard's point was that sometimes state officers support the opinions of private bodies that regulate cheating in sport. In fact, sometimes, some legislators have criticized the unwillingness of private bodies to enforce what might be seen as "private" rules against cheating. See this.

Posted Feb 19, 2008 4:41:20 PM | link

Candy says:

Prokofy Neva: The home in Second Life worth a $1000 US isn't valued until there is an attempt to sell it and cash out the proceeds; then it becomes taxable.

I do not want to re-hash the tax debate...

However, the obvious brightline rule appears to be tax on "cash-out" (which perhaps has reached consensus?) -- but I do not think that is necessarily the end of the taxation issue (nor is it what I find interesting about the tax question). This rule basically disposes of all the worlds without real currency exchanges but leaves a lot unanswered for those that do have exchanges.

If I find (or steal?) a pair of sneakers in Second Life, do I have to pay tax on them? In real life I would pay tax on their fair market value -- in the year I took title to the sneakers, whether or not I sold them. Virtual or real, the sneakers I found still have an actual real $$ value.

Basically, I do not think it is that far-fetched to tax this Second Life sneaker scenario and therefore the possibility should not be written off so quickly.

Posted Feb 19, 2008 5:29:50 PM | link

Thomas Malaby says:

Paging Bryan Camp...

Posted Feb 19, 2008 6:57:43 PM | link

Bryan Camp says:

Hi y'all,

I'm still happy with my thesis that so long as virtual currency is not used (like it was in China) to purchase anything other than in-world experiences, it would not be considered gross income within the reach of the current income tax statutes until such time as it's cashed out.

That said, I agree with Candy that it is not too far-fetched to think that activity within SL or WoW would trigger a tax liability.

One development that I think might interest folks here is happening in taxation of casino gambling and "casual games" like Worldwinner.com.

While at the ABA Tax Section meeting in (fittingly enough) Las Vegas last month I gave a presentation on why electronic game credits should not count as income until they are cashed out. I was laughed out of the room by other tax academics, so I've got some work to do, but I think the issue is important and has potential to leak into legal analysis of virtual world economic transactions. So I'm kind of fighting a battle there to forstall error from infecting tax analysis of virtual worlds.

In the old days you put an actual nickel into the slot machine and pulled the lever. If you got lucky, you might get 21 nickels in return. Once you put your hot little hands on the cold hard cash, then BINGO (to mix metaphors) you had reportable gross income ($1 in the example).

Problem was, there was really no way to track any of that so those types of winnings never really got reported. Of course, since the whole scheme was designed to make people losers, the U.S. Treasury did not really care that folks did not report their winnings because it would generally be offset by their losses. Technically, however, folks should report the winnings and then take the losses below the line, itemizing and thus wasting their standard deduction.

Nowadays, however, slot machines are electronic. So you load the machine with your dollar and push the button and, if you win, you no longer get any cash. Instead, you get a credit in the machine. To get the cash you must take the positive step of pushing another button to cash out.

In a private letter ruling one part of the IRS said that a similar scheme in the casual gaming site Worldwinner was income to the taxpayer at the time of the credit to the taxpayer's gaming account, even if the taxpayer did not choose to cash out. It was the ABILITY to cash out that the IRS thought was important to it being income. The legal doctrine is called "constructive receipt." That just means the taxpayer has control over whether to actually receive the cash or not.

And of course casinos track every virtual level pull, making it relatively easy to create a reporting system based on the volume of play.

Now I disagree that the credits are income. I think the taxpayer must take the step of cashing out and that if the taxpayer instead uses the credits to play some more games, then that is just a bargain purchase: the taxpayer is getting more "play" for the initial investment. Taxing that is like taxing consumption, which is not what the system is supposedly designed to do.

The new Chinese law mentioned in an earlier post forbidding anyone to make money cashing out is an extreme version of the idea of limiting accumulation of wealth to the status of bargain purchase.

As I said, the tax profs in the room disagreed with me. Part of the reason they disagreed was that I went online and showed them the Worldwinner website where I had created an account. In the account page it said "real money" next to the numbers showing the credit I had remaining to play and it used dollar signs.

This representation as real money was very powerful. Too powerful to resist. It looked like a bank account.

After the panel presentation an attorney from the Office of Chief Counsel, Individual Taxation & Accounting Division chatted with me and said they were working on a guidance project regarding electronic credits in slot machines. There is some significant potential that the IRS will decide that the interstitial winnings in electronic slot machines are income prior to a taxpayer hitting the "cash out" button.

If the IRS goes that way, then there is potential for the rationale behind that holding---this idea of 'constructive reciept'---to infect virtual world tax analysis.

One obvious distinction is that casinos are required by law to redeem your game credits for cash at a fixed rate. Likewise, Worldwinner obliges itself in its EULA---sort of---to redeem your game credits for cash at a fixed rate. In contrast, WoW forbids redemption of Gold and SL does not promise to redeem Lindens. And although such can be converted to U.S. dollars, there is no fixed rate.

This distinction, however, does not present much of a problem to a pro-tax argument. In both WoW and SL, even though the "game credits" (i.e. that which enables the user to engage in more game play) are not redeemable by the owner of the virtual world, they are exchangable and have a readily ascertainable fair market value. Thus, if someone pays you 5,000 Lindens you have the ABILITY to convert them to US dollars. You have control. That's the key to the constructive receipt doctrine. In contrast, the kind of "game credits" you'd get in a video game like Pac Man or in a pinball machine are neither redeemable nor exchangable, so there is no question that their accumulation does not equal income.

But the accumulation of Gold or SL or any other virtual currency that is used to facilitate use of the virtual world is potentially open to taxation so long as it is exchangable and, thus, has economic value outside the virtual world, even if it cannot directly purchase goods and services outside the virtual world.

It's the currency that I think has the greatest potential to be viewed as taxable. But once that happens, the virtual sneakers are not far behind.

That's all for now. Gotta go to bed.

Regards, -bryan camp

Posted Feb 19, 2008 11:56:16 PM | link

Richard Bartle says:

Darryl Woodford>My point was that in the case of performance enhancing drugs, it's not the state stepping in to provent the market, it's a seperate body (e.g. British Olympic Association, Major League Baseball) enforcing regulations that are stronger than those enforced by law.

Yes, and this is what virtual world companies do when they ban RMT. They are adding regulations beyond that required by the law.

In general, games have rules. Thus, by definition, they MUST be adding regulations beyond that required by the law! People agree to limit their behaviour in some areas in order to gain freedom in others. For example, if I'm playing backgammon then I eschew my natural ability to move my tokens an arbitrary number of points, instead restricting myself to moving them only according to the dice roll. I do this because, if you also do it, we both benefit (assuming we both thing backgammon is fun). Nothing in the law says I can't move my backgammon tokens as many points as I want; it's a limitation in the rules of the game. When I (metaphorically) sign up to play, I agree to abide by those rules. If I break them, well, whatever game I'm playing, it's no longer backgammon.

With virtual worlds, some people want to play without RMT. They are willing to give up their freedom to use real-world economics in order to have the fun of playing on a more level playing field. They should be allowed to do that. If someone comes along who likes RMT, they shouldn't play a game for which it is against the rules. If they play it anyway, they should expect to be kicked out if discovered.

People who like RMT and see nothing wrong with it are perfectly entitled to play games where this is allowed or even encouraged. People who don't like RMT should not, however, be forced to compete with people who don't play by the rules and use RMT anyway.

Likewise, people who want to take (legal) performance-enhancing drugs are perfectly entitled to set up their own international athletics competitions if they feel really strongly that they're doing nothing wrong. Those who do not want those activities in their games are, however, within their rights to kick people out if they find they're breaking the rules. It doesn't matter what the law of the land says, it's the rules of the game. The law of the land lets me ride a motorbike in the 100 metres, but even those who advocate performance-enhancing drugs would probably draw the line at that.

The state intervenes in games if those games impact people outside the games. For example, Last Call Poker (teams of players link together gravestones to make poker hands) can upset the bereaved whose headstones are effectively being used as game tokens, so there's perhaps a case for prohibiting it. The state will also intervene if the players can be overly-impacted themselves, as they might with Russian Roulette. Other than that, though, the state will not generally intervene (and nor should it).

Now with RMT, the state has to decide whether the impact on non-players of not intervening is sufficient reason for them to step in. They need to balance this against what would happen if they did step in. For example, legislators could reason that RMT in WoW means that non-players are having to pay slightly more tax in order to cover for the revenue that is not being garnered from WoW's players for in-game transactions. Therefore, they should tax in-game transactions. However, that would kill the game stone dead, and then there would be no income from such a tax, nor from the tax on subscriptions that Blizzard pays. Therefore, the public purse is better off if in-world transactions are not taxed. Then again, they may think this is the price that has to be paid to maintain the tax system's integrity, and close it down anyway.

If a virtual world embraces RMT, then all transactions can and should be taxed. It's when the virtual world doesn't embrace it that the problems lie.

Here's a final analogy. Oscar statuettes are worth hundreds of thousands of dollars. Since 1950, the Academy of Motion Picture Arts and Sciences has only given them out on condition that if they're offered for sale, the Academy has first option to buy at the price of $1. Nevertheless, statuettes issued before 1950 do sell, and they fetch a lot of money (Bette Davis's 1938 oscar went for $578,000). So oscar statuettes are worth a lot of money. Even if the Academy gets to buy post-1950 ones back for $1, they're still worth a lot of money (because the Academy could still sell them at the market rate, right?). Why, then, does the US government not tax movie stars for the large amount of money they are being given when they accept an oscar? Well, they don't tax them because the Academy is trying to prevent trade in oscars. It doesn't want them sold, because it sees them as achievement awards: if you have an oscar, it's because you won it. OK, so it breaks down when winners die and their heirs inherit them, but at least the statuettes aren't traded. While the Academy continues to try to prevent the trade in oscars, the government will stay out. If the Academy only makes a token effort or outright endorses sales, though, those celebrities could find themselves landed with tax bills for winning.

If a virtual world developer doesn't want RMT and makes a reasonable effort to prevent it (without having to compromise their world's design), then tax authorities will probably be OK with it. If it only makes a token attempt to prevent RMT or colludes with RMTers, then sure, it may be just a game, but it's a game that's unduly affecting non-players and it's therefore legitimate for the real-world authorities to intervene.

Richard

Posted Feb 20, 2008 4:48:27 AM | link

Clement Song says:

@ Kenan
Here is the url of that directive on the Chinese government's website. It's all Chinese of course.
http://www.ccnt.gov.cn/gsjpd/whsc/t20070314_35433.htm

Some companies in China are giving out real gifts to redeem the virtual currency to circumvent the government policy. There is also a vibrant community who does the virtual items trading outside of the game.

Posted Feb 20, 2008 5:23:54 AM | link

Darryl Woodford says:

Richard > That makes a lot of sense. Banning RMT is a rule on top of that given by society, I agree. I wasn't aware however that you were taking Edward's definition of defining closed games as banning RMT. I see the membrane definition given here as highly problematic, but that's an issue for another discussion.

I guess the question that is left to define if we accept it however is that of "reasonable effort". Is banning RMT in your terms of service enough? Probably not, I guess there needs to be some sort of significant active effort. Using your analogy, an athletics body could include it in their rules, but unless they enforce it strongly, athletes seeking to gain an advantage will still use the performance enhancing drugs. Is WoW taking an active enough role (eBay entries are basically down to guides, but there's still plenty of offers on Google), I guess somebody will have to determine that, probably when a tax case arises.

I still see a problem when there is a real world market however in other terms. Whilst somebody may be able to say Blizzard are taking an active enough role to prevent RMT that the tax authorities should not get involved, I imagine you would agree that a one-off "elite" (or whatever the term is in WoW) sword does have (despite Blizzards efforts) a real cash value. If a player used an exploit in the game to steal that item, should it only be the developer/company that has the right to investigate that? Do you believe that the player should have no legal recourse in that case, should the developer fail to return it?

Posted Feb 20, 2008 9:29:59 AM | link

robusticus says:

People who don't like RMT should not, however, be forced to compete with people who don't play by the rules and use RMT anyway.

There are plenty of games made where RMT is not even a possibility, perhaps people who don't like RMT should play one of those, instead? It's not like RMT was born with Pong, after all. A solid gold chess set still has 8 pawns.

The big problem with Station Exchange other than that it was released late was that it was a leper colony. Might've gone better if there was a "Purity Server" and SE was enabled on all the rest of them.

The issue with the pro sports analogy (even the Olympics) is the players get paid. All of them. So if someone wants to design a game that will pay me a salary to play, preferably $25 million or so a year, I will publicly promise right here on this blog to never buy gold, powerlevel or otherwise break a TOS. Until then, the world turns and content is a commodity that will be traded.

Plus, a lot of that nonsense with MLB has to do with the league having an anti-trust exemption.

I think though there might actually be a consensus on piracy issues. For example, dupe bugs I think everyone would say shouldn't exist or be used.

Posted Feb 20, 2008 9:45:40 AM | link

Bryan Camp says:

@ Richard,

That's pretty cool info about the Oscars. But unless there is some really wierd statute I'm not aware of, your analysis is a bit off. Receipt of an Oscar statue constitutes taxable income. That's the plain reading of 26 U.S.C. section 74(a). The U.S. government does indeed tax the receipt of the statue. However, because of the right of first refusal clause, the fair market value to the recipient is only $1. So it's only a $1 income. Once that is reported, the recipient then has $1 basis. If the recipient later sells the Oscar, the recipient will have income in the amount of the sales price over $1. It will likely be capital gain.

Notice, by the way, that the contractual restriction on alienation of the Oscar does not prevent the Oscar from being the "property" of the winner. Nor does the existence of the clause say anything about the tax consequence of a recipient who breaches the contractual arrangement and sells the statue for $100,000 without giving the Academy the right of first refusal. That would still be $99,999 of income, even though "ill-gotten" in some sense.

Cheers, -bryan

Posted Feb 20, 2008 9:50:58 AM | link

Clement Song says:

If virtual currency in virtual worlds does carry real world values, are these virtual worlds operating somewhat like a financial institution? What happens if SL goes down or approaches the end of its life cycle? Will people need to "cash out" before that?

During the State of Play V in Singapore, I asked the platform developer panelists the above question. I don't think there was a consensus on this issue.

I personally think that there could a bubble in the virtual world space. When people start to "work" and make money in these virtual worlds, they are no longer playing a game where they knowingly trade money for fun. These people expect a real world return on their virtual world investment. Therefore, the bubble could burst when one of these virtual worlds goes down. It could just be a rumor that their virtual world is going down, then their residents will rush to cash out and could potentially force the virtual world operator out of the business.

Posted Feb 20, 2008 12:37:40 PM | link

Peter S. Jenkins says:

@ Clement - This raises the whole issue of a meaningful "right of exit" and the role that RMT has in that. Obviously, there is no meaningful ROE without RMT and the ability to cash out one's virtual assets. The ROE provides some justification for non-interference by the RW in the rules of a VW, even if those rules are draconian, the argument being that if players don't like the rules they can always exit. This might be one reason why many virtual worlds take a "nudge-nudge wink-wink" approach to RMT, despite the potential taxation fall-out, when they could quite easily code a complete ban on it. In other words, they probably see the somewhat tentative and sporadic interest of the taxman as preferable to the heavier hand of other potential forms of intrusion concerning player rights, e.g. speech, representation etc. To paraphrase Claude Rains' brilliant line from Casablanca, where the right of exit was also predicated on a grey market, "I am shocked, simply shocked to see that there is RMT going on here!" followed by a hushed "Here is your plat, sir!"

Posted Feb 20, 2008 10:01:12 PM | link

Prokofy Neva says:

Candy, once again, no need to complexify it: the taxation event occurs *when you cash out into real dollars*.

There isn't a tax on the transactions within the virtual world in the virtual currency which is used to conduct microtransactions. Indeed, to avoid legal liability, the games and worlds indicate in their TOS that this currency is not really a currency, but is fictional, and is merely a limited license to access content. Governments cannot be expected to try to tax limited licenses to access content in proprietary worlds.

So, no, there isn't a tax on the "fair market value" of sneakers in their equivalent cost of pennies in US dollars while the transactions are in world. Even when they escalate to cost much more like a real life pair of sneakers (the sneakers, say, from a real-life company like Adidas, but in pixelated form), there is no tax *inworld*.

This is just how it is. Trying to complexify it is pointless. No authority has reached in to do this, indicated it will reach in to do this, even speculated that it might ever reach in to do this. Instead, when they have been asked, they say the moment of taxation occurs when the virtual currency is converted.

I realize that people want to be absolutist about this, and create this space for the work of future lawyers in addressing all the hypotheticals that might occur in theory within worlds, and not between worlds and real life. But...let's not manufacture hypothetical jobs for lawyers in virtual worlds, ok? They do enough in real life.

Posted Feb 21, 2008 10:41:44 AM | link

Desmond Shang says:

>>Closed: LOTRO, WoW, EQ, etc. These worlds require a strong membrane. They abhor interoperability. Gold-for-dollars is an anathema. The entire value proposition rests on their differentness from reality. They should not be taxed or regulated at all. Rather, the law should support the membrane at all costs."


That is the ideal, but it is clearly unenforceable.

"I'll ship you my spare NVIDIA card for your WoW stuff" for example.

All worlds are open. It's just a matter of degree.

Ironically I'd bet the worlds trying to stay "closed" the most diligently will also create the most lucrative black markets.

Posted Feb 21, 2008 2:39:41 PM | link

Ace Albion says:

Wait- the US IRS is looking at taxing individual "wins" in slot machines? Are they also taxing every hand of poker or blackjack in a Casino also?

I almost think that it's an issue as simple as hastily renaming "virtual dollars" into "virtual green beans" and removing all occurences of the dreaded "$" symbol from all interfaces.

Posted Feb 22, 2008 4:13:10 AM | link

blackrazor says:

Runescape, with 1 million subscribers and several million banner-ad-sponsored players declared total war on RWT on Dec. 10, 2007.

They changed their game mechanics to basically disallow all unbalanced trading between characters. Every item in the game has been given a value, and all trades must balance within a very narrow margin that basically makes RWT impossible.

Even in various pking and staking contests, you can no longer easily gain your opponent's items if you win, eliminating rigged matches that could be a path to RWT.

If you drop items on the floor, other players will not see them and cannot pick them up, again closing a RWT path.

All of these changes have created an uproar in the community, but Jagex (maker of Runescape) has stated that they had no choice. The RW-traders were making members accounts using stolen credit cards (as part macroing the most desirable goods for later sale into gold to be used for RWT), and the massive charge-backs were an unsustainable cost for Jagex. I presume this relates to both the actual charge-back costs and the possible loss of their merchant accounts or the hiking of their transaction fees with the credit card companies as a high-risk vendor.

Would such drastic actions also make their players safe from the taxman?

Will this effectively "raise the bar" on what the taxman will expect from other gaming worlds, if they are to remain protected as "closed".

Posted Feb 23, 2008 12:43:08 PM | link

Richard Bartle says:

Darryl Woodford>I guess the question that is left to define if we accept it however is that of "reasonable effort".

Yes indeed, and this is not clear cut. Is a small developer that tries to stem the tide but can't (through lack of resources) going fall foul of the law? It's doing the best it can.

What would particularly concern me would be if there were some implication that the virtual world's design should somehow strive to prevent RMT. I don't think that should count towards "effort" at all, as it could impact seriously on the fun that people might otherwise have had if the game world didn't try to defend itself through limiting its design.

>Is banning RMT in your terms of service enough?

Well, it would certainly let people know where they stood. Ideally, though, we shouldn't even need a TOS - the default should be that you can ban people for any reason whatsoever, so long as it isn't against more general laws (eg. on grounds of race - and even then there are situations where this sort of thing is sanctioned in the real world, eg. clubs for minority ethnic groups). I can see, though, that a revenue authority could require that virtual worlds state in advance which side of the fence they wish to sit on, and that they may require this to be stated in advance. That said, it's a bit harsh to expect people who create their own, small-scale, non-commercial virtual worlds to have to register them for tax purposes in case any of their 100 players use them for selling stuff to each other.

>Is WoW taking an active enough role

I'd say so, yes, but RMT apologists seem to think Blizzard is deliberately unenthusiastic in some areas because it indirectly raises money for them.

>I imagine you would agree that a one-off "elite" (or whatever the term is in WoW) sword does have (despite Blizzards efforts) a real cash value.

It does, but that value is to Blizzard, not to the player.

>If a player used an exploit in the game to steal that item, should it only be the developer/company that has the right to investigate that?

Not at all - anyone can investigate it. It's what you do as a result of the investigation that matters.

>Do you believe that the player should have no legal recourse in that case, should the developer fail to return it?

I am, yes, although I would add that a developer would be stupidly unwise not to do so. The thing is, the only people who get to decide whether an exploit is indeed an exploit are the developers. If they say something is a feature, rather than an exploit, there's no "crime" committed. It ultimately comes down to a "what is art?" question, and courts are not equipped to deal with that.

Richard

Posted Feb 24, 2008 6:24:50 AM | link

Richard Bartle says:

robusticus>There are plenty of games made where RMT is not even a possibility

Yes indeed, but that doesn't mean people who don't want to design or operate an RMT-free game world should be obliged to design it so that RMT is impossible. There are indeed some minor design changes that can be made which would reduce RMT to a tiny gnat's bite of a problem, but that's not the point: the point is that if people want to have a virtual world with no RMT, they shouldn't have to compromise their design just to stop people who ignore the rules and do RMT anyway.

>perhaps people who don't like RMT should play one of those, instead?

Why should they have to? If I don't like RMT and I find 5,000 other people who don't like RMT and we set up a virtual world specifically for people who don't like RMT and then we open it up and RMTers come in and spoil it, why can't we just kick them out? They're playing a game not intended for them.

>Might've gone better if there was a "Purity Server" and SE was enabled on all the rest of them.

There would still have been RMT on that "purity" server, though.

Richard

Posted Feb 24, 2008 6:32:07 AM | link

Richard Bartle says:

Bryan Camp>unless there is some really wierd statute I'm not aware of, your analysis is a bit off.

This is why you're the tax lawyer and I'm not, heh.

>However, because of the right of first refusal clause, the fair market value to the recipient is only $1.

So if the Academy held a general meeting at which it was decided that they would waive that buy-back option, and that anyone who had an Oscar was free to sell it to anyone else, suddenly everyone already in possession of an Oscar would have to pay tax on the $100,000 of income they had just received?

Oscars have a market value of several hundred thousand dollars. The Academy could sell them for that amount - it's only the Oscar-winners who are bound by the $1 rule. You seem to be saying here that I could give my daughter a house worth a million dollars, but she wouldn't have to pay any kind of gift tax on it if I made her sign a contract allowing me to buy it back for $1. Is that right?

Could I make everyone in a virtual world sign a contract saying that every virtual object they own I get to buy back for $0.000000000001? Would that get them off the revenue tax hook?

>Notice, by the way, that the contractual restriction on alienation of the Oscar does not prevent the Oscar from being the "property" of the winner.

Well it does, sort of. If an Oscar-winner dies, then their heirs inherit the Oscar. When the heirs subsequently attempt to sell it, can they do so on the open market? No, they can't - the Academy still has first refusal to buy it for $1. This is despite the fact that at no point did the heirs sign any contract with the Academy. How does that work?

Richard

Posted Feb 24, 2008 6:44:24 AM | link

Richard Bartle says:

Clement Song>If virtual currency in virtual worlds does carry real world values, are these virtual worlds operating somewhat like a financial institution? What happens if SL goes down or approaches the end of its life cycle? Will people need to "cash out" before that?

The problem is that to cash out of a virtual world such as Second Life, you need to find a buyer for your assets. If the virtual world is going to close, though, you're not going to find one: the reason you want to cash out is the same reason no-one will buy from you - the virtual world is not going to be around any more.

Example: I have a store full of virtual surfboards. The virtual world announces it will be closing in a year's time. Why do I want to cash out? Because in a year's time, those surfboards will disappear and I will have lost their value. Why would anyone want to buy them? Well, they may think they're going to get a year's worth of use from them. However, if I still have half a store full when there's a week to go before closure, people are only going to get a week's worth of use from them. They are not going to pay what those surfboards were "worth" a year ago. Or maybe they are, but only because the currency - Linden Dollars - is as worthless as the surfboards.

This question was raised at State of Play 1. In real life, if some service is being closed down, there is the option for the government to step in and keep it running for long enough that people can move stuff off it. For example, if the New York Stock Exchange ran into financial difficulties and announced it was closing down immediately, the US Government could fund its continued operation in order that companies quoted on the NYSE could transfer their listing to some other stock exchange, say Chicago's. Then, the NYSE would be allowed to close.

With virtual worlds, though, there is nowhere else to go: you can't take your virtual land and your virtual house out of one world and move it to another. You could be sitting on a billion L$ and it would disappear when Linden Labs closed their servers. There's nowhere else it could go. You bought a sandcastle below the tide-line, and while the sea was going out you could sell it to other people who didn't think it would ever come in. When it started to come in, though, suddenly people realised they were buying something with a limited lifespan, and that affected its value. Eventually, the sea will take it and its value becomes precisely $0.

Note that this analysis only applies to virtual worlds which do not equate their internal currency with real currency. Linden Labs don't guarantee that L$ can be sold for real $, they merely support an exchange that allows people to sell one for the other, the price being determined by market forces (although I believe they do intervene to support prices, as a central bank might). Virtual worlds which do peg their virtual currency to real currency would have far, far bigger problems were they to close down, because their currency doesn't float and therefore doesn't change value according to the developer's situation. Project Entropia is in this situation, for example, and unless their reserves can entirely cover the virtual currency they've issued, they would not be able to honour all their debts were they to close.

Richard

Posted Feb 24, 2008 7:03:52 AM | link

robusticus says:

There are indeed some minor design changes that can be made which would reduce RMT to a tiny gnat's bite of a problem

Seems to me as a relative noob, starting from scratch, that one would have to go way out of their way to make game gold have a real world value. Unless one were to mimic some other design that already incorporates RMT as a feature.

And I don't know about those minor tweaks. Runescape RMT is still going strong. Blind auctions seem to be only a minor annoyance to the sellers but a huge pain to real players. And there is the chargeback issue which is faux because you get to a point where you deal with the game companies in the same way you deal with the gold sellers - with disposable credit cards.

Spam? Go look in your snail mailbox. What is it, 6 cubic tons per year of carbon per person? But it is too much to ignore some bits flying across your screen and we have to disable community features to prevent that. Oh wait, the people who complain about virtual spam probably aren't old enough to own a snail mailbox. So they won't understand when I talk about how I tried boycotting the post office but that doesn't work very well, unfortunately. Apparently the schools rather insist I suffer naseua every time I check my mail.

So you have to compromise the design because you can, whereas you can not compromise human nature.

But what got me was the exclusivity argument. I don't think that is the solution, I think rather you want to be inclusive and provide a greater variety of economic activity. Besides, if you want a "pure" world, why would you even open it up in the first place? And why would you make the game usable by anybody with a pulse? Seems a contradiction to have an economy based on a thousand clicks, but exclusive to only those who want that.

Posted Feb 28, 2008 11:42:48 AM | link

Bryan Camp says:

@ Richard:

The legal analysis depends on the nature of the agreement between the Academy of Arts and Sciences and the recipient of the Oscar.

To address your questions in order:

1. No. If the Acdemy decided to retroactively waive the right of first refusal, then the value of the Oscars in the hands of the original recipients would zoom up alright, but that would be unrealized income. Only when and if they sold for $100,000 would they realize the $99,999 income. When they receive the Oscar, they have recieved an item with a fair market value of $1 and must report that as income. It's like winning a share of stock that is worth only $1. Later appreciation in value of the stock---for most any reason---is unrealized gain until the stock is sold. Same with Oscar.

2. Gift taxes are something entirely different than income taxes. Gift taxes tax consupmtion. They are excise taxes that tax a transaction. Every transaction contains consumption somewhere in it. SO when I give an item of property to my child, the gift tax is based on the fair market value of the item I give at the time I give it. I must pay the tax. In the U.S. there is an exemption from gift taxes for gifts of $12,000 or less by one person to another person in a single year (so Mum and Dad can give $24,000 to Junior without triggering gift tax).

3. While the GIFT tax consequence of gifts hits the donor, the INCOME tax consequences of gifts hits the recipient. Section 61 says the accession to wealth is income. Gifts increase wealth and are therefore income unless you can find an exception. In the U.S. the Internal Revenue Code section 102 gives you that exceptions. It excludes the reciept of gifts from gross income. I imagine there is a similar provision in the Inland Revenue laws.

Bottom line on gifts: If you gave your daughter a home worth one million dollars (lucky daughter!), she would not owe any income taxes on the gift. YOU, however, would owe a big gift tax, unless there was some exclusion. In the U.S., taxpayers are given a one-time lifetime gift tax "credit" that currently (I think) shelters some $1.5 million in gifts. So you would not actually owe any gift tax, but you would draw down your lifetime credit. This is called the "unified credit" becuase it also works to protect the passing of gifts upon death. I don't teach this stuff so am not up on all the numbers. But this is one reason why those who shout and moan about the unfairness of the "death tax" are just really, really, stupid. Becauase of that huge unified gift tax credit (doubled for married couples, by the way), the estate tax only hits the top .05% or so of households. You have to leave an estate of upwards of $3 million to even begin to be bothered by the tax.

4. I would expect (but do not know) that the Academy's right of first refusal is an agreement between the Academy and the Oscar recipient. Unlike a deed, it does not run with the property itself. So when Clint Eastwood dies and will his Oscar for Unforgiven to Richard, Richard gets the sucker and can most likely sell unrestrained by the right of first refusal.

5. Yes, you could put a right of first refusal into you TOS. But the law will properly ignore if you never actally do it and it's just a sham. I suspect the Academy rarely has to exercise its right of first refusal, but a virtual world has a lot more volume of transctions.

Most of the above is off the top of my head, but I think it's pretty accurate. Please feel free to email me directly (bryan.camp-at-ttu.edu) if you have more questions. I'm not following this thread as closely as I would like to be able to.

Regards, -bryan

Posted Feb 29, 2008 10:28:16 AM | link

Richard Bartle says:

Thanks for that, Bryan. From what you say, it doesn't look like we could use Oscar law to stop people from having to pay tax on virtual currency transactions. Damn!

>So when Clint Eastwood dies and will his Oscar for Unforgiven to Richard, Richard gets the sucker and can most likely sell unrestrained by the right of first refusal.

This doesn't appear to be the case. Cyrus Todd, grandson on Richard Todd (who won an Oscar in 1956 for Around the World in 80 Days) tried to sell his grandfather's Oscar in 1989, and the Academy managed to get a permanent injunction against his doing so. http://in.rediff.com/movies/2006/mar/03oscar.htm .

Richard

Posted Feb 29, 2008 12:42:04 PM | link

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