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Dec 14, 2005



The tax man cometh.


If virtual currency must be viewed as real world currency, it should be noted that virtual currency depends only on the longevility of the virtual "authority", that has the right to issue them and control the transactions. When the game is no more around, the money lose not only their nominal value, but they end their existence (unlike real world currency where you are left with banknotes and coins that have numismatic value). Personally I think selling virtual currency, or items purchased by virtual currency not as selling goods or converting money between two currencies but as providing a service - and that service is "providing game-based characteristics for a payment". Any attempt to rule virtual currencies as real world currencies is opening a HUGE can of legal worms that once regulared, will be impossible to innovate without being closely watched and storngarmed by real world economics preventing the impact of virtual economics. The only people who will profit from this will be once again the lawyers.


I'm no expert, but I expected (and didn't see) mention of gambling regulation. In Second Life, there are rather a lot of gambling games.

"The Internet Gambling Prohibition Act of 1997 was passed by the Senate on July 23, 1998, by a vote of 90-10. This act amends the Federal criminal code to prohibit and set penalties for: (1) placing, receiving, or otherwise making a bet or wager via the Internet or any other interactive computer service in any State; and (2) engaging in the business of betting or wagering through the Internet or any such service. There are exceptions for state lotteries, horse racing, and (yes) jai-alai. "
Steven Skiena - http://www.cs.sunysb.edu/~skiena/jaialai/excerpts/node19.html

"Betting is illegal in most of the world (including Nevada), with exceptions carved out over the years by special interests, such as for horse bets, lotteries, and casinos. Only the UK, to my knowledge, allows non-sports betting. Some off-shore gambling places are now soliciting folks citizens to bet with them by phone (e.g., 1-800-I-CAN-BET) or internet (e.g., Internet Casino)."
Robin Hanson - http://hanson.gmu.edu/ideafutures.html


It's great to see this kind of work going on in law schools - and this is definitely an interesting piece. Thanks for posting it, Dan (and thanks to Joshua for sharing it). I realize it is a draft, and look forward to reading a more polished version in the future - hopefully my comments are on the more constructive side of criticism.

  • Overall, I must admit that I am a little unclear on the conclusion we are meant to draw. The point seems to be twofold: (1) virtual currencies are not "money" or legal tender, but might be some kind of negotiable instrument/currency-like mechanism in certain cases - basically meaning "they are tradeable (for cash) and have economic value"; and (2) for the most part, it isn't legally relevant whether or not virtual currencies are "money" (except in some exceptional cases like interpreting contracts/wills). Am I missing something?
  • The case of money laundering is interesting, and one that has come up in the past with respect to VWs. The conclusion that it doesn't matter if virtual property is "money" is unsurprising - many of the more popular money laundering schemes involve cycling money through the purchase of non-monetary forms of property (eg. real-estate, antiques, art, etc.). It might be more interesting (with respect to the monetary status of VW currency) to ask whether someone who had no intent of ever taking the money out of the game would be guilty of money laundering (eg. cycled dirty money through a couple accounts to ulitmately pay for their epic mount/a stockpile of VWgold/etc.).
  • On a side note - while I generally agree with the conclusion about (lack of) VW sovereignty - I am a little unclear as to the relevance. Does foreign currency get some special status in the US that a negotiable instrument issued by a (non-sovereign) private entity wouldn't?
In the end, though, kudos on a worthwhile exercise - such things are useful even when you come to the ultimate conclusion that the proposed approach may not have much legal relevance - some of the implications raised in the process will undoubtedly shed some new light on the things we blather on about around here.

Apostol >The only people who will profit from this will be once again the lawyers.

Don't worry - if trade in virtual items is indeed approaching $1billion/year, lawyers (and the tax man) will get a cut whether we define the commodity traded as "property", "money", "service", "time" or "pink elephants" ;-)


“The tax man cometh.”

Don’t mean to spoil the party, but the Taxman is already here… (And, I don't just mean my virtual villain in CoV.) RMTs are already subject to current tax laws, as well as any income derived from those trades.

As far as untaxed revenue goes, there are many, many, many bigger birds to fry before anything that has a whole $1B *estimated* (primary+secondary+private+personal) market. A billion$ of virtual revenue, oh boy, oh boy!! Well, maybe it’s a billion, wait..... sorry uncle Sam we don’t really have good numbers.....and oh yeah, by the way, a very big portion of that is being created overseas and you’ll need to set up years and years of international negotiations with our very close trading buddies in China, who are very concerned these days about anyone in their country possibly ‘making money’ off of Americans, or our precious virtual assets. I’m sure if we tell them that the US government would like to tax their citizens, they’ll be more than happy to set the other issues, like, well, the piratization of anything and everything that every other country in the world produces. Maybe we could have our boys in blue put everything else on hold to hunt down this very important fictitious $1B is virtual trades. Yes, yes, let’s put everything else on hold!! You know this might pay for what, 27 minutes? of the little presidential project we have going in the middle east.

While I fully agree that taxes on *actual real goods* that are being traded on the internet are just a matter of time, (see http://news.com.com/Internet+taxes+Its+just+a+matter+of+time/2010-1071_3-5778677.html) I think we need to realize that the legislature decides to ‘not tax’ a number of smaller industries all the time. (see http://www.cbo.gov/showdoc.cfm?index=6301&sequence=0).
“Moreover, (untaxed) cooperatives include such large and well-known firms as Land O'Lakes, Southern States, and Welch's. Information on the size of the cooperative sector is not available, but in 2001 and 2002, four industries together--credit unions and three types of utilities providing electric, telephone, and water services--earned $77 billion in total revenue. “

Yes, our $1B in potential virtual revenue, sounds very, very important to government, I can hear them coming right now!!

To be clear, I’m not saying that the industry won’t need to be smart about things, most likely there will need to be a number of design/legal developments in the future to take added precautions, but we are very far, and very many political tactics away from federal taxation of virtual trades in magic circles. I’m hoping at some point the industry has stronger lobbyists than say, those municipal golf courses.

As far as using virtual currencies to laundry money, yes, this is possible, and yes, most likely it is happening. But, this is also happening to the tune of many billions of illegal $ a year in many other industries. It’s just as easy to set-up a fake auction on eBay, and send an empty box to Columbia as it is to buy/sell virtual currencies, you’ll also lose less in the transactions. Heck who needs to send an empty box, sell to Columbia for $200, sell back to the US for $100. The problem with eBay is the same they would have with virtual money trades. Most RMTs are less than $100 and to get any real volume you have to do a lot of work. It’s much easier to set-up a fake company, and transfer funds that way. If you want to see a small snapshot of how busy the government is with this whole issue, you might try http://www.moneylaundering.com/. Coincidentally, they are also busy with a few other topics these day, like that other little war we still have going with what were they….oh yeah, illegal drugs!……or those other little squabbles of illegal labor markets, Medicare fraud, social security fraud, straight tax fraud, illegal foreign investments, the war of terrorism, etc, etc, which are well above a trillion $ (of actual tax revenue) or so. That said, I’m sure our little magic circle hobby here is much more important to the Feds, and we should all be running around like level 3 newbie gnomes praying to our virtual stone gods hoping we can survive the inevitable day when the Feds clamp down on our little party. Oh no!! The sky is falling!!!

As far as private currencies, or more commonly corporate scrips, are concerned, they have been around in one form or another for many, many, many years. I have had a Disney dollar in my wallet since I was in high school, and things like coupons redeemable for goods/services to prize tickets at Dave and Busters, to airline mileage redeemable for flights, to credit card reward plans that are redeemable for goods/services all are very common, and trading in the real world today with very little complaints from consumers as to the governments current tax policies.

There are even many hard currencies (like e-gold) that are being purchased, traded, sold everyday. Not a big deal, not a big problem, and not really big news to any government.

(On a personal note: I really enjoyed this essay, and the topics covered here are spot on, I just don't draw the same conclusions as to the inevitable effects of this line of logic.)

I’ve said this before, and I’ll say it again, the biggest risks we (as players) face today are 1) becoming a target for a 'sin tax', which would be more about political control than tax revenue, and 2) from the Government taking a keen interest in our luxurious pastimes because the industry and academia doesn’t have its virtual horse dung together.

For those that don’t know the story, it’s as follows:

“Dear Mr Taxman,
This is good clean fun! But feel free to keep taxing RMTs and any income derived there from!”



On a related note, it's interesting to consider the case of the euro, the introduction of which was pretty much unprecedented in the history of currency. It was a virtual currency first, in the sense that it was traded on currency markets before being rolled out as hard currency, and to me this exemplifies one more step in a long process: a shift in the basis for monetary legitimacy away from the nation-state and toward online markets. I enjoyed Josh's paper very much, and its focus is on the US legal ramifications, but the legal recognition of currency as currency is just one aspect of its legitimization. It's worth bearing in mind that there may be a broader transformation of the nature of currency going on, in which virtual world currency is just one very interesting case.

(I've written about the euro here. I would recommend Simmel's The Philosophy of Money for anyone interested in these issues.)


Bruce Boston said:

"Don’t mean to spoil the party, but the Taxman is already here. RMTs are already subject to current tax laws, as well as any income derived from those trades."

There seems to be some confusion about what is being discussed when someone mentions whether or not the proceeds from sale of virtual items are reported for purposes of taxation. It is well known that individual reporting of proceeds received from the sale of virtual items should be reported, and are taxed. This is well established. What may also be discussed, at least by myself in the past, is whether such a transaction will need to be reported by the market or broker by which it is sold. Transactions have two parties, and many transactions are reported by both parties. If I earn an income from an employer, the employer files the amount they paid (Form W-2), and I file the amount I earned (Form 1040). If I sell a commodity, the broker, or exchange authority, reports the sale in Form 1099-B which I also report in Form 1040 Schedule D (in reference to U.S. Federal Income Tax). Failure to file income can be detected from the mismatch. You seem to be reaffirming the income reported on the Form 1040, which, I believe, is well established, where previous comments can be directed at the potential regulatory aspect of forms similar to the 1099-B filed by the exchange authority.

One further note at the individual level, such scrutiny on the difference between leisure personal sale and intentions of profit for business are blending with online sales, which effects the manner in which it is filed, and taxed. On an individual level, that is.

"While I fully agree that taxes on *actual real goods* that are being traded on the internet are just a matter of time"

Just to be clear since there seemed to be confusion on the previous tax pair filings, taxes on "actual real goods" are already being taxed at the individual level. On many state 1040-based income tax forms there exists a Sales and Use Tax, as well as Use tax forms, which is a sales tax on any items purchased online or out-of-state in which sales tax was not collected. The point, though, is not whether individuals should or should not report such purchases out of state, as many states already require. What is pending is whether or not merchants will need to collect and report sales tax for online transactions, and whether or not such laws will be federal, for standardization, or respective to each state.

"Yes, our $1B in potential virtual revenue, sounds very, very important to government, I can hear them coming right now!!"

Government need not be interested specifically in RMT of items or currencies in virtual worlds, but it can attempt to regulate a larger industry in which RMT becomes categorized within it. That may also be relevant to anti-laundering laws.

Finally, estimates of the future are a consideration of potential liability, not absolute certainty. This is not some shout about the sky falling, but merely an exploration of future complications considering items from virtual worlds involved in legally recognized transactions.

Prior to companies like Vonage, there was concern over seven years ago that a VoIP service industry should expect regulatory policies such as Federal Wire Tapping and 9-1-1 services. Many countered about how such services were much different than the established industry and much smaller than the industry giants. Wonder how that turned out...


In case this interests anyone else...
Earlier, I suggested It might be more interesting [...] to ask whether someone who had no intent of ever taking the money out of the game would be guilty of money laundering, and while I still don't know the answer for the US, I have since had the chance to look at our Criminal Code up here at the North Pole. It looks like stashing illicit gains in an EVE Corp probably wouldn't save you from jail on laundering charges, even if you never had the intent to take the ISK in question back out of the game. The wording of the statute doesn't depend on a definition of "money", or even, it would appear, the definition of "property" as long as you started with proceeds of crime and then tried to conceal them:

Every one commits an offence who uses, transfers the possession of, sends or delivers to any person or place, transports, transmits, alters, disposes of or otherwise deals with, in any manner and by any means, any property or any proceeds of any property with intent to conceal or convert that property or those proceeds, knowing or believing that all or a part of that property or of those proceeds was obtained or derived directly or indirectly as a result of [committing a crime]. [Criminal Code of Canada s.462.31]
Granted, the statute is written broadly enough that hiding the cash in a sock under your bed might well qualify. We even have case law [R.v.Tajani (1999) 138 CCC 3d 366] suggesting that "convert" is broader than "conceal", and that converting illicit Canadian funds into US funds, for example, is enough to make out the offence - now whether that would apply to a virtual currency is another matter.

I don't know if this thread is still alive, but fwiw:

We've been working on an ambitious--extremely ambitious--plan in this space. You'll probably be interested to know that the legal consensus we've received from a well known outfit is that both taxation and EULA issues are an unknown at best. EULA's might not hold up in court given complex considerations about what constitutes property rights interest. In fact, in S Korea and other jurisdictions courts have been ruling in favor of personal property rights in virtual worlds.

As to taxation, it is not determined if taxes would be based on derivitave gains law (within the US), or income taxation. Instead, the IRS will almost assuredly wait until the legal rights are flushed out in the courts before attempting to recover taxes. States may try to preempt, but that is more easily avoided legally.

AS to financial/economic worries. It's not that complicated, actually. A virtual currency is not a currency at all, but a consumable commodity (in financial engineering terms). Trade on such at an "exchange rate" is in effect a derivative trade at spot for a consumable commodity. It doesn't matter whether the virtual currency authority is stable, goes away tomorrow, or is even trustable. These risk factors will be included in the price in hard currency a virtual currency commands.

We've back tested a series of triangular arbitrage formulae against the *real* market data (not IGE's "sell" prices, but data our autonomous agents have pulled over the past 6 months from an aggregate of stores and "farmers" buy/sell prices), and found that these notions hold. Interestingly, there is no market clearing price discovery currently occuring. Instead IGE and others are fixing sell prices and adjusting buy prices at a pre determined markup margin. Given the low transactional frictions, this will change in the coming months...especially if we have anything to do with it.

The best thing the game publishers can hope for is that we succeed. Buy optimizing the virtual currency market, and taking the broker-profit out of the system, power will return to the publishers in terms of control of their internal game economies and player behavior. That is, it will no longer be profitable for farmers to sell items for hard currency. They will need to use the in-game economy, which the publishers can more easily monitor and guide. Game currency will be the store of value, and the convertible translation mechanism--which it often is not in most titles today, largely because of the activities of IGE and others.

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