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Oct 18, 2006



The government will get its money either way. Anyone making any kind of real money in SL will have to pay income tax on it, eventually. If a sales tax was instituted, businesses would pass that on to the consumer as they usually do.

I'm somewhat interested in the impact real world companies have on the virtual worlds. There has been a relatively short timeframe someone with some skills could jump into Second Life, find a niche making objects or providing a service. Advantage: little guy.

I'm sure the appearance of a company like American Apparel in-world has got to give some pause (from the perspective of a small shop owner). The amount of marketing muscle they could put into a game could really skew the economics. I wonder out loud. Advantage: big company.

Isn't the long arm of government or big business making virtual worlds seem a little less other-worldly? Is Second Life really "user-created" with a company like American Apparel in game?


All I can say is "Thank you", to TN, the State of Play, Ted Castronova, and everyone else in academia that did the heavy lifting on getting in front of this particular potential trainwreck. That the first political notice of the in-game notice was going to be a money grab, rather than a rational assessment, was a great fear of mine.



Reading the release, it doesn't sound like anything has been definitively determined yet.

More and more large companies seem to think there's an advantage to having a presence in-world and many are selling virtual wares there too.

I wonder how Adidas reports in earning on shoes & apparrel it sells in Second Life. It's probably just rounding on their financial statements now. But given enough products and transactions it could move beyond that. If they're spending money to be in-world, wouldn't shareholders (or at least managers) what to see what kind of return they're getting on their investment?

Especially since the Second Life Linden dollar has a floating exchange to the US$ I think its just a matter of time before the virtual CPA/tax man appears in-world... But it probably wont be for decades. Accountants are a pretty staid bunch.


I think that virtual economies will remain separate from the real economy because as long as the virtual world is run by one company they're equivalent to a transaction on foreign soil. Everything is internal to a single entity which is not the United States, and if the value of the company rises as a result of the in-game transactions, the Gov't does get to tax whatever money the company manages to siphon off for itself.

So... doing business in-game is equivalent to doing business in Mexico, the proceeds only get taxed by the US when they fall back within its jurisdiction.

Arguing over whether or not the company running the world will put taxes on in-game transactions is a different question (a good one), but I think the national governments involved will know better than to try to subvert foreign economies without taking over governance as well. Entirely possible that the Gov't will buy out large Virtual Economies at some point in the future to ensure their stability and the value of their goods, but not something worth talking about yet.

I think that virtual economies will remain separate from the real economy because as long as the virtual world is run by one company they're equivalent to a transaction on foreign soil
But because money is being exchanged FOR goods from that foreign land, wouldn't the good itself therefore be taxable? Or is it because that good never ever enters this land that it remains separate?

FYI, US citizens are taxed on all income world-wide. So the fact that a transaction happens in Mexico doesn't make it tax free. If doing business in-game is equivelant to doing it in Mexico, then to be consisent, in-game income should be taxed.


'Fraid I don't know as much as I should about that point. But still, in-game income wouldn't be taxed until it registers a gain in income in the Citizen's name.

It's more like one person has U.S. citizenship and a fake ID with their Mexican identity and uses American for most things and Mexican identity for Mexican transactions.

The Gov't is apparently saying that it's legal to have citizenship in two gov'ts independent of each other, and not pay taxes unless you're transferring funds between the two.

What happens in VWs, stays in VWs.


Stipulation; by 'two gov'ts independent of each other,' I mean totally independent. The U.S. gov provides insurance of life, liberty, and the pursuit of happiness for your physical vessel, VWs provide the same for a mental avatar which has no real-world component.


To ressurect an old debate in TN...

So what are the chances of VWs classifying themselves as sovereign nations now?


I'm not sure I understand, I'm sorry if I'm going over old ground but I'm new in these parts ^_^. While second life is a virtual world, I in fact live in the real world, the money I (potentionally could) make is virtual until Linden Lab exchanges it for real dollars. Now once I get that money the government will happily take a percentage of my income not caring where I got the money from.

Now why shouldn't sales tax apply as well? A VW isn't a sovereign nation, and i certainly cannot live there. However money is changing hands, most of it (I believe but cannot find a citation) between US residents or companies. A government certainly has the right to tax sales between their citizens and corparations.

However my thoughts are that the more important issue requiring regulation is that of the legal standpoint of these companies running virtual economies. If one, for example Linden Lab, was to go broke, all the time and money invested in their virtual world would be simply lost. And as their terms of service states one would have little or no legal recourse to recover one's money.


Lumping together Second Life with World of Warcraft is a mistake. WoW prohibits "real money transfer," Second Life is all about real money transfer.


The reason sales tax don't apply in VW transactions is because sales tax usually applies only to tangible goods. Plus, sales taxes are paid only at the individual state level in the US, for now. For instance in CA, if you download software you don't pay sales tax, but if you get a CD with the same software on it you pay sales tax.

The other question is one of ownership. I believe in WoW you only have a license to use the items in the world. Where in SL you can have legal ownership of items in the VW. If you don't own something or are legally responsible for it, I don't think you would have to pay tax when it's transferred to someone else.


Mikyo>Lumping together Second Life with World of Warcraft is a mistake. WoW prohibits "real money transfer," Second Life is all about real money transfer.


First, set aside precedent, law, current tax policy, anti-tax political posturing, and our love of Second Life. Theoretically efficient taxation requires that similar transactions be taxed similarly, regardless of where they occur. If I buy a floral design from you using dollars in Denver, it is the same transaction as buying the design from you using Linden dollars in Lala-Land. Same trasnaction, should be taxed the same. If not, then inefficiencies arise: some people will run businesses in Second Life solely because of the tax advantage, not because SL offers any genuine cost advantage. Activity is generated (the movement of enterprises into SL) that has no economic justification - that's inefficient and wasteful. It's just like the situation when two counties have different sales taxes: business move over the county line, not because the other county is economically better, just because the sales tax is lower. That does not deny that the other county, or SL, may have some real economic advantages; we're talking about any additional increment to activity: activity that would not have happened without the tax advantage. All the costs of these kinds of activities and movement are economically a waste: a drag on society.

Thus to the extent that SL is like another county, another province, an extension of the real world economy, transactions in it ought to be taxed. SL has consistently billed itself as an extension of the real world economy and has emphasized the ability of users to make real world money on intellectual property generated there. The founders and designers have stressed that SL is not a game. It's a platform. And unfortunately, I can't see any reason to treat transactions in the platform of Second Life any different from ones in the platform of First Life.

Again, let me stress that this is the result of a politically neutral, platform neutral assessment. It pays no attention to current tax policy, which is loaded with inefficiencies which would make this one look small. I'm just offering it in the interests of encouraging tax policy that's good.

While Second Life transactions ought to be be taxed, World of Warcraft transactions MUST NOT be taxed.

Why the difference? World of Warcraft is a game. Its economy is not part of the real economy. It is not the purpose of WoW to allow users to capitalize financially on property, intellectual or otherwise, created in that environment. On the contrary: doing so is explicitly against the contract that all users sign whenever they use the service. The owners of WoW actively seek to prevent users from realizing any US dollar gains from playing the game. Workers making things in WoW do not compete directly with workers making similar things in the real economy. The correct analog in the case of WoW is not Monroe County and Franklin County, as in the case of Second Life, but Monroe County and a game of Monopoly. Play money is play money and must not be taxed.

There is no precedent for such a ruling and, to my knowledge, no economic or policy analysis of it.

Some grounds:

a. Keeping WoW tax-free generates no inefficiencies. There are no real-world productive activities that would move to WoW solely for the tax advantage.

b. While real-world taxation might impose a burden on Second Life, it would destroy World of Warcraft. WoW is a fantasy game. Such an intrusion by the real government would utterly destroy the fantasy. The government would owe Blizzard significant damages.

c. The fact that many WoW players do in fact liquidate their holdings in real dollars, in complete, clear, self-conscious violation of contracts to which they have agreed, is not relevant to the analysis of proper tax policy, of the first-best recommendation. The first recommendation must be to 1) prevent all such activity, and 2) keep the fantasy world tax free. Now, given that (1) is difficult, we have to ask whether companies make a good faith effort to keep their economies sealed off from the real world. If they do not, the case for taxation is stronger. For example, why should companies that who put up billboards in Oslo pay a tax, while those who do so in Anarchy Online pay no tax? Such a situation makes no sense. AO advertisers should pay the same tax as advertisers int he real world do, or AO should take the billboards down.

In any case, a "second-best" tax (and regulatory) policy would pay attention to the practicalities of sealing off an economy from the real world. Governments should make the following deal with the makers of fantasy games: "if you make good faith efforts to keep your economies sealed (and we will help you with that), we will not tax or regulate economic activity within them."

This would allow games like WoW to opt out, at a cost: if they really do not want to be part of the real world, they must be aggressive against RMT. Platforms that encourage RMT cannot, I think, expect to avoid the taxman for long.


Actually, there is some very loose tax precedent, Ted -- the Mark McGwire home run ball situation. I think that ad-hoc determination was essentially about maintaining the magic circle. And like I've said elsewhere, I think there are other instances where you can see the law flexing this way around game spaces.


Remember this old 2003 thread? Dave is right -- we're repeating ourselves here, except this time the JEC is on board. :-)


I can see taxation at the point where one cashes out being what we go for in the medium term. But I think some work needs to be done on scope of cashing out. That is what about the range of cases when one is not swapping Linden’s for physical world currency but goods and services?

Here are some examples, my Three Fuzzy Tax Points:

    1. If a given items is offered for sale and the seller only values that item in Lindens then what is the taxable value? (And I’m not talking futures, we have already seen this happen: http://terranova.blogs.com/terra_nova/2006/01/small_ad_big_ne.html>Small ad. Big news?)

    2. If a service is offered for Lindens e.g. someone pays for a web site design in Lindens – what is the tax value and where is the Tax Point?

    3. If one buys an object in world that has something like a unique texture and the rights on the texture allow one to use it out of world, then again, what’s the taxable value? And where is the tax point? It is when I receive the object in-world? What if I never actually use it out of world? If it is the case that object have rights that mean that they can be used out-of-world then is it the case that all such transactions are taxable, if so we need to start reading the rights associated with objects within SL pretty darn closely.


Hi all, I'm a tax prof here at Texas Tech and am currently writing an article on this subject. I have no definitive answer but given the great response I got this past weekend at the ABA Tax Section meeting when I and a few other tax geeks presented a panel on this subject (whether VWs are subject to federal income taxation), the answer is not as clear as some might think.

Everyone agrees with a cash out rule, at a minimum. While there are some interesting issues there (timing, characterization of gain, applicable deductions), the more interesting problem is the in-world transactions. The basic problem is the more one views a player as "owning" in-world items (inluding in-world real estate) so that property rules trump contract rules (Josh Fairfield has written on this idea recently), the more the transaction looks like a realization event in a barter exchange.

The answer to ren reynolds' questions is given in Treas.Reg. 1.61-4(d) which says that income includes the receipt of any property (in the amount of its fair market value, or fmv). While the reg talks about property received for services, the same rule applies to property received for other property. All property in WoW and SL has a readily ascertainable fmv. So the prima facie case for taxation is quite strong.

The home run baseball was an ad hoc administrative exception dressed up in "lack of control" language. Congress was prepared to pass the "Homerun Baseball Protection Act" or whatever it was called and the IRS just acted to pre-empt that law. So, effectively, Congress told the IRS to do that. Congress can tax or not tax whatever the hell it wants to, subject to Article I limits. And notwithstanding the recent "puffery" of the DC Circuit in the Murphy case, the term "income" is very, very broad. U.S. citizens are taxed on their worldwide "income." So it does not matter whether you treat VWs as foreign jurisdictions, although doing so brings into play the foreign currency rules, which treat foreign mediums of exchange as commodities...as property.

The term "income" means "any undeniable accessions to wealth, clearly realized, and over which the taxpayer[ has] complete dominion." Comm’r v. Glenshaw Glass, 348 U.S. 426 (1955). "Income" can be in the form of cash (or cash equivalents), property, or services. If I trade you my RW sword for your RW goblet, we each have income because the law treats that transaction just like you sold the goblet for cash and then paid me cash for the sword.

But the broad sweep of the income tax stops short in three places. First, until you sell the goblet, it cannot be income, even though it might get more valuable over time and thus be an "undeniable accesssion" to wealth. Second, what the cook eats is not income. While the law could impute income to self-provided goods or services just as the law does to the barter transaction I mention above, the law does not do that. So if I make my own sword for my own use, that does not count as income even though it makes me wealthier. Finally, if it's "priceless" it ain't income. The receipt of something that cannot be valued in real-world money is not income. So if I'm at a Bob Dylan concert and he invites me up on stage and sings me "Happy Birthday," well that's a priceless moment but thank god I don't have to report it on my income tax return, precisely because it is "priceless."

Once an in-world economy is linked to the real-world economy, taxation is not far behind. That third reason for not couting something as income goes away. We don't tax monopoly money, in part, because there is no robust market for monopoly money. If I swap you Park Place for 3 Railroads, it is not a taxable exchange because neither one has a readily ascertainable fmv outside the game.

But if I "own" a virtual sword the same way I "own" a real-world sword, then swapping that virtual sword for a virtual goblet (both of which can be valued in both in-world currency and real-world currency) is arguably just as much a realization event as the real-world swap of my sword for your goblet. ...unless we can figure out whether one of the other two exceptions to section 61 apply.

The most promising exception (to me at any rate) is the imputed income exception. To the extent that the virtual item is not property but is simply a representation of your "right to play" on the game (call it a "unit of play"), then we might make a strong argument for the cash-out rule because in-world swaps of virtual items are simply enhancing your game play. It is self-created value---you are enhancing your game play according to the rules of the game, controlled by the owners and developers of the game. Under that view---which gives primacy to the TOS and EULA---not until you cash out your player account (in a real-world transaction) will you have a realization event.

Notice that I do NOT say that the in-world swap simply enhances the value of your player account. The problem with that view is that in-world items are as available for separate cash out as are accounts. The virtual goblet and sword have an ascertainable fmv. Lindens have an fmv. So I don't think you can just aggregate everything into your player account.

I hope to have a draft article posted on SSRN in a few weeks.

Regards, -bryan camp

Texas Tech University School of Law
806-742-3990 x269
806-742-0901 (fax)


Hi Bryan --

Thanks for that exegesis! I'm looking forward to seeing the footnoted and bluebooked account of all this on SSRN -- I'll finally have a place (and a person) where I can refer all the tax queries I get about this stuff.

I heard about your ABA presentation on the backchannel and I was hoping that you might chime in here at some point. Caveat that I am barely functional at tax law, but I think your "imputed value/unit of play" analysis sounds like a promising solution to this issue. I'm wondering: I'm sure this will be clear from your paper, but where else does that come into play? It doesn't work for casinos, right -- so if I'm in a process of playing and I go from $1K in chips up to $5K but then lose it all an hour later, technically I've got to offset the $4k loss with the $4k gain, right. Not asking for legal advice, of course! :-)


Hi Greg,

Part of my article (or a separate article) will cover online "casual" gaming for money, as on Worldwinner or Iwin, as well as outright internet gambling, as on partypoker.com.

As to RW casino gambling, the "units of play" are the casino chips. So if you sit down at a blackjack table, put in $1000 cash for chips (to use your hypo), you have no income (or loss) until you cash out the chips. You might, intersitially, go up to $5k in chips. You might even take a break and ask the casino to "hold" the chips for you in the cage (you can do that). No income. Not until you cash 'em in. Tax law will not treat chips as either cash or property, according to the 3rd Circuit Court of Appeals in famous gambling case called Zarin v. United States. Instead, chips are just an accounting mechanism to keep track of how much "play" you are getting for your $1k. Ted Seto from Loyola Los Angeles has posted a paper on this on SSRN. He calls it "one-step" accounting. And this is true even though chips are tangible and you can exchange them (at least in Vegas or Atlantic City) for other goods and services. A lot of folks disagreed with Zarin (including the majority of the U.S. Tax Court at the time) at the time and still do today, but it does provide, IMHO, some good support for the "unit of play" theory.


Bryan -- thanks!

I just downloaded Zarin (Julian had mentioned that case in his Legal Affairs piece) and will get the Seto tax article. It sounds like a perfect solution, though I just saw that Judge Stapleton (my favorite federal court of appeals judge) dissented from the majority opinion.


Let me revise and expand on that -- Judge Stapleton is simply my favorite judge period, bar none. He's also a superb equestrian, a wonderful soloist, and a master of comedic monologue.


The article given above is very useful and informative

COSMIC TECHNOLOGIES - One stop shop for accounts, book keeping, taxation etc.,



Edward Castronova,

I'm hearing "I stick my head in the sand" there, I'm afraid. I've said it before to others, and I'll say it here - trying to drive RMT out of games does nothing but damage to them.

You can design to minimise the impact, yes, but it's Human nature that people will want to get ahead, and as the MMO-playing generation grows up, gets jobs and family.. they WILL still want to compete.

"No" just drives the market away from the likes of Ebay, to the FAR worse threat of companies like IGE, whose methods of getting guild leaders to loot the guild treasury, and the lack of recourse for players, means far more will be hurt.

The ONLY resonable soloution, to that is Eve's (allowing the sale of game-time for in-game cash.). But that, again, has tax implications.

Given the way the in-game economies work, note, the MOMENT governments start taxing MMO's they implicitly start accepting the fact that those corperations are printing cash.

The economic effects of THAT...

Hey, if it was easy, anyone could pl...oh. Heh.


Apparently the Australian tax-man considers SL transactions subject to GST. http://www.theage.com.au/news/biztech/virtual-world-tax-man-cometh/2006/10/30/1162056925483.html

From the article:
"If you are getting a monetary benefit then it's not treated any differently - normal rules apply," an ATO spokeswoman says - in what is believed to be a world first. If a virtual transaction has real world implications - if it can be attributed a monetary value - it attracts the attention of the Tax Office.


Thanks for the link. With regard to income tax, I don't see the need for additional regulations here. I have no doubt that tax is applicable, and rightly so. The real problems appear on the assessment level, and this is much more fundamental.

With regard to VAT/GST, such tax duty will be applicable to enterprises or professionals only, and again, I don't see a reason why VAT should not apply here as well. The problems here circle around questions like where the tax incurs or how to get a proper invoice.


I'm curious as to whether anyone can direct me to infomation regarding the cost involved in the creation and starting of an online video game (MMOG). I'm particularly interested in cost comparison information. For instance what is the estimated cost for Runescape vs Warcraft vs Everquest. Any real information regarding this matter would be appreciated.

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