The Taxman Cometh to Virtual Worlds - Yes, They are Interested. Why?
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Selling virtual items on eBay isn't the only way people are generating income from virtual worlds (and I'll go into more detail on that in a bit). But do we really have to worry just yet? Well, the amount of commerce going on in virtual worlds has been enough to interest the Joint Economic Committee of the U.S. Congress; it has started an investigation into the matter. The committee is specifically interested in transactions that "include the sale of goods and services and take place entirely within virtual economies; there is no real-world or physical exchange. However, a real-world value can often be assigned to such transactions using exchange rates or other methods."
Does this mean that the next time you sell a +5 Sword of Slashing you'll have to fork over some real (not virtual) money to the IRS? Probably not. But it does raise some interesting distinctions. Before I address those, let me give you some numbers on this virtual economy that is raising the interest of the tax men. Some studies have indicated that the time and effort expended on online worlds by their players has an economic impact equivalent to the gross domestic product of Namibia - and that was back in mid-2004. More recently, Second Life's user-to-user transactions have reached levels as high as US$500,000 a day. And Second Life citizenship is growing rapidly, at a rate of about 10 to 15 percent a month.
Second Life is a special case - which brings us to one of the other ways people can make money online in virtual worlds. In most online games, the player doesn't own the character, any of the character's possessions, or anything else; that's made perfectly clear in the EULA. In Second Life, however, players - or Residents, as they are called -- can create items from "prims," and they own whatever they create. It's their intellectual property. They can sell the item as well, for Linden Dollars. Unlike other forms of virtual currency, which are worth whatever you can get for them on eBay, Linden Dollars can be easily exchanged for U.S. dollars. The exchange rate fluctuates, but from all the figures I've seen it seems to stay somewhere between 250 and 350 Linden Dollars to one U.S. dollar.
Some people even become rich playing Second Life. It's hard to imagine, but the game even seems to have produced its first millionaire. In late November, Second Life resident Anshe Chung, created by Ailin Graef, sent out a press release reporting that she now had in-world assets and currency worth US$1 million. That's not bad for two and half years of work that started with a $10 investment.
Next: So What Might Be Taxable? >>
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