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US Joint Economic Committee Mulls Virtual Taxation

by Glen Shapiro,, New York

23 October 2006

Last week it was announced that the US Joint Economic Committee will begin a study of the interactions between the virtual economies of online role-playing games such as World of Warcraft and Second Life, and the official US economy.

In a statement, the Committee explained that:

"The past few years have seen a dramatic increase in the popularity of online gaming and the virtual economies that accompany them. The population of these online worlds has been estimated to exceed 10 million people worldwide. Because of their newness, some uncertainty exists regarding taxes and intellectual property rights."

Chairman Jim Saxton went on to add that:

“There is a concern that the IRS might step forward with regulations that start taxing transactions that occur within virtual economies. This, I believe, would be a mistake."

The staff of the Joint Economic Committee has therefore begun an examination of the public policy issues related to virtual economies.

A virtual economy is defined as the universe of transactions that occur within an online community. These transactions 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.

Based on existing law, if an individual generates cash income in US dollars from transactions in virtual economies, the question may arise whether a tax is due on that real-world income. However, if the transaction takes place entirely within a virtual economy, then it seems there is no taxable event.

The Committee observed that:

"Such distinctions should be addressed and resolved in a common-sense manner. Clearly, virtual economies represent an area where technology has outpaced the law. The goal of the forthcoming JEC study is to help lawmakers understand the issues involved and head off any premature attempt to impose a tax on virtual economies."

According to reports, the currency used in Second Life, known as the Linden dollar, is often traded on third-party exchanges and on online auction site, eBay.

In addition, real life companies are expressing an increasing interest in selling their wares to a virtual captive audience.

Speaking last week to the UK's Independent, David Fleck, vice-president of Linden Labs, the company behind Second Life revealed that the company intends to cooperate with the investigation.

"We want to be good corporate citizens, and we are being pro-active and working with the Joint Economic Committee, not just sitting back waiting for something to be handed down. But the Linden dollar is not a real currency, it is not recognised by any banking system in the world and the legalities are unclear."

He concluded:

"It has to play out, and we have to make sure we understand the implications. It will have to be examined against regional tax laws, country by country, even state by state."

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