US Congress launches probe into virtual economies

Well if they plan to tax us on any profits as a whole then they better take into consideration what we spend to get them. I wonder if i can deduct for teleporting

I would be infinitely more worried about the fact that in the United States it's now illegal to gamble online, including in SecondLife.

I'd worry about that long before I'd worry about having to claim capital gains or income tax on SL.

If they decide to pursue this, all tier paid, Lindens bought, services purchased AND your computer equipment, internet service all become deductable - except for an unlucky few whose incomes are currently taxed as misc income for the most part, the IRS will actually lose money on the attempt. They would have to assign a significant workforce to begin monitoring of virtual economies - to do that they have to be able to forecast a resonable return on the effort expended by the agency to justify their budget. Unless they can securely forecast at least a break-even on the effort - its a wash - no matter what Congress decides. Moreover, by their very nature, virtuals are too fluid economically to legislate against successfully. Better to try to pin down jello than try to legislate taxation against a virtual economy.

If congress really are looking into it then I'm sure that they'll realize that they have nothing to worry about, because they're already taxing residents when they convert their virtual earnings into real money.

Also, congress (some guy who a reporter has spoken to) look into alot of things.

The reporter is just trying to make his mark. Next week the reporter will be reporting on how congress are looking into bringing in gun laws into online worlds.


Thread closed.

I said this in the arguments thread of the Yahoo story and I'll reproduce here:

Sure, you can tax the real world transactions. The Second Life company called Linden Labs adds their tax on and they pay taxes, is one way to interpret it.

Also though, if the government sticks their nose in to tax profits in a game that allows legal conversion from profits, they must also allow them to claim LOSSES when a business venture goes under, claim internet usage, computer upkeep and a percentage of electricity bill as a business expense, etc.

As I've already said, I'm sure some people would LOVE to be taxed. People who earn EIC who are not capped wouldn't mind. However, these type of games then would have to produce forms the IRS would allow to provide proof of the transactions. Of course, then they'd have to get separate licenses to show that each player would be an independent contractor, so the freedom and pull of those kind of user created content games would go down the hole, since not just anyone could create.

That's the beauty of Second Life and games like it. You can play how you want.

My SL business has lost over $1000us this year. I should be able to use that to reduce my RL business income.

Or at least I should be able to carry over the loss to latter years.

Edit:


As a self-employed sub contractor who works at home I am curious how this would affect me differently than any other worker. One difference of course is that I already deduct my computer and expenses, but the deduction is based on the percentage that the business uses them vs. how much I use them for personal uses. Claiming SL as a business would increase my deduction percentage.

While it may be true that no one pays taxes on barter trade, that doesn't mean that no one *should* pay tax on it. The fact that transactions in SL can be effectively tracked makes the bookkeepign that much easier. Now there is no excuse not to claim it!

I think you've missed the point of my example. In that case, LL doesn't enter into the equation at all, and the transaction is completely between two individuals. You are trading your art for *my* services, and should be paying tax on that value.

I agree that existing tax law covers this situation. We simply seem to be disagreeing on when value is created and the transaction becomes taxable. I'm saying that as soon as you take in L$, that is net income regardless of whether it is cashed out or not. You seem to be saying that you only need to pay tax on the amount you actually convert to US$. Is that correct?

I've been following this discussion over the many threads it has surfaced on and seen it approached from many angles. The impression I get is that so far governments don't seem to be particularly bothered as the taxes that could be levied might be less than the cost of collection, thus negating any point. Similarly with the gambling, The amounts wagered and paid out are negligible compared to real-world gambling institutions.

I suspect that some day commerce and incomes in virtual worlds will eventually reach a point where they will be regulated and taxed just as in the real world but that such time is still a long way off.

Ok, if the L$ is worth something, and Linden Lab can print a infinite amount of L$, does that mean that Linden Lab owes an infinite amount of taxes?

Put another way, if you can trade a virtual sofa for a virtual couch in a barter transaction, then does the person who has an infinite amount of virtual sofas and couches in her inventory (because of the copy), have to declare all of them as unsold inventory?

I'm not sure real world accounting rules can apply to a world purely based on ideas.

I'm not sure how you can say that. Of course LL enters the equation. I pay the $195 usd value of my land tier with the proceeds from my sales in SL so I'm very directly trading art for services with LL. That's the totality of the barter I do in SL and what I receive from them is deductable as a business expense to begin with. LL would likely be the only party in that transaction liable for taxes they aren't paying based on the market value of time I spend creating content. The proceeds I receive from people buying my products is already taxed since that's the source of all the L$ converted to US$ that ends up in my bank account.



And I'm saying I think that's nutty. By that logic any gold or items you receive in WoW would also be taxable based on their current ebay value.

Touché! Eventually some set of rules will be drawn up. Until then it's 'the new frontier' so to speak. Make the most of it while it lasts.

Quick, someone figure out the market value of the ideas we're trading in this thread so we can properly pay taxes for the barter.

Of course not. When Linden Lab creates their infinite supply of L$, they aren't exchanging value with anyone, therefore there is no income to be taxed. The point of income tax is that the state is getting a piece of the economic value you are creating, ostensibly to use for the betterment of all. If there is no economic value created (as in the case of someone storing an infinite supply of chairs, or LL's infinite L$ machine), there is nothing to tax.

As soon as L$ are traded for something of value, however, the transaction becomes taxable.

In the same vein, if I have a digital image that I can sell, I don't have infinite income. I only have the income generated from *actual* sales of my artwork. That is, when economic value is transferred between people.

Not quite. I don't think WoW gold or whatever would count as income if you only receive it as part of the course of the game without selling it, as no economic value is being transferred. Plus, there is the fact the Blizzard is aggressive about asserting its property rights over content which in theory precludes users from liquidating. This clearly distinguishes it from SL, in which users ostensibly own what they create and are encouraged to derive value from it by the very fact that LL operates the primary exchange.

If the IRS does start to tax income in SL its clear that LL will have to make everyone re-register with the members real life personal information. There currently is no way for the IRS to track someone in SL when it only takes a generic email address to become a member. I understand that there is some info on the Premier accounts but there are many out there (myself included) that make plenty of money in SL without having a Premier account. With the logistics of implementing this vs. the costs to the IRS (a lot of people in SL have lost income) make it appear that there is no real benefit to taxing SL.

Stop paying billions for this stupid war and that would greatly help our budget deficits. Just a bit more than what they could get from SL!.

But there's a problem there - the question of percieved value.

If I cash out my L$, then I'm trading them for something of value (US$), fair enough. But if I trade them for some art in SL, how's it established that the art has value? I'm not trying to insult Chip or anyone else by saying that their art doesn't have value. But the other day, I saw someone selling a box of 125 solid colour textures for L$400. Solid colours - those same things you get by using blank and tint. Do they have value? If you just say that they must have value because someone was prepared to offer L$ for it, then that argument only applies if we accept that L$ have intrinsic value, which passes the buck again. And if you say the art has intrinsic value then we get to the stupid question of whether I have to pay tax on the "income" I get from my work when I create things for myself. (That might sound ridiculously impossible but I've heard similar things suggested, usually based on kibbutzes or other shared communities.)

If tomorrow, LL tanked, hit by a meteor, sank (with the rest of California) into the ocean (ignoring the plate tectonics for a moment) along with its staff and all supporting assets - in short it no longer exists. What recourse is there for all the virtual creations decimated in the destruction? What is the effective value of it? Nada. Zip. It existed only as a stream of 0s and 1s on a device that no longer exists. All that would remain would be individually archived virtual artifacts with no effective framework against which to value them - other than the efforts of the creator, and whatever value the marketplace decides to place upon it.

The only point at which any of the virtuality has intrinsic, and therefore potentially taxable value is where it in fact becomes a RL asset. Be it a service or object. So to discuss the ability to tax services and goods in SL you would have to assign some RL intrinsic valuation to each product or service, independent of the Lindex exchange system. Because LL controls the rate of exchange for Linden$ to US$, there is functionally no way to apply intrinsic valuation of any taxable merit. LL could simply and arbitrarily revalue Linden$s' market value to whatever they chose. From 1:1, to 1,000,000,000,000:1.

The point is moot.

Ricky is saying that anything that is traded is taxable. Whether it be pigs for chickens, Justin Timberlake's used underwear for Britney Spears', it doesn't matter what, it is all taxable. But in practice the IRS doesn't bother. But if tomorrow everybody stopped using money and started trading in used underwear, then the tax collector would want some of your underwear collection.

Ricky is right.

But I feel the L$ is like used underwear, the IRS just isn't going to bother. The IRS can get their slice after we've converted our virtual money into real money.

Thursday , October 19, 2006

LONDON — The Republican head of a U.S. congressional committee said it would be a mistake if the Internal Revenue Service introduced regulations to tax virtual economies such as "Second Life" and "World of Warcraft."

Rep. Jim Saxton of New Jersey, chairman of the Joint Economic Committee, confirmed on Tuesday a Reuters report that the committee was studying the public policy and tax issues related to virtual economies.

"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," Saxton said in a statement released on Tuesday.


http://www.foxnews.com/story/0,2933,222402,00.html

And I heard the end of the world is comming!

std-disclaimer: IANATL

A weak analogy but it's how I look at this situation.

Think stocks. I can hold stocks that go up and down in value, split and split again, without any of that activity being a 'taxable event'.

But try to sell those stocks and it's a different story.

(Sure I can't trade stock for other things like I can trade L$'s... so the analogy is far from perfect).

The question is whether or not proceeds from SecondLife are to be treated as "revenue", "income" or as "sales". Sales obviously have a taxable aspect per transaction. Revenue or Income becomes taxable if it exceeds costs.

Depending on one's ethics, the only clear courses of action seem to be:
1) Burn all receipts and evidence until tax law catches up with virtual economies... or
2) Keep track of everything just in case you're audited at some point.

In either case, it's still very much a wait and see.

I planned to report my income and expenses relating to SL this year.... It's only going to beef up my refund check )

Next thing you know, they're going to put a tax on Monopoly money. A credit card reader will be shipped in the latest boxes so you can properly pay those taxes you get when someone inevitably lands on Boardwalk while you've got a hotel on it.*


*This never happens, at least when I own Boardwalk with a hotel on it.

So does this mean we can write off those "missing inventory" things on our taxes?

How about when an update borks a product? Take a tax deduction for the loss?