Income From Second Life To Be Taxed?

Filed as News on March 5, 2007 9:03 pm

Two things, they say, are sure in life: death and taxes. And while you cannot exactly die from playing online role-playing games, you’re most likely to be taxed when you earn from such activities. Take Second Life, for instance, with its bustling in-game economy. CNN Money reports that tax authorities are looking into actually taxing in-game economic activity.

In case you haven’t noticed, Second Life is booming, and its economy has boomed too – putting the virtual reality world in the crosshairs of tax authorities, experts say.

Under current tax law, it’s clear that earnings in real U.S. dollars generated within virtual realities are reportable to the IRS. If a Second Life real estate mogul cashes out of her in-world property portfolio, she’s liable to pay income tax on any profit that’s been exchanged into real greenbacks – just as an eBay seller is responsible for reporting income generated from an online sale.

Tax law is murky, however, when it comes to dealings that occur solely within Second Life or other computer-simulated environments. For instance, is a transaction that occurs only in Linden dollars and doesn’t involve any real-world, dollar exchange taxable?

It’s an argument of income versus value-added. When you cash out whatever earnings you made on an online activity, that’s considered income, and hence can be taxed. However, when you create value without necessarily earning money (yet), that’s considered value added, and in some instances that is also taxed (as value-added tax).

For instance, in the real world, when you turn some sheet metal, rubber and other parts into an automobile, you create value. When you turn silicon into computer chips, you create value. Similarly, when you level up an MMORPG character you create value. Same goes when you convert some blank piece of online real estate into an awesome piece of architecture on Second Life that people will pay actual dollars to visit.

CNN cites IRS to have said that “[a]n accumulation of ‘points’ would not result in tax consequences, but redeeming or selling them for money, goods, or services would.” So Second Life users can count on enjoying freedom from being taxed unless they actually cash in from their virtual transactions. But as the virtual world and virtual transactions get an increasingly bigger role in our daily lives, pretty soon the virtual economies would be ripe for the picking for the taxman.

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  1. By Helge Olav Helgesen posted on March 5, 2007 at 10:34 pm
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    As you noted in this article, there are movements that want freedom inside SL. I am very anxious to see if we – the users – get any rights.

    Moreover, the IRS question is also interesting, specially internationally. As a Norwegian resident, should I pay taxes to Norway or the US? And what about export/import of goods over SL?

    I belive the future of SL is money laundry or other illegal acts, as with e-gold today. So something has to be done.

    The future is exciting :)

  2. Linden Lab Launches Second Life Grid Platform : The Blog HeraldSeptember 5, 2007 at 10:42 am