I was going to blog on this story last week, but I wanted to wait until we had a virtual world expert, Leandra, in-house to help with the analysis.
Leandra blogged below on the economy of Second Life and whether exchanges there for Lindens should be taxable. This duplication of an economy in cyberspace has another ramification besides than this very interesting tax question. Apparently, there are "hundreds" of casinos on Second Life where players can wager and win Lindens. The creators of Second Life, Linden Labs, worried about possible criminal liability for hosting the world that contains these casinos, invited FBI agents into Second Life to take a look around and give them guidance. (CNN story here.) Apparently, since the U.S. crackdown on online gambling (which readers of the Glom should probably be sick of hearing about by now!), gambling on Second Life has increased. Unfortunately, the FBI have not given Linden Labs any clear conclusions at this time.
So, how could gambling on Second Life be any different from gambling on an onine site, which the U.S. government says is illegal nine different ways? I could go to an online site, use money from my bank account or credit card to create an account at the online casino. When I have winnings, I can cash out. Now, it sounds like on Second Life, I would use money from my bank account or credit card to buy Lindens to use at the online casino. When I have winnings, I can then cash out. How is this different?
According to the DOJ, I would be violating the Wire Act by gambling on Second Life. (I would like the chance to fight that one in court, but I don't have time to be a test case right now.) Also, after the SAFE Ports Act passed last Fall, Second Life would be liable for processing the exchange of U.S. dollars to Lindens and from Lindens that facilitated the illegal online gambling. So why is the FBI so confused? If PartyPoker would just make me purchase "PartyBucks" at some ratio, would that make it legal? My colleague Larry Ribstein has coined the phrase "the Apple Rule" to describe the seeming willingness to prosecute corporate officers for options backdating, which may or may not be illegal, but not popular officers such as Steve Jobs, who have done the same exact thing. Perhaps we could call this "the Posner Rule"; Second Life is so hip and cool and brainy that even lovable jurists like Richard Posner drop by every now and then. So how could Second Life be criminal like those sleazy online gambling sites based in foreign countries and run by foreigners? Either it's all legit or it's all not.
The CNN article reported that there are "hundreds" of casinos on Second Life, and that the larger ones might earn $1500 (U.S., not Lindens) per month. So, let's multiply $1000 per month by 500 casinos. That's $500,000 per month, or $6M a year. And it's only beginning. If the FBI tells Linden Labs that these casinos are legitimate, how many casinos do you think there will be this time next year, as U.S. players shift away from online gambling, which has become increasingly difficult to navigate after U.S. payment systems have opted out? Look for the Bellagio -- Second Life, Trump Second Life, and even PartyPoker Second Life.
Just one more thing, In the many comments to Leandra's posts, it seems that some readers equate "virtual" for "imaginary." I think that gambling helps put this in some perspective. Lindens seems to have a real-world value, an exchange rate to the U.S. dollar, so Lindens are more like foreign currency than imaginary currency. Or, you can think of Lindens as casino chips. Just because your winnings come in chips doesn't make them untaxable winnings, nor do you get to pay your taxes in chips. Just as I would have to report the sale of my house to the IRS if I were paid in casino chips, Beanie Babies, Lira or free lawn mowing for the rest of my life, I see no difference in being paid in Lindens for my goods, services or poker playing.
TrackBack URL for this entry:
Links to weblogs that reference From Virtual Tax to Virtual Gambling:
1. Posted by Eric Goldman on April 9, 2007 @ 10:27 | Permalink
Christine, I think you're 100% right. This situation really does put the spotlight on exactly how virtual worlds are unique/special/different. When there's an exchange rate between real and "virtual" currency, I think any differences drop off.
But what if a person merely accrued Lindens in a virtual casino and never cashed out? I think Leandra is suggesting that this synthetic currency, so long as it stays synthetic, should be outside government purview. I'm sympathetic to this argument, but I wonder how we might apply it to other types of near-currency, like frequent flyer miles.
2. Posted by Get Yo' Tax Right on April 9, 2007 @ 15:35 | Permalink
I swear you are wrong.
And you are wrong because in the facts as you state them there is no "cash-out" point, or realization event upon which whatever value appreciated becomes equivalent to cash.
Virtual gambling is like purchasing stock. You pay a fee in dollars for the chance of winning big, but you only pay tax when you sell the stock and earn profit; likewise here you only pay tax when the Lindens are converted back to cash and you have more than you started out with.
So: if you're selling your Lindens on eBay for cash and you make more than you paid to generate those Lindens, you (in theory) owe taxes. If you keep the Lindens in a virtual world and only use them for Linden transactions, Uncle Sam should leave you alone.
The mere fact that you can use math to jerry-rig an "exchange rate" does not mean that Lindens are real currency. We should not change the basic rule that you haven't any taxable property until a realization event occurs.
3. Posted by Jake on April 9, 2007 @ 19:17 | Permalink
Frequent flier miles are not "income," but rather, a deferred discount or rebate built into the price of a ticket that you pay for with cash or a cash equivalent. They also are politically untouchable. At the rate things are going, Lindens will soon be politically untouchable (if they aren't already).
I would certainly agree, however, that the interface between virtual accessions to wealth, and cash or cash equivalents in the real world, must be policed to prevent tax evasion to the detriment of honest citizens at large. But if a virtual transaction never transits that interface, becoming camouflage for tax fraud, there is no income recognition event under any responsible view of income taxation.
4. Posted by Leandra Lederman on April 10, 2007 @ 9:44 | Permalink
Very interesting post, Christine. As you suggest, the gambling context seems to be another one in which the question arises whether virtual worlds are spaces in which laws do not (or should not) apply. My view is the same as I understand yours to be—virtual worlds are essentially platforms, and they exist within our world, not outside of it. In theory, an otherwise illegal or regulated activity shouldn’t become legal or unregulated merely because it is accessed in Second Life. However, I think Second Life poses a challenge to regulators partly because it can feel so much like a game. This isn’t really my area of expertise, so I’m thinking aloud here, but perhaps there are contexts in which the game-like feel should be taken into account in determining how to apply the laws to consumers. But it would seem nonetheless that those conducting a commercial activity in Second Life should not be able to escape regulation that would apply to that activity if conducted elsewhere, including elsewhere on the internet.
5. Posted by Deunan on July 25, 2007 @ 21:38 | Permalink
Your analogy regarding trading dollars in and out of the virtual world of Second Life and trading dollars in gambling sites is flawed. Linden Labs position regarding the Linden Dollar is that it is not real currency you do not have a right to receive real currency in exchange for Linden Dollars under Linden Labs TOS. In short there is nothing from stopping Linden Labs from deciding to unilaterally delete all of your Linden Dollars for any reason it deems appropriate and would have no responsibility to reimburse you if a server glitch caused all your Linden Dollars to disappear.
6. Posted by Lawrence on February 23, 2008 @ 17:44 | Permalink
Interesting article about virtual gambling.
I love to gamble online because it gives me a recreational outlet, especially online slots at http://www.onlinecasinosslotsmachines.com
7. Posted by real money gambling on May 21, 2008 @ 13:10 | Permalink
There are very many ways to go about exploring the world of football gambling. It can be performed online or through a traditional "real world" bookie. And if, through knowledge and smart money management, bookies or the gamblers are able to make a profit, football gambling can very easily make a comfortable lifestyle for the gambler, or exist as a fun, challenging and lucrative hobby.
8. Posted by Belstaff Jacken Shop on January 12, 2012 @ 5:50 | Permalink
I like ANMJ on FB & just subscribed to the email feed! :)