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.

Eric.

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.

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.

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.

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.

Interesting article about virtual gambling.

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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.

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