April 09, 2007
From Virtual Tax to Virtual Gambling
Posted by Christine Hurt

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. 

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