April 18, 2007
Virtual Tax Revisited
Posted by Leandra Lederman

Bryan Camp of Texas Tech Law School has posted on SSRN an interesting paper on the taxation of events in World of Warcraft (WoW) and Second Life. As I understand Bryan's argument, he would treat exchange transactions within both worlds as "imputed income," which is not taxable under federal income tax law. He thus comes out in favor of a "cash-out" rule for determining tax liability in both worlds. Bryan adopts the "magic circle" analysis of virtual worlds—which he also analogizes to theater's "fourth wall"—the notion that activity within the virtual world is separate from our world and thus without consequences in it.

Bryan and I agree on the end result of non-taxation of exchanges within WoW under the federal income tax (per my previous post on this issue), although I take a different path to get there. However, I disagree with the magic circle notion; my view is that virtual worlds exist within our world, not outside of it. Accordingly, my position is that there is no magic circle that shields all activities within virtual worlds from taxation; we have to look more carefully at each world and the activities within it. I therefore do not agree that a magic circle protects conduct within Second Life.

Bryan recognizes at the end of his paper the possibility that Second Life will become commodified to such an extent that its activities would warrant federal income taxation. The view he expresses is that transactions within Second Life should be taxed once businesses begin accepting Lindens (Second Life's currency) for real-world services. He comments that that will make Second Life essentially into a barter club (which posed a huge tax compliance problem in the 1970s, before the IRS cracked down on such clubs).

I share that concern. However, my view is that, given the magnitude of economic activity already existing within Second Life and the number of real-world companies already established there, adopting a policy of non-taxation of Second Life activity inevitably would foster the kind of commerce that Bryan views as tipping the balance toward taxation. Christine's excellent post on gambling within Second Life sheds light on this: If conducting an activity within Second Life draws a magic circle around it that exempts it from the laws that otherwise apply to that activity—and would apply to that activity if it were conducted elsewhere on the Internet—then that activity will likely move to Second Life. It seems inappropriate as a policy matter to allow a business to escape regulation that applies to its competitors simply because of the particular platform used to conduct the business.

Internet, Taxation | Bookmark

TrackBacks (0)

TrackBack URL for this entry:
https://www.typepad.com/services/trackback/6a00d8345157d569e200d8345182a069e2

Links to weblogs that reference Virtual Tax Revisited:

Bloggers
Papers
Posts
Recent Comments
Popular Threads
Search The Glom
The Glom on Twitter
Archives by Topic
Archives by Date
January 2019
Sun Mon Tue Wed Thu Fri Sat
    1 2 3 4 5
6 7 8 9 10 11 12
13 14 15 16 17 18 19
20 21 22 23 24 25 26
27 28 29 30 31    
Miscellaneous Links