The Metaverse Blogger

Remember that virtual McMansion your mom told you not to buy, because it might turn out that you didn’t have all the money needed to pay for it? Well… we hate to break it to you, but your mom might have been right. On January 7, 2009 the United States Internal Revenue Service moved closer to taxing virtual goods and transactions following the release of national taxpayer advocate and adviser Nina Olson’s 2008 Annual Report to Congress. The primary objective of Olson’s report is to shed light on existing and emerging issues needing to be addressed by the IRS. In this years report, Olson pushes to simplify the tax code, improve the IRS’ handling of tax payers experiencing financial hardship, among other recurring issues. The new player on the table this year though is the necessity, Olson says to “pro-actively address emerging issues such as those arising from virtual worlds.”

Her report shed light on the fact that in 2005 $1 billion in real dollars was spent and exchanged in virtual world environments. An astonishing figure in itself when you consider that virtual worlds have only grown in popularity, with more and more each year including support for purchasing virtual goods with real money. With virtual worlds boasting more than 16 million (and growing) paid subscribers, many of which take part in active economies using real money, the potential for not only abuse but tax evasion is high. In light of the above facts, Olson says that the United States IRS has neglected to inform tax payers about the methods used to report such activities. “Economic activities in virtual worlds may present an emerging area of tax noncompliance, in part because the IRS has not provided guidance about whether and how taxpayers should report such activities,” said Olson’s report.

Olson states that to improve tax compliance online, the IRS issue guidelines addressing how taxpayers should report economic activities within these virtual environments. But where is the line drawn, and where does the taxation stop?

While the concept that the US government may begin to tax virtual transactions may feel like a violation of some veil of privacy we tend to feel online (and in virtual worlds), the concept isn’t a new one on the global scale. In fact, the Swedish IRS and the United Kingdom have made similar moves to begin taxing virtual goods and transactions, with Korea already having applied these laws in July of 2007. Indeed, some virtual worlds even include a level of taxation in their virtual closed economies (one that does not allow for transfer of funds or purchase of virtual goods with real money) such as Stagecoach Island. Stagecoach Island is a virtual community owned and operated by WellsFargo, built on the Active Worlds platform. The virtual world revolves around banking, paying a mortgage and taxes. While a very elementary system and not one that has any bearing on the real world, it’s an example of a system we may begin to see throughout virtual worlds, with real world monetary implications.

One has to wonder though how the government will be able to financially link the purchase of goods, and the necessary taxation to the actual user behind the computer. In todays world while online anonymity may have lost a few points to big brother, the road to directly tying a user to their virtual world actions (let alone online actions) is far from paved. If the governments of the world truly begin to forcibly, and not voluntarily, require you to declare purchases made online, we might begin to see a whole new level of operation on the virtual spectrum. We might even see the requirement to use social security numbers upon sign up, as is required with online marketing profit sharing systems like Google’s Adsense. Not only does this heighten the risks of identity theft, it poses a whole new array of security liabilities for virtual world operators. Even if the governments of the world came up with some different tracking method for virtual purchases and transactions, the cost of implementation would most certainly be high for all parties involved. While this may be a buerocratic dream for the governments of the world, it would most definitely put a few more nails in the coffins of already struggling virtual environments. Survival of the fittest, eh?

MindArk

While the news or possibilities of virtual taxation may not be the most welcomed, recent history has proven a dire need for some sort of regulation of virtual economies, with issues like the group of Chinese money launderers. And even still, the above is just one example of how the line between virtual and real world boundaries have begun to blur. In May of 2008, MindArk, owner of the Entropia Universe moved to find a way to include virtual property from its real economy in wills. “There is land in the game of considerable value, which if the player would die, is uncertain who would claim [it],” says project manager Carl Uggla.

What do you think about taxation of virtual goods? Do you think it’s a necessity, or the over stepping of national governments into the doings of the virtual world? Let us know!