Virtual Economy Research Network

Should Blizzard pay taxes for the gold it earns by selling items to World of Warcraft players? Professor Theodore P. Seto's analysis of the taxation of virtual assets is the first to distinguish between businesses and ordinary users. In this post, I attempt to explain and comment on his paper.

About a year ago, there was a story ricocheting on some news sites about Sweden planning to impose taxes on virtual property sales. It turned out to be a bit of a dud: all they wanted to tax was real-money income, not in-game transactions. Real income, regardless of its source, is supposed to be reported to the taxman anyway. Swedish WoW players would not have to include epic drops on their tax statements, nor would Second Life entrepreneurs be required to report their profits — unless they convert the virtual income to real money, I deduced.

However, nine days ago the Swedish Tax Agency posted a statement/ruling on their website, titled "Virtual worlds — value-added tax" ("Virtuella världar — mervärdesskatt"). In it, the agency states that in-game transactions may incur liability for both value-added tax as well as income tax under Swedish law. Below is my translation of the summary part of the statement interspersed with some analysis.

Greg Lastowka at Terra Nova has put together a wonderful bibliography on virtual world related articles in law journals. Several of them deal with virtual property and virtual economies.

According to news reports, Dutch police have arrested an unnamed 17-year-old on suspicion of having stolen 4 000 € worth of virtual furniture from other users in Habbo Hotel. The teenager is said to have hacked into others' accounts and transferred the items into his own account.

Robert Bloomfield posted a story at Terra Nova with the rather dramatic heading Financial Market Meltdown in Second Life? It's a description of unfolding events that demonstrate how difficult it is to create security markets in virtual economies. Securities are essentially promises: exchanges of money now for money in the future. Problems arise when someone fails to keep their promise.

In the real economy, there is the legal system that can force you to keep your promises. In Second Life, there isn't. Should there be? Is it just fun and games where you can make commitments and then break them with impunity (except perhaps social consequences, having to get a new avatar)? Or is it a business environment? To what extent does real contract law already apply? These are the issues being debated now.