US Congress launches probe into virtual economies
By Adam Reuters
SECOND LIFE, Oct 15 (Reuters) - Booming virtual economies in online worlds such as Second Life and World of Warcraft have drawn the attention of a U.S. congressional committee, which is investigating how virtual assets and incomes should be taxed.
“Right now we’re at the preliminary stages of looking at the issue and what kind of public policy questions virtual economies raise — taxes, barter exchanges, property and wealth,” said Dan Miller, senior economist for the Joint Economic Committee. “You could argue that to a certain degree the law has fallen (behind) because you can have a virtual asset and virtual capital gains, but there’s no mechanism by which you’re taxed on this stuff,” he said.
The increasing size and public profile of virtual economies, the largest of which have millions of users and gross domestic products that rival those of small countries, have made them increasingly difficult for lawmakers and regulators to ignore.
For example, in Second Life up to US$500,000 in user-to-user transactions take place every day, and the economy is growing by 10 to 15 percent a month.
“Ownership, property rights, all that stuff needs to be decided. There’s just too much money floating around,” game designer Sam Lewis, who trained as an economist and has worked on games such as Star Wars Galaxies, said in a telephone interview. “The tax laws don’t know how to behave because these are virtual items: ones and zeros on a database we’re allowing you to play in,” he said.
Even if it is inevitable, Lewis is not exactly looking forward to having real-life tax authorities enter the virtual world.
“I’m a designer that thinks any sort of boundaries or rules actually give you an interesting challenge to overcome, but off the top of my head I don’t particularly want the IRS coming in,” he said.
The rapid emergence of virtual economies has outstripped current tax law in many areas, but there are some clear-cut guidelines that already apply. For example, people who cash out of virtual economies by converting their assets into real-world currencies are required to report their incomes to the IRS and other national tax authorities, depending on where they live in the real world.
Less clearly defined is how to deal with virtual income and capital gains that never leave the virtual economy. In the real world if you earn income or own an asset that increases in value, you are usually required to pay taxes. In a virtual economy the situation is unclear.
“Let’s say the IRS decides they want a valuation of your assets. We don’t have a stock market where we can as of the 31st of December, these assets went up, these went down,” Lewis said.
Miller of the Joint Economic Committee, who became interested in the issue when he began exploring some of the virtual worlds in his free time, said he has an open mind about how real world tax authorities should interact with virtual economies.
“We are starting with a blank slate and going through the various dimensions of virtual economies, and seeing where they might intersect with public policy,” he said. Miller hopes to have a rough draft of his report done by the end of the year, although he admitted that some of his colleagues may need some convincing.
“I found that talking about this issue with some of the other economists on the committee, they are not really familiar with what a virtual economy is. The idea of Second Life or World of Warcraft or some of these other synthetic universes, they have trouble wrapping their head around it. So there’s an educational hurdle to overcome here,” he said.
However, there are probably some on Capitol Hill who won’t require much explanation.
“I can almost guarantee that there are some members of Congress spending time in Second Life or World of Warcraft,” Miller said.
