Virtual Musings

As economic activity continues to migrate to virtual economies, governments have recognised that this means there is a fiscal drain on their own real world economies as a result of a net loss of taxable assets and incomes. At the same time those deriving an income from virtual worlds or hoping to invest in them have had to live with the uncertainty of whether their virtual assets are taxable and whether any taxation would be retrospective. 

Most people’s intuition probably is that accumulation of assets within a virtual world purely for purposes of a “game” should not be taxed even when the assets could be (but are not) cashed out for substantial real-world funds. This is generally the international tax authorities’ consensus too, and is consistent with the tenets of taxation that only income or gain is taxable and that funds held in a virtual account are not real until exchanged for a real currency. Most people are naive however to believe that this will prevent the tax authorities from eventually trying to get their eager hands on their virtual wealth. Already Sweden is taxing the real world proceeds of virtual world gamers as soon as they ‘cash out’ their earnings. In the UK the Inland Revenue is investigating companies who are trading within worlds such as Second Life to ensure that their tax liabilities are being met.

Taxing Real Money Trades (RMT) in this way is logical and possible because the income is tangible and the tax can be collected by the local tax authority. It meets the requirements of businesses and governments and is fair and understood. However, the aspirations of tax authorities to be able to access the riches held by players inside virtual worlds is currently being baulked by two main problems. Firstly the question of what property rights, if any, virtual world participants have. If something is not your property it cannot be constituted as income, similarly if the EULA states you are receiving a licence to use a copy of an item as in Second Life, the same applies. Secondly there is the question of sovereignty; who has the right to tax you and do whose tax laws apply?  The country where you live? The place where the game servers are housed? The state where the game company is registered?  It is an administrative and political nightmare that will have to be resolved before any attempt can be made to tax in-world transactions. At present such a tax provision would be unfair, inefficient, and unenforceable. It is ironic though that if players win the virtual property battle with game owners, it may open the doors to allow taxation of in-world trades and assets! 

I am of the opinion that regulation and in particular tax laws need to be fair, clearly understood and most importantly based on common sense. Clearly there is a need for regulation to prevent tax evasion and money laundering, but I see no sensible reason why this cannot occur at the border between virtual world and real world. Funds can only enter or leave worlds at specific points which can be monitored and regulated and whatever exists in-world has no value until it enters the real world, just as gambling chips have no value (and are not taxed) until they are cashed. 

An interesting angle on this is put forward by Bryan Camp [1] in his paper on taxing virtual worlds “The Play’s The Thing.”  That; what goes on within the boundaries of a virtual world is entirely play and specifically roleplay, all items therein are merely props used in play, money is play money similar to monopoly money and all it buys within the world is more playing time and so Linden $ or WoW gold are just units of play.  As long as this distinction holds true then in-world assets are clearly not taxable. The tax question will arise however, if the virtual becomes real, for example if account owners gain the ability to trade Lindens for real goods and services that are useful outside of Second Life or online exchanges such as Amazon.com or EBay start accepting payment in Lindens. The commercializing of Virtual Worlds threatens to weaken and eventually breach the wall that separates play from reality and in this respect it may give the tax collectors the opportunity they have lacked to enter these formally closed of realms to the detriment of all those who just want to play!

 Virtual World Design as Public Policy

Recently I was privileged to attend the 6 day Life2.0 summit spring ’08, which took place in SL.

Among the many interesting talks on virtual world development and studies was a talk by one of my favourite game academics, Edward Castronova, Associate Professor in the Department of Telecommunications at Indiana University, Bloomington. He is an expert on the economies of large-scale online games and his most heralded achievement was to demonstrate and document how closely virtual economies relate to RL economies.  

His latest book is called “Exodus to the Virtual World” ( ISBN-10: 1403984123 ) which was the subject of his talk and an audio recording is available at

http://www.slcn.tv/metanomics-edward-castronova 

In his book Castronova explains how Virtual worlds have exploded out of online game culture and now capture the attention of millions of ordinary people. They spend dozens of hours each week to massively multiplayer virtual reality environments (like World of Warcraft and Second Life).

The thrust of his argument is that this is the start of an exodus into the refuge of fantasy, where we can experience life under a new social, political, and economic order built around fun. He makes the point that in the current political and economic climate, given the choice between a fantasy world and the real world, how many of us would choose reality? Exodus to the Virtual World explains the growing migration into virtual reality, and how it will change the way we live; both in fantasy worlds and in the real one.  

Coincidently, I was chatting to Thom about the usual geeky stuff we chat about when he said “have you read this book?” and I was able to say I went to the talk .  We started talking around the subject and it got me thinking about how the ideas in the book might apply to my own experiences and motivations for being in SL and the other worlds I play in, and also how we might use this knowledge to reshape the real world experience and govt policies.  

The analogy in the book is that of a migration to a foreign country such as the waves of European migration to the US. The influx of new people changes the receiving country as it grows and adjusts to new cultures, greater competition for space, economic wealth and political power. But Castronova also reminds us that there is also a profound effect on the countries that people migrate from as was seen in many European countries. Demographic imbalances, loss of labour force, tax revenues, political instability.  So he asks, what will the effects be on the real world if we continue to migrate to the Virtual in large numbers? Are we going to have less involvement or interest in real world issues as we escape into cyberspace or will we use our experiences inside these worlds to define a new order built around fun which will increasingly be adopted by real world governments and institutions? 

I find this debate fascinating and thoroughly recommend reading the book and listening to the talk. 

I will be adding my own thoughts on related issues such as escapism, avatar rights, socio-economic equality etc...  in further posts….

Helllo dear clams (:))

I'm not really a writer, more of an absorber of information which then travels into the ether, so It was high time I did something to share that information and maybe do something worthwhile.

My academic interest is in virtual worlds and game theory & design and I often come across news or research that would be of interest to the talented community of HCI and anyone who is as enthused by the subject.

so stay tuned :))

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