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One day all taxation will be like this...By Simon Sweetman

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20th Jan 2008
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Simon Sweetman on taxing the virtual world: “Perhaps some of us need to get a first life before we start mucking about with a second.”

A few years ago I wrote a chapter on taxation for a book on e-commerce. At much the same time tax authorities the world over were setting up committees to advise them on its implications. But it turned out that questions about eBay and distance selling could be answered under the existing rules, and those committees faded away. So did the e-commerce book.

But the world moves on, and in the world of cyberspace more quickly still, even if no one can hear you scream. It is now possible to buy and sell intangible assets online, with no physical movement at all: In the simple case you can download software which of course includes music and videos. Still, it is likely that the seller will have to provide on its website the information enabled to locate it in real space – though that may well be in a low tax regime.

What is new is the possibility of trading within a virtual environment. At its simplest – the profits Stoke City pay me as Championship Manager when they win the Premier League – it is no more likely to produce anything taxable than the rents I charge for my hotel on Mayfair when I play Monopoly.

Some people must think there is more to it than this, and the news that the CIOT has opened a shop giving advice in Second Life provoked a number of reactions, some of them of the do they think they’re getting down with the yoof variety. The avatar is apparently one Tax Anderton, and his first appearance was filmed by Sky News. Do you feel as sure as you did about reality? The institute also flagged up ‘Meet the people behind the CIOT’ videos on YouTube, and offered podcasts through Apple’s iTunes. Well, Rob Ellerby did say that he wanted to ensure that the CTA and ADIT qualifications reflect the needs of the tax professional in the 21st century. As part of the CIOT's Tax Advice Week, Anderton will be “available to other Second Life members to discuss tax issues for people in an online environment”. Is there a taxation authority on Second Life?

Apparently Jack Taxable (another from CIOT) is also to be found on Facebook. E&Y has the second largest network on Facebook, with 13,500 members worldwide - second only to the US Army! Given that Facebook appears to be a system for the CIA to gather lots of information without any effort, this is not entirely surprising.

What are the tax implications of trading in Second Life? Apparently, a joint economic committee of the US Congress has been investigating the issue over the past year with its findings due to be published very soon. At the same time, UK-based tax advisers have urged the Treasury to take the lead in considering the tax implications of revenues generated in the virtual world. However, what is not at all clear is what the tax regime operating in Second Life actually is, or whether any first life states are looking to negotiate tax treaties with the online world.

Accountancy Age, boldly going where no accounting mag had gone before, began to ask the questions. Experts, it said (an intriguing reference, this: who are these guys?) have already suggested that Second Life could be used as a way to avoid tax and cover up fraud. They also warn that dragging virtual businesses into the tax net won't be easy. For example, do you tax residents of a virtual world in that virtual world or after they have converted their money to recognised currencies? And if HMRC taxed virtual profits, wouldn't it have to accept payment in Linden dollars? Then there is the question of whether virtual wealth forms part of an estate for inheritance tax purposes. And is VAT really payable on goods that only actually exist on a computer?

Now if Glub Glub the dwarf sells the magic helmet of Basildon or if my avatar, Cicely Notax, sells sexual favours in Second Life, then at first glance this is no more taxable on me than are the rents I charge my siblings when playing Monopoly? Is it different because there is an exchange rate set for Linden dollars against the US dollar (even at 265/1) and so the sale proceeds are capable of being turned into real live money? And the next question of course is where does any profit arise? Second Life has an address in cyberspace, but can transactions purely take place there? Is it even part of your world wide income? This is not like trading on eBay where real physical goods are being traded and the seller must provide a real world address.

The Wikipaedia entry for Second Life asserts A small percentage of Residents derive net incomes from this economy, ranging from a few hundred to several thousand US$ per month, while a larger percentage derive a gross income large enough to offset most of their expenditures in L$. The currency has become the subject of concern in economic circles in regard to possible taxation.

More questions than answers, perhaps. Or perhaps some of us need to get a first life before we start mucking about with a second.

Links to related articles

How do you tax the residents of a virtual world? By Mark Simpson
The CIOT updates its web presence

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By The Minion
22nd Jan 2008 09:52

Watch this space!
I did a post sometime ago about the tax implications of trading virtual currencies (more techie individuals would be able to link this post - i can't).

It did stir up a response mainly from games purists who did not like the idea of people buying virtual currencies and "cheating" their way to the top.

Having said that companies do exist to allow individuals to trade virtual currencies (an avatar passport photo would not be a lot of use!) and at least one has recently negotiated a deal with game developers to trade in the currencies of their new games.

At the rate things move in the tax world a lot of water will have passed under this particular bridge before it is regulated and taxed.

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By User deleted
22nd Jan 2008 14:21

David
Can't find the link you mean, where did you make your remark? I have added some links to Virtual tax stories below the article though.

Nichola
Tax Editor, Accountingweb

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By The Minion
22nd Jan 2008 17:15

my posting was
headed virtually exempt and dated 23rd July 2007

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By User deleted
25th Jan 2008 14:09

Sad or Mad?
Like Simon, I find this interesting as a concept.

It’s very easy to rush to judgement on Second Life users, but two facts are worth bearing in mind:
1. there are, as at today’s date, over 12 million SL users (I’m not one of them by the way). Some of these are people with multiple avatars, but nevertheless there are still literally millions of people who belong to this. It's quite feasible that the economy of SL is larger than that of some third world countries…
2. Many Second Life users are motivated by the fact that they don’t actually have a great deal of quality in their “real” lives. They may for example be paraplegic, long-term unemployed, or just live in Basildon. None of that matters in SL. In SL you can be exactly who you want to be…

Now, turning to the tax thing, a relevant point, it seems to me is the value of what is actually being traded in SL. Take a ten pound note out of your pocket and consider what it’s worth. Nothing, of course. The value lies in what that note represents - the promise of the Governor of the Bank of England to pay £10. All money is virtual.

In SL currency is issued by Linden Corporation, and is valid only in a world that is governed by Linden Corporation. If LC goes into liquidation tomorrow, or simply chooses to switch off the server that runs SL, then what is any SL asset, be it land, chattels or specie, likely to be worth?

I’m glad I’m not on that committee

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