Online Taxes?

By Wanda Emely Rebolledo

For many our taxes are complicated already? Can I claim this or that? Do I have to declare that? It is all really confusing. No matter how confusing it is now, it might get worse.

The reason for this is online games such as Second life. Many people see online communities as a way of escaping real life. It is something that although connected to the real world is not the real world and that is why they love it. Games such as Second life have changed this.

We all know that many online games have their own currency, while many of these currencies stay in the game and have no real world application some games are different. Games such as second life offer participant a chance to convert the games currency - Linden dollars (Linden$) – into legal, real-world currency [1]. This is done by trading your Linden$ with other players who are interested in purchasing it, much like real world currency exchange [1]. While other games such as WoW that don’t have official money swapping application, people still sell items online [2]. And it’s not like they can only make a few buck here and there, Anshe Chung reported that their net worth in the game is over $1 million[1][3]. That’s a lot of money, and this is whole community that has the ability to do this. So do they have to pay taxes?

Well at this point no, but some suggest that since in the “real world” people that generate income and have property rights, and who are involved sale or exchange are taxed[1][4]. Than those who are online in virtual world, and have the same type of interaction should also have to pay taxes [1][4]. This argument stems from equality, why should people who earn their money online not pay taxes.

Ok, so this is where it will get complicated. If they start to get taxed for income they generate online, then will people also get taxed for virtual assets. Can you even but a real world figure on a virtual asset, since the value will dependent on whom looking at it. For example
a gamer may place it value really high but an accountant may view it as insignificant.

Then some people suggest that the income should be taxed within the game [1], but then issues become who gets the money. If someone is playing from Australia, in American based game do they have to pay taxes to America, or will they pass it on to the Australian government? For example in second life some products get charged a value added tax even if not from European countries [5]

Some just view that taxes are just getting out of hand, if we start taxing online games that offer real world currency, what’s next? Enforcing tax on games / exchanges that take place entirely within virtual worlds?
"[I]s a person subject to tax each time he or she acquires virtual property? How about when the person exchanges one virtual property for another, or for virtual currency? [...] What, if any, information reporting, withholding, backup withholding, and recordkeeping requirements apply to these transactions?" [6]


Comment 1:

By Jae Moran (N7157266)

Tax Consequences of Virtual World Transactions
Wanda’s post raises a valid point regarding the tax consequences of virtual world transactions. Do assets and financial gains accumulated in a virtual world fall under the same jurisdiction as real world assets and real financial currency?

Online games such as Second Life create computer-generated scenarios and communities for multiple users to interact as characters. These online identities frequently exchange goods and services in both the real and virtual worlds. It seems that economic activities in the cyber world may have tax consequences that real world avatar counterparts need to consider.

The IRS has provided some clarification relating to this virtual income for individuals. In general, you can receive income in the form of money, property, or services. If you receive more income from the virtual world than you spend, you may be required to report the gain as taxable income [7].
What does this mean in Economic Terms?

Gamers who play EverQuest, an online game with over 450 000 subscribers, generate imaginary economic activity in their virtual world that can be measured in real-world terms like gross domestic product (GDP). According to Indiana University economist Edward Castronova, EverQuest's annual GDP—the total wealth in goods and services an economy creates—is about $135 million [8].

Ted Castronova, an expert on virtual economies and an associate professor of telecommunications at the University of Indiana at Bloomington states that "From the standpoint of economic theory...there's no fundamental distinction between selling euros and buying magic wands" [9]. By Castronova’s theory, virtual possessions and currency do hold a real value, particularly to the online communities who actually play the games. "They carry value with them. If you're going to tax exchanges in the real world, you've got to tax exchanges in the virtual world, in economic theory." He adds though that the distinction between these transactions is common sense, and when people are engaging in a game of entertainment, real world economic reasoning does not apply.

If you would like to see how to play in a FREE Virtual world, follow this link

Comment 2:

By Amie Milton (N7200862)
Wanda discusses a significant issue within contemporary society, taxes. On this evenings news taxpayers were made aware that $1.4 million dollars of taxpayer money is being spent on asylum seekers' tobacco consumption. "While the Federal Government spends millions on anti-smoking campaigns to cut smoking rates among Australians, the cost of keeping up detainees' smoking habits is racking up a bill of about $4000 a day."[10] As a fellow taxpayer, I am wondering why my hard earned money is supporting a company putting burden on the health of Australians, instead of helping our own citizens afford suitable housing?

To have you say on this issue visit this website:

Comment 3:

By Kate Bell (N7187955)

I strongly believe Wanda has raised a significant issue that is only likely to gather momentum as we move further into the 21st century. Whilst this notion of ‘no taxes’ in virtual worlds may be appealing to some, its future imposition will be problematic, as it will remove the reward element of online gaming. As Castronova (2007) [11] notes, every ‘sink’ or game mechanism in which cash flows out of a synthetic economy is currently described as a fee rather than a tax. However, if taxes are brought into our virtual worlds it is highly unlikely users will be willing to pay additional taxes on top of ongoing costs. It seems that these policies will become unavoidable as more and more people spend their time visiting virtual worlds.
For an additional perspective on this topic, click here [12].

Comment 4:

By Sarah Marris (N5122384)
I don’t know what I find more absurd, people paying money for virtual game items and property, or facing the possibility of paying taxes on those items. Surely this kind of ludicrous behavior would only happen in America? A audio transcript from National Public Radio (NPR), details how one man contacted the IRS in America to see just how legal or illegal it was for him to gain income or profit on virtual property. Not only was he told that it was indeed taxable for profiting on the virtual property, but also that there are specific rules relating to bartering and the taxes that can be imposed for such. The full transcript is found at the link below:


[1] Terando, W. D. 2007. It's Just a Game, Or Is It? Real Money, Real Income, and Real Taxes in Virtual Worlds. Accessed September 12, 2011.

[2] Dugi Guides. 2011. World of Warcraft Scams Report. Accessed September 12, 2011.

[3] Chung, A. 2007. Anshe Chung Studios homepage. Accessed September 12, 2011.

[4] Lederman, L. 2007. “Stranger than Fiction': Taxing Virtual Worlds. In New York University Law Review 82.

[5] Second life. 2011. Value Added Tax. Accessed September 12, 2011.

[6] Hall, J. 2009. IRS to tax Second life/World of Warcraft earnings? Accessed September 12, 2011.

[7] iRS. 2011. Tax Consequences of Virtual World Transactions. Accessed September 17, 2011.,,id=215593,00.html.

[8] Dibbell, J. 2006. DRAGON SLAYERS OR TAX EVADERS?. Accessed September 17, 2011.

[9] Terdiman, D. 2006. Are virtual assets taxable? Accessed September 17, 2011.

[10] Benson, S. 2011. $1.4m for asylum seeker' tobacco. Accessed October 4, 2011.

[11] Castronova, E. 2007. Exodus to the Virtual World: How Online Gaming is Changing Reality. New York: Palgrave Macmillan.

[12] Cheng, J. 2006. "The taxman cometh? IRS urged to tax virtual worlds, economies". Accessed October 5, 2011.