Taxing and Regulating Virtual Worlds

MMORPGs (massively multiplayer online role-playing games) are internet adventure games with no real end. The point of most of these games is to quest for experience to gain skill levels and explore vast virtual worlds filled with monsters and other players.

In some of the more popular MMORPGs, like World of Warcraft, you can learn profitable in-game trade skills, gather valuable resources from the land, and participate in functioning economies with in-game auction houses. However, even in a virtual world of magic and mythical races, you aren’t safe from the long arm of government.

Over the past 15 years or so, virtual property and income in online games have attracted the eye of governments for taxation. When virtual money and items become traded with real money, then monetary value is assessed to those items. There is currently a black market for in-game currency and items, traded online for real money.

Governments are looking at ways to justify taxing virtual items because they now have real-world value, even if they exist only on a server somewhere. With this inevitable tax comes intrusive and overbearing regulation. More bureaucracy and less freedom; that’s always a good thing, right?

Governments such as China, Britain, South Korea, the U.S., and Australia have considered the virtual world as the next step in levying property and income tax. In fact, Britain already imposes a VAT tax on the rent and sale of virtual property for the game Second Life. Not to be outdone, the U.S. Congress recently reconsidered its position on taxation of virtual items and income. Back in 2007 Congress was researching the online economies of World of Warcraft and Second Life:

The JEC [Joint Economic Committee of the U.S. Congress] statement said: “Clearly, virtual economies represent an area where technology has outpaced the law. The goal of the forthcoming JEC study is to help lawmakers understand the issues involved and head off any premature attempt to impose a tax on virtual economies.”

Note the statement: “premature attempt to impose a tax.” That doesn’t say they don’t intend to tax; it says that they eventually want to try.

Virtual property and income legislation is the camel’s nose under the tent for more government control by necessitating regulation and enforcement in virtual worlds. What happens when they extend their regulation to issues outside of enforcing tax compliance?

Here are a couple of examples of breaking the law in regard to virtual games: account hacking and identity theft. Both are traditionally handled outside of the game because they’re considered actual crimes. However, once government is involved in any aspect of virtual worlds, a question of jurisdiction is raised.

Right now, in-game “crimes” are handled by game companies at their own discretion. In-game crimes are usually defined as petty pranks or breaches of terms-of-service agreements. If players begin to appeal to the government for in-game incidents, then government will have to decide what constitutes actual crimes because they would be indirectly involved in game regulation.