Page last updated at 03:08 GMT, Tuesday, 25 November 2008

Slapping a tax on playtime

By Flora Graham
Technology reporter, BBC News

Game gold for sale, BBC
Many sites sell game gold to players keen to kit out their characters.
Gamers more used to battling demons, giants and dragons may soon be tacking another mortal enemy - the tax man.

Slowly but surely authorities around the world are turning their attention to online games and virtual worlds and the tax-exempt status of the economic activity taking place within them.

They are places where people can make virtual millions selling land, property, weapons and even people. But as tax havens their days may be numbered.

In October, China's tax authority announced that it would focus on a previously ignored sector of its economy: the trade in virtual goods and currency. Sweden and South Korea have also moved to clarify the tax rules for virtual money.

Cost plus

Some wish them well, some wish them ill, but many are just pondering how to go about taxing goods and services that are by their nature immaterial.

The two most obvious moments when taxes could be applied are when virtual goods are sold for real money on places such as eBay or when a transaction happens in-game.

Many people sell gold, items and even characters via online marketplaces for many popular games - often a new World of Warcraft player will buy a character from a veteran because they don't want to work their own way up the ranks.

This transaction involves cold, hard cash and is already taxable in most countries - although the taxes are rarely enforced.

China has outlawed such trades, which are big business because of "gold farms", where people generate vast amounts of in-game goodies, usually gold, by endlessly repeating tasks that earn rewards within the game.

With the majority of World of Warcraft's 11 million players located in China this is a big business. Recent estimates suggest there are about 500,000 gold farm workers in China.

Screenshot from Eve Online, CCP Games
Eve Online employs a full-time economist to study the game

"It's very hard to stop markets that are trying to happen," said Professor Edward Castronova of Indiana University, who researches the economics and sociology of video games.

Much more controversial is when players are taxed when virtual goods are exchanged for virtual money, such as Second Life's "Linden dollars". In this case, the whole transaction happens in the game and no real-world money changes hands.

"I think it's an extraordinarily dangerous development," said Prof Castronova.

"It's as if every time I played soccer in my backyard and scored a goal, I would have to pay the government three euros," he said. "It takes away the game's contribution to human happiness."

Richard Bartle, a multi-player game pioneer and researcher at the University of Essex, says in-game taxes would spoil the fun.

"If you were taxed every time you bought a property in Monopoly, you'd be annoyed. The same goes for people in World of Warcraft."

Cheating times

But there is one major difference between Monopoly and Second Life, pointed out Theodore Seto, a professor at the Loyola Law School, Los Angeles who has written about the tax law surrounding virtual goods.

"You can exchange your Lindens for dollars or Euros on a floating exchange rate any day at any time, without limit," said Mr Seto.

Because Linden dollars are fully convertible at exchange facilities within Second Life and independent exchanges, trades that use Linden Dollars are taxable under US law, said Prof Seto.

Screengrab from Second Life, Linden Lab
Games such as Second Life that push economics may face taxation

Sweden's tax office agrees. In April 2008, it published a clarification to its tax laws which said that in-game transactions are taxable—in theory. There is no evidence that such a tax has been levied, but it is possible.

"It's easier to tax virtual transactions than it is to tax real-world transactions," explained Prof Seto. Tax collection is based on organisations reporting their dealings to the authorities, and tracking these trades is even easier within a computer program.

"The neat thing about it is, all transactions can be recorded. In the real world, we don't have that."

Prof Seto suggests that games can keep their fun-factor, and keep the taxman out, by banning trades for real money. World of Warcraft is one game that has such a rule.

"If 'gold' is not exchangeable for currency, and it's contrary to the rules, and they make it technically difficult to make the exchange, then I think we should treat the events in World of Warcraft as games."

"By contrast, Second Life actively markets itself as a venue for making real money."

Prof Castronova supported attempts to keep the real-world economy out of the gaming world, but saw flat bans on such activity as heavy handed.

Instead, he would like to see games designed so that people don't have the incentive to accumulate vast amounts of gold or spend real money to try to get something.

"The way monopoly is designed, I don't have an incentive to whip out 50 euros when I'm playing you and use it to buy Park Place," he explained.

"This is a game of four people who know each other, and if you pulled out a wad of real cash and tried to win the game, those people wouldn't be your friends anymore."

Mr Bartle said players should be discouraged from real-world trading, but suggests that social censure wouldn't be enough. Better, he said, would be real-money fines for players that "cheat" by spending money to get ahead in the game.

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