Several nations have made policy decisions regarding the taxation of virtual currencies, such as Linden Dollars in Second Life. Most recently, Sweden and South Korea have declared those transactions taxable. The US has made noises, but surprisingly has so far has not declared so-called game currency transactions as taxable. Dave Rosenberg of CNet News makes the assertion that such polices are silly because the currencies are controlled by the game company. He further asserts that the transactions only result in the purchase of virtual goods that have no value outside the context of the game.
While Rosenberg’s position is the popular one, I think he’s quite wrong. Not that I’m anxious to pay more taxes, but it’s important to realize that Rosenberg’s mistaken assumption is not that game currencies are not real, but that money of any kind is real. The dollar bill in my wallet is only valuable because collectively we believe that it is. If for some reason you were to lose faith that my dollar could in-turn be exchanged by you for something you wanted, then it would hold no sway with you. It would lose its value. And tangible assets like gold are really no different. If a plague suddenly wiped out every crop on the planet, overnight, your basement full of canned peas, tuna, and Spam becomes instantly more valuable than all the gold ingots I might have buried in the backyard. So when we talk about currency, what we are really talking about is a quantification of value. It’s not about dollars or yen or Linden Dollars or gold. It’s about value. And taxes are placed on a portion of the value trading hands, independent of how that value is quantified.
“But wait,” Rosenberg might exclaim. Virtual currency is only used to purchase virtual goods. These goods have no value outside the context of the game, and therefore have no “real world” value. While that seems to make sense at first blush, we need to realize that much of what we spend “real money” on has no real world value outside a limited context. If I drop $8 to spend 2 hours in a movie theater, what do I have to show for it when I’m done? I bought an experience, but it is not transferable. It has no post-purchase value whatsoever. That ticket also only has value in the context of the movie theater. If I leave the theater after only watching the coming attractions, I have nothing. The value has a limited spatial context. Is that different than buying a jet-pack for my avatar that I can’t resell or that won’t work outside the game? I’m just buying my personal enjoyment, which, while valuable to me, is not tangible… and therefore virtual. Yet the state collects sales tax on my movie ticket—not on my jet pack. That may be a good deal for me, but it’s not equitable.
While I’m as fond of money as the next person, it’s not real. It exists only as a quantified symbolic manifestation of value. When our “money” is taxed, we need to be mindful that it is actually the value being taxed, not the money. And in that light, there is ample precedent for taxation of value transfer in any form. That value need not be tangible or subsequently transferable. Virtual currencies are representations of value, and therefore subject to taxation. It’s only a matter of time.