"Second Life" and the Virtual Buck

Associated Content

By Crissy Gottberg

7 January 2007

Second Life, the popular on-line virtual world, has come to be such a phenomenon that it now offers its own legal problems - many of them stemming around one avatar called Anshe Chung.

Anshe Chung is the first millionaire of the virtual world. This means that all the linden dollars she earned through various trades and deals within Second Life can be transferred into real money outside of Second Life to a net worth of well over $1,000,000. This, in itself, has people asking questions about taxation of this virtual money.

For years people have used PayPal, which trades in real money like a virtual bank, and other on-line banking methods, these are still recorded in US dollar amounts. In Second Life you buy Linden Dollars. These virtual bucks can buy anything from a new shirt for your avatar, to wings, or a vacation house on your own private island. Or you can use Linden Dollars to start buying and trading virtual stocks, develop land and sell it, and in so doing earn yourself a tidy sum, just like Anshe Chung.

Second Life continually shifts the exchange rate for Linden Dollars to real dollars according to various criteria, trying to in effect create a virtual currency. While other systems like IMVU and There.com have offered this service, none have done it to such degree as Second Life.

By carefully balancing new sources of linden dollars with linden dollar sinks they try and uphold a steady currency of about L$250 to L$350 to $1.

Now, with Anshe Chung and others making big virtual bucks law makers, and especially IRS, have taken an interest in their doings.

They already tax income from linden dollars that have been cashed out. Now they are considering taxing assets built up within the world of Second Life, and perhaps WOW and other virtual worlds with monetary systems.

How would such a system work? Would you have to file a virtual tax report? What of those from other countries who also live within Second Life?

Could they treat Second Life as another country and leave it an autonomy of its own? Linden dollars can not be used outside of Second Life, though people do sell Linden dollars on Ebay and other websites for real dollars. Virtual real estate, while traded within the virtual world, can not enter the real world economy. It is a system of its own, separate from the real world. It is much like the Euro, you can't spend a Euro in the US any more then you can spend a Linden dollar.

What effect will a tax system have on Second Life?

When implementing their own brand of taxation to encourage players to keep down the clutter of useless objects players had a protest to unfair practices. The taxation for Second Life was created for a valid reason, to clear unused and unnecessary items and keep price of items from dropping. Players did not protest the actual tax, but the unfairness of taxing some items at higher rates then others.

Even more of interest to IRS then users turned millionaire are the actual well established businesses who make a presence in game and trade in Linden Dollars like Harvard University who sponsors classes in game, and Major League Baseball. Other businesses are jumping on the bandwagon, providing shops where you can buy clothing for your avatar and link to websites to buy actual clothing and items and have it shipped to your home.

The real question will be what effect this will have on the real world economy. All these new taxable incomes will definitely have an impact.

Also, what will happen to the casual gamer who just logs into Second Life for a bit of fun? What impact will it then have on Worlds of Warcraft, and other MMORPG's who's virtual income is regularly traded in the real world?

As the virtual world gains more significance among gamers and non gamers alike, these questions among many others will finally have to be answered.

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