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By Joel Klebanoff

Virtual Laws and Taxes

Has humanity become significantly more frivolous recently, or is it just that the nature and tools of our frivolity have changed?

"What is that cursed fool Klebanoff going on about now?" you ask. That's a terribly rude way of asking, but I'll ignore your impudence and answer you. According to an article published on the electronic pages of CNET News on December 1, 2006, a group of legal experts spent almost two hours at the New York Law School discussing who governs virtual worlds.

These experts concluded that because the virtual worlds in games such as Second Life, World of Warcraft, and EverQuest are not autonomous countries, they are not subject to real-world national laws. According to the article, the experts also said, "Because lawmakers in countries like the U.S. have been slow to understand virtual worlds and the legal, social and economic issues that arise in them, legislators have not yet addressed many of those issues."

I've got a question for these experts. Exactly why would they expect lawmakers to spend so much as one minute addressing those issues? We're talking about a world that exists only as a figment of some computer's imagination. I've wasted more than five decades worrying about a great many things, both important and trivial (mostly the latter), but as far as I'm concerned, this one doesn't rank as worthy of the least little bit of angst on the part of real-life regulators.

If they're looking for a list of things that our governments should be worrying about, I'd suggest the following real-world problems as only a start: People around the globe are dieing as a result of acts of war and terrorism, many of which are perpetrated simply to further the age-old argument that "my god can beat up your god." More than 45 million people in the country with the largest economy on the planet don't have health insurance and, therefore, face possible financial wreck and ruin should they become seriously ill or injured. That sounds bad, but in the global context, those people are the lucky ones; in the developing world, millions die or suffer horribly because of inadequate healthcare. In the rich world, we boast education systems in which many universities feel the need to offer tutoring in basic reading, writing, and arithmetic because some high-school graduates haven't achieved an adequate level of those skills. Again, in most poor portions of the world, the situation is far worse. The human species is, arguably, imposing a burden on our environment that may be unsustainable in the long-term. Finally, the worst problem of all is that, due to a short stature, an appearance that is not the least bit hunk-like, a pathological shyness, a deathly fear of the friend speech, and an extreme lack of self-confidence, I can't get a date. OK, maybe that last one affects only me, but if the government wants to spend a little time on this issue, I won't complain.

Oh, and I've got one more question for those experts who spent two hours discussing the virtual-world governance issue. Was it really such a slow day on the legal and academic fronts that you felt this was the best use of your valuable time? Is our real-world legal system so perfect that you couldn't think of any other topic worthy of discussion? Sorry, that was two questions. Feel free to answer either one or both.

I'm probably risking death threats from hardcore gamers by suggesting that virtual-world play is somewhat frivolous, but so be it. Then again, it's probably only a minor risk because most hardcore gamers are fed intravenously so they need not spend a minute in the real-world. I doubt they're going to pull themselves away from their virtual worlds long enough to read this article, assuming they spent enough time at their studies to be able to read in the first place.

Beyond the fact that virtual worlds are frivolous, there's another reason why gamers shouldn't take them too seriously. If they do, other people might follow their lead. The actions of some of those other people have the potential to cost the gamers real, not virtual, money.

An unrelated December 3 CNET article, headlined "IRS Taxation of Online Game Virtual Assets Inevitable," quoted a senior economist with Congress' Joint Economic Committee as saying, "Given growth rates of 10 to 15 percent a month, the question is when, not if, Congress and IRS start paying attention to these issues." It seems that some people think that, in the future, you might be forced to pay real taxes on your virtual earnings.

As a total non sequitur to you (although not to me), I thought I'd relate that, if my creative energies aren't flowing when I write one of these things, I sometimes take a break and watch a movie to recharge my batteries. I've just finished doing that. Unfortunately, the movie I chose to view for the umpteenth time was Woody Allen's Everything You Always Wanted to Know About Sex* But Were Afraid to Ask. The editorial rules of this publication don't allow me to use that as inspiration, so I guess I'm on my own here. But I digress.

Where was I when I left off? Oh, yes. Taxes on virtual-world earnings. Isn't it just like the government to try to find a way to tax this stuff? Don't get me wrong. Parents here don't have to pay tuition for children to go to public schools; instead, parents and non-parents share in the cost of providing basic schooling so that the children of poor families aren’t deprived of the opportunity to receive a decent education. I drive on roads and walk on sidewalks without having to pay tolls in most cases. The fire and police departments don't charge me for their services. And I live in a country where, if I get injured or sick, I can, assuming they have space and time for me, go to the doctor or hospital of my choice and have the visit covered by a universal, tax-funded medical insurance plan. So, while I don't want to pay one penny more in taxes than I have to, I don't mind paying my fair share. But do they really have to tax every last cash flow, asset, and activity on the face of the planet? Can't they leave us with one or two untaxed pleasures?

What would lead the revenuers to think that it's fair to impose real taxes on virtual assets? They want to do it because those virtual assets sometimes get traded for real dollars and, therefore, carry a tangible value whether or not you sell them. I wrote about this in a previous tirade, "The New Alchemy." I think buyers of virtual artifacts are behaving ridiculously unless the buyer's intent is to sell the artifacts at a profit later. As I rhetorically asked in that previous rant, "Is there such a colossal shortage of tangible things for them to acquire in this world that they've got to spend their hard-earned dollars on make-believe crap?" But that's beside the point. The truth is that real people are making real money selling fictitious stuff to other real people, and some government types are looking at the possibility of taxing the income on those transactions.

As an example of this tax situation, a tax professor quoted in the December 3 CNET article brought up the case of a person from Montreal, Kyle MacDonald, who, in a widely reported exploit, used a series of 14 trades to successfully exchange one red paper clip for a farmhouse in Saskatchewan. I don't know how that relates to the virtual world because both the paper clip and the house were real, but the professor made the point that MacDonald might have a few tax issues because of the difference in the value of the paper clip and the house. Presumably, the people who made the intermediate trades would also be liable for taxes on the difference in value between what they gave and what they got.

The professor put one caveat on his discussion. He was using MacDonald's case as only an example. He couldn't comment on MacDonald's specific tax situation as the professor is an American tax expert, whereas MacDonald is a Canadian and subject to Canadian tax law. Well, I'm not a tax expert, but I am a Canadian. I don't think MacDonald used an incorporated company to make the trades, so corporate tax law probably doesn't apply here. Let's assume that this would not be considered to be earnings from a sale by an unincorporated sole proprietorship, but, rather, a personal capital gain, which is taxed at a lower rate. Personal capital gains taxes currently work in Canada like this: You take any capital gain you've earned, divide that by two, add the result to your other income, and then apply the normal income tax rates to the total.

Let's work this out. This was a red paper clip, so I'll assume it was one of the more expensive vinyl-coated varieties. Staples Canada's Web site lists a box of 100 vinyl paper clips at $1.46. So a single paper clip costs $0.0146. I'm sure that the Canada Revenue Agency (CRA), generous souls that they are, would be willing to give MacDonald the benefit of the doubt and round that up to two cents. (CRA was, at the time of writing, the English name for Canada's bilingual version of the IRS, but the CRA changes its name almost as frequently as IBM changes the name of the system formerly known as AS/400, so I don't know what the CRA will be called by the time you read this. Nor do I know what IBM will be calling its computers, but that's beside the point.) A single paper clip may be worth two cents, but a Saskatchewan farmhouse is worth… Well, actually, as a committed urbanite who thinks that the countryside should be strictly reserved for wildlife, farmers, and rednecks (with no insult intended toward farmers or wildlife), I wouldn't personally value a Saskatchewan farmhouse as worth much more than two cents, but others, including the CRA, probably disagree with me. I'll use the CRA's assessment of the farmhouse's value rather than my own, since that's what it would force me to do if it were me reporting the transaction. So, to my mind, MacDonald should pay tax on his rather large capital gain. That way, the Canadian government will be able to continue to pay the salary of our soldier, without having to increase the taxes it takes from me.

(As an aside, there is a bit of a complicating factor. In Canada, gains on the sale of a principal residence are not taxable. Then again, even homeless people would have trouble finding adequate shelter under a paper clip, so I don't think that rule applies here.)

How did I get this far afield? What the hell was I talking about? The mind wanders quite a bit at my age. Oh, yes. Regulations and taxation in virtual worlds. Given the potential future interest of lawmakers and the tax folks, play your virtual games if you want, but my advice to you is if you're successful or corrupt in your play and you happen to encounter an avatar that bears the moniker "taxman" or "lawman," unplug your computer and start running. Quickly.

This article originally appeared as part of a weekly series of "Tech Tirades" in MC TNT from MC Press Online. The first year's worth of Tech Tirades does not appear here. Instead, you can find them in BYTE-ing Satire.

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