The Speculist: Now in Second Life

Lots of companies have been showing up in Second Life over the past few months. Now Reuters has set up a news bureau there.

And don't be surprised if you see the IRS open a branch office there soon:

"Right now we're at the preliminary stages of looking at the issue and what kind of public policy questions virtual economies raise -- taxes, barter exchanges, property and wealth," said Dan Miller, senior economist for the Joint Economic Committee of the U.S. Congress.

"You could argue that to a certain degree the law has fallen (behind) because you can have a virtual asset and virtual capital gains, but there's no mechanism by which you're taxed on this stuff," he told Reuters in a telephone interview.

This is bad news. Once you bring taxation into the Linden Labs virtual economy, all other forms of regulation will follow. When the news broke last week about the online gambling ban, I figured that the online gambling activity that takes place in Second Life would be exempt, seeing as it's only virtual money that changes hands.

But if the tax authorities start treating Linden Dollars like real money, that's a big game over. And it isn't just gambling. Right now, I can go into Second Life and start my own Building and Loan to compete with the branch bank that Wells Fargo has opened there. Or I could hang out my shingle as a loan shark and hire werewolves to enforce repayment for me (within the rules and behavioral norms established by the Second Life community, of course.) The 2L economy is a big playground where people are free to give new and weird models of commerce a try. But that kind of environment only works if with play money.

The rule should be that it's play money while it's in Second Life, and its taxable and subject to regulation when you cash out. Fat chance, though. The success of the virtual economies is going to kill them. Virtual economies are likely to be replaced by heavily regulated electronic economies that are every bit as real as the ones in the "real world."

That's too bad.

Comments

"The rule should be that it's play money while it's in Second Life, and its taxable and subject to regulation when you cash out."

Exactly. This is just an extension of the "no taxation without representation" principle. Since the U.S. government is not the governing authority within this virtual realm, taxing within the realm would just be King George all over again.

Unless the U.S. Government starts providing services within this virtual world, they shouldn't tax the virtual world.

They would argue that they do provide a service to the virtual world by, say, hunting for predatory pedaphiles within Second Life. But that is just policing the Second Life world to keep crimes from occuring in this world. The U.S. government would have no interest in tracking down someone who robbed a bank within the Second Life world. Unless the government wants to start doing that (including battling werewolves and vampires), they should stay out of Second Life.

The U.S. government does subsidizing the Internet infrastructure that the "Second Life" world runs on, but we can't start down that road. That would eventually mean that all Internet traffic would be taxed, including this blog. There are more compelling reasons not to tax than to to tax. Small things like like the rights to free speech and assembly.

A big part of the attraction for Second Life (both from an intellectual and entertainment standpoint) is that it's not like this life. It would be a shame if this form of escapism were remade into Real World 2.0.

Where would this end? When you get taxed in Monopoly, would you have to send it to the IRS?

Posted by: Stephen Gordon | October 16, 2006 12:13 PM