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Aug 12, 2008



>> "Casino chips, by contrast, are redeemable. The receipt of casino chips as gaming winnings should therefore be treated as an immediately taxable event; we should not have to wait until the patron cashes out to tax her winnings."

I most likely missing something here, but why would you want to tax casino chips before the money payout. This doesn't only make the administration of the game an awful lot more complicated, but also serves as a potential cause for the following scenario:

- I'm playing an absolutely unrealistic game of dice with a 1:1 win/lose probability (e.g. 1-3 is a win, 4-6 is a loss)
- I have a certain very large amount of cash "n" in chips on me, let's say 10 000 EUR
- I always bet a very insignificant sum, e.g. 1 EUR
-> According to the theory of probability, I could play this game for a very, very long time before I lose (assuming that the bank can't lose)
--> According to the suggestion above, I'd have to be taxed for every time I win, despite the fact that I'm not making profit and the chips are never actually get converted to money

I fail to see the point.


PS: Seeing Dr. Seto's profile, i.e. "Income Taxation, Corporate Taxation, Partnership Taxation, International Taxation, Tax Policy", I'm pretty sure that he knows what he's talking about, I can't however see how the above statement could possibly be valid. Once again, maybe I'm just misunderstanding the statement or there's a rather rudimentary difference between the (vast majority of) European and the American taxation laws. The exchange of "play money" is not taxable on this side of the pond.


Hi all, I've not read Ted's piece yet. I am curious, however, on whether there are any virtual worlds whose currencies are not convertible, whether in accordance with the TOS (as in SL) or in violation of the TOS (as in WoW). Historically, it has made no nevermind to the Tax Code whether the accumulation of income happens in violation of a legal duty or not. Embezzlers must still report their ill-gotten gains (but are also allowed to deduct from those gains the expenses of embezzlement, at least so long as the expenses themselves do not violate the law)!

I cannot believe Ted would take the position that simply because a virtual currency is convertible makes the acquisition of that currency gross income under section 61. So I suppose I need to read the article. I'll report back when I do.

@Nicholas, the reason Ted says that the interstitial casino chip winnings should be taxable is based, most likely, on a doctrine of constructive receipt. That's the idea that if you "could" have cashed out but chose not to, then that is the same as a cash-out followed by a subsequent re-investment in the game. I don't know how he gets to his conclusion, however, that the doctrine should apply. Casino chips are not cash equivalents, so far as I can see, under the Tax Court rulings. Further, on information and belief, the IRS may soon be issuing a Rev. Rul. taking the opposite position.

Cheers, -bryan


A big loophole that I believe Dr. Seto ignores is the permanence of virtual worlds, virtual goods, and possession of virtual currency. In most countries companies running these worlds are under no legal mandate to keep the world running until all possessors of virtual currency or property have the opportunity to "cash out."

For example, MindArk has a bidirectionally convertable currency for Entropia Universe. If the company decided to close down operations and go out of business, or was forced to do so for some reason, people with PED (Project Entropia Dollars) would have great difficulty converting the PED to dollars. I would argue virtual currency only has value if some kind of legally binding escrow or insurance system is present to guarantee the real world value of virtual currency.

Of course, a government may decide to try to immediately tax virtual world gains anyway, simply in the hope of realizing taxable income better or faster. However, I don't think the discussion is about crass realpolitik, but rather the theoretical principal of how and when such transactions "should" be taxed.


Without having read the whole paper, it sounds like the line professor Seto is drawing is very similar to the position taken by the Swedish Tax Agency earlier this year:

Transactions between participants in a virtual world, where the deal is about the sale of a "product" or a "service" against reimbursement in an internal currency, should be considered, according to the Swedish Tax Agency's ruling, [actual] sales of electronic services, if the internal currency can be exchanged to a valid legal means of payment. If the internal currency cannot be exchanged to money, the transactions should not be considered [actual] sales.

I.e. tax liability rises at the instant a virtual-virtual trade takes place. It does not wait until gains are exchanged to national currency.

More on the Sweden situation here. Btw I note that Virtual Economy Research Network has disappeared from the link list on the right side of this page.

Ad Nicholas Chambers: At first glance your casino game example seems to demonstrate the absurdity of such a rule well. However, without being a tax lawyer, I suspect that other rules apply simultaneously to make the situation more complicated. For example, in the case of Sweden, even if each individual virtual asset transaction generated income tax liability, you could still deduct any associated costs in the perfectly ordinary manner, paying tax only for net profit only.

As for the idea that "play money is not taxable this side of the pond", I would be interested in learning more, if you could point out some source or discussion on this.

Ad Arnold Hendrick: The permanence of virtual assets has of course been brought up previously in discussions over the legal status of "virtual property". In that context, Josh Fairfield has pointed out well that all kinds of "real" properties are also subject to unexpectedly disappearing or losing their value. This does not make them any less real -- it is simply one more risk to factor into their market price. Extremely ephemeral assets will be priced low regardless of their other merits. Any taxes on such assets will consequently also be low.


I like this kind of bright line because it allows a world owner to be protected from taxation in-world, provided he or she exercises good faith enforcement of a no-RMT clause. To me the key thing is to create legal categories that allow virtual world providers to continue their work without fear of interference.


Ted, that's a good point, I didn't realise that Seto's typology is similar to the one you presented in Right to Play. After reading the paper, though, it seems that Seto's distinction is based on a practical assesment of how "readily and routinely" RMT conversions take place, as opposed to the operator's chosen policy.

In all, it's a very interesting paper (as were Camp's and Lederman's on this topic previously) and I ended up blogging about it at length.


Vili -- thanks for that summary & the very insightful comments in it.

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