Tax office tackles growing trade in virtual items for real money
Saturday, 4 August 2007
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HM Revenue and Customs has begun investigating people who are making real-life profits on the life-simulation computer game, Second Life.
According to Blick Rothenberg, the London-based chartered accountant, the Revenue has become concerned at the growing number of people who are using the game to trade virtual items for real money, generating profits without paying any tax.
"There is no doubt that HMRC are looking at this and trying to decide how to tackle what could be a considerable loss to the Exchequer," said Matt Coward, a senior tax partner at Blick Rothenberg.
"The phenomenon of Second Life raises a significant number of tax questions and poses a conundrum for tax authorities worldwide. Will HMRC try to tax profits within the virtual world? Or try to seize the tax that is owed when the profits are taken out and converted into real cash?"
Second Life has some 8.5 million players worldwide, of which the majority are in the US. However, the game has seen a jump in popularity in the UK over the past two years, with several thousand Britons believed to now be regularly trading through the site.
Although players trade in "Linden dollars" within the game, these are bought from the game's creators for real money. As a result, items within the game can now regularly change hands for real cash.
Last year, Ailin Graef - a US citizen who owns the virtual character Anshe Chung, a wealthy landowner - was reported to have become the first person to have accumulated a net worth of more than $1m (£490m) through the game.
The joint economic committee of the US congress launched an inquiry this year looking into imposing a tax on transactions within games such as Second Life, and World of Warcraft. The game makers boast that there are $1.5m-worth of transactions within the game every day - none of which is subject to any tax.
Patrick O'Brien, a spokesman for HMRC said individuals were free to make profits from trading through games such as Second Life, but would have to pay tax on gains which were greater than their annual capital gains allowance of £9,200.
He said anyone who had established a business that made profits through Second Life, however, would be subject to tighter rules.
"The same tax rules apply to internet trading as to any other form of trading and our compliance approach remains the same," he said. "It is the core function of HM Revenue & Customs to ensure our customers are aware of their responsibilities and account and pay for what they owe, whether it be income tax, capital gains tax or any other type of tax. Our enquiries cover all areas where non-compliance may occur."
HMRC has a bot, known as Xenon, which trawls the internet in search of people who using the web to trade but not paying taxes. He said it was possible that Xenon could track down someone who was making substantial profits through a game such as Second Life.
"With members of Second Life turning their [virtual] income into real money, we know that HMRC will definitely try to get their slice," added Mr Coward.
