About a year ago, there was a story ricocheting on some news sites about Sweden planning to impose taxes on virtual property sales. It turned out to be a bit of a dud: all they wanted to tax was real-money income, not in-game transactions. Real income, regardless of its source, is supposed to be reported to the taxman anyway. Swedish WoW players would not have to include epic drops on their tax statements, nor would Second Life entrepreneurs be required to report their profits — unless they convert the virtual income to real money, I deduced.
However, nine days ago the Swedish Tax Agency posted a statement/ruling on their website, titled “Virtual worlds — value-added tax” (“Virtuella världar — mervärdesskatt”). In it, the agency states that in-game transactions may incur liability for both value-added tax as well as income tax under Swedish law. Below is my translation of the summary part of the statement interspersed with some analysis.
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.
So the test of whether a transaction taking place in a given virtual world is trade in the legal sense is whether the in-game currency is exchangeable to real money. Does the existence of a secondary market satisfy this test, or does the operator have to carry out the exchange? How about operator-endorsed marketplaces like LiveGamer? This is not clear to me from the text, and I hope that some native Swede will eventually translate the complete ruling.
In any case, the consequence of your virtual asset sales being deemed sales in the legal sense is that you are then supposed to report the proceeds to the tax agency so that they can determine your income tax. But there’s more:
A participant who sells electronic or other services in a virtual world may, according to the Agency’s ruling, be carrying on a trade [a tax law term] under the criteria set forth in the income tax statute (1999:1229). The decision depends on the scope, permanence, independence and profit intention of the activity. If the participant is carrying on a trade, the activity is considered professional under the value-added tax statute (1994:200).
The Agency also finds that a participant who, without carrying on a trade, independently and with certain permanence sells electronic services for more than 30 000 Swedish kronor [about 3 000 €], is carrying out an activity that is professional according to chapter 4, 1 §, first paragraph 2 of the value-added tax statute.
If your activity is serious enough, you may be considered a professional, which invokes additional obligations under law. One notable obligation is that you are then supposed to start paying value-added tax on your virtual asset sales. Value-added tax in Sweden ranges from zero to 25 % of the price before tax, depending on the type of the good or service. Most goods are taxed at 25 %.
Even if you are not otherwise considered a professional, if the value of your virtual sales exceeds 30 000 Swedish kronor (about 3 000 euros or 5 000 US dollars) in a tax year, you may still have to pay value-added tax. This applies regardless of whether you trade with other Swedes or with foreigners:
A sale has taken place in Sweden if the seller is a Swedish trader [person carrying on a trade] who sells electronic services to another Swedish trader or a private person in Sweden or another EC [European Community] country. A sale from a foreign trader to a Swedish trader has also taken place in Sweden. The same applies if a trader from outside the EC sells services to Swedish private persons.
Why would Sweden want to start taxing in-game transactions? It may sound about as sane as prosecuting PvP players for murder. But the situation may be a bit of a dilemma for the taxman. If you categorically rule that transactions inside virtual worlds are outside the scope of tax law, you are creating a tax evasion channel for companies and individuals. For example, profitable company A buys a virtual asset and deducts it as an expense. The asset is then handed over in-game to loss-making company B. Company B liquidates the asset and reports the income, but pays no taxes due to showing zero net profits.
On the other hand, if you rule that all in-game transactions are treated like real trade under the law, you end up with a crazy situation where Swedish World of Warcraft enchanters may have to add value-added tax to the price of their services.
In practice, I suspect that the solution to this dilemma is that the taxman does not really approach the issue so categorically. Bloggers and punters will be keen to draw shocking conclusions from the text as I just did above, but its actual scope may turn out to be much more modest. One thing hampering the interpretiation of the ruling is that it is couched in language involving mysterious “parallel virtual worlds” where people lead a “parallel life”. What services are those exactly?
Finally, it is interesting to note that Sweden is home to MindArk, the company behind Entropia Universe, a sci-fi MMO featuring what they call a “real-money economy”. MindArk sells the game’s currency at 10 units to one US dollar, and buys them back at the same rate (minus transaction costs). From what I have heard, MindArk CEO Jan Welter Timkrantz is not happy at the moment.
Thanks to Peter Zackariasson for the tip!