Sweden taxes virtual property proceeds… as does everyone else

There’s a story ricocheting in some English language news sites about Sweden’s plans to impose taxes on income from virtual property sales. The original source seems to be Swedish Radio Ekot. The news may seem startling to some, until one realises that such income is already taxed in Sweden and in other countries. From Ekot:

“It becomes something completely different when it’s outside the gameworld and in the real world, and that’s when the taxation effect comes up,” says Dag Hardyson [project leader for the tax authority’s internet commerce control unit]

Another quote in Telecom TV clarifies the point:

“We’re not interested in ordinary gamers; more than 99 per cent of them play Internet games for the sake of playing and most people keep their virtual money on their game account. However, if they move it out of the virtual world into the real world, then we’re interested in them.”

So Swedish WoW players will not be required to report epic drops on their tax statements, nor will Second Life entrepreneurs need to report their profits, unless they convert the virtual income to real money. Real-money income, regardless of its source, is supposed to be reported to the taxman in any case.

What is notable here is the fact that the Swedish tax authority is starting to pay explicit attention to virtual property issues. Last December it was reported that some people at IRS, the U.S. taxman, are similarly concerned. Even though income tax liability for virtual property sales proceeds is a no-brainer, there are other, more difficult taxation issues lurking in virtual economies that will need to be addressed as their real-world economic impact grows.

For example, virtual economies could be used for tax evasion, moving assets from one entity to another. Profitable company A buys a virtual asset and deducts it as an expense. The asset is then handed over to loss-making company B. Company B liquidates the asset and reports the income, but pays no taxes due to showing zero profits.

Such manouvres are possible due to the fact that transactions within a virtual economy are not reported to real-world authorities. The obvious solution would seem to be to require that these transactions be reported. However, this would be just crazy in a game world like WoW. I believe more research and discussion on these issues is needed to make sure that regulators can make informed decisions once the time comes.

Update: see 2008/04/16: Sweden moves to tax in-game transactions

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