THE government should give serious thought to taxing the revenues earned in virtual worlds such as Linden Labs’ Second Life, according to a leading Scottish-based tax specialist.
Launched in 2003 by San Francisco-based Linden Labs, Second Life has more than five million registered users and two million unique users, with the majority in Europe. Residents create characters called “avatars” who can earn money by developing properties and starting businesses.
Second Life is different from other virtual worlds in that its residents retain full intellectual property rights for any digital content they create. This has led to a burgeoning virtual economy in which thousands of people already make part or all of their real life income from their Second Life businesses by converting Linden Dollars to US dollars at an exchange rate of L$268 to US$1. More than 150 Second Life residents are earning US$5000 a month from Second Life, according to Linden Labs. One of the biggest opportunities for making Linden dollars is in real estates and land speculation.
Russell Hills, head of tax with KPMG in Scotland, said the Treasury ought to take a more proactive stance towards the taxation of profits earned in online worlds including Second Life.
Hills said: “The amount of publicity around people in the game means some are using it as a business opportunity to make a profit.”
A resident named Anshe Chung — really a woman named Ailin Graef — has become the website’s most successful businesswoman by developing themed communities, accumulating US$1m in assets within Second Life.
KPMG’s Hills said: “The issue is the extent to which wealth that is being generated in the virtual world is being recycled and remaining there — or being withdrawn into the real world and converted into real money.
“I do also wonder if Linden Labs has missed a trick. Perhaps they themselves could have taxed revenue in order to help fund the development of their platform.”
KPMG believes that the UK government should assess the scope for tax planning and fraud, as well as considering the tax implications for virtual businesses. Hills added: “I have yet to hear whether KPMG will be opening an office in Second Life. It depends how far people’s imaginations can go.”
This article was published in The Herald on 4 June 2007. Read on Herald Scotland