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The taxman has no power in the virtual world

Tired of paying taxes? Grab an axe and go spill some blood. Virtually.

Tired of paying taxes? Grab an axe and go spill some blood. Virtually.

In an article published two years ago, I told the story of a young Montrealer who earned $3,000 a month selling virtual dresses and T-shirts to players of Second Life. In this online game, millions of people walk avatars (virtual selves) into nightclubs and other imaginary places. They pay real dollars to buy their avatars a sexy haircut, a little cat, a house … even a penis!

Meanwhile, “gold farmers” in China spend their days slashing monsters with their swords and stealing their gold pieces in World of Warcraft. These gold pieces are then sold over the Internet to other players who need them to progress in the game. Estimated profit: US$2,000 per day.

Two years later, what has changed? “Second Life has slowed down a bit, but Facebook games like Farmville are exploding,” says Michèle Blanc, senior partner at Analyweb. Last year, 70 million people (your friends?) spent US$500 million to feed non-existent pigs and decorate their virtual farms.

A parallel economy is growing at a breakneck pace. From US$800 million two years ago, the annual value of goods traded in virtual worlds on the Internet has now reached $1.5 billion. At the current exchange rate of 200 per U.S. dollar, the World of Warcraft gold coin is faring better than most South American currencies.

In this day and age, a three-headed virtual rabbit can be more productive than most human beings. Edward Castronova, an economist at Indiana University and an expert on virtual worlds, has calculated the value of all goods — magic swords, armour, etc. — created and traded by players in the realm of Norrath, a region of the game EverQuest. GDP per capita: US$2,280. Average hourly wage: $3.42. These figures put the economy of Norrath above those of China and India.

The United States and Canada do not tax flying castles, or dresses made of pixels. “The U.S. govern­ment has been trying for the past five years to seek ways to tax these transactions. But the IRS has no rule of procedure for virtual goods,” says Castronova. “It’s too weird for them, and doesn’t fit into any categories.”

Thousands of new web entrepreneurs rejoice. For once, bureaucrats put spokes in their own wheels.

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