102207 Taxation Of Virtual Worlds Metanomics Transcript
TAXATION OF VIRTUAL WORLDS
OCTOBER 22, 2007
57 MILES: Hello everyone, and welcome to Metanomics ’07 with me, Nick Wilson, 57 Miles
in Second Life. Today we have a special session with our resident host, Robert Bloomfield,
Professor Bloomfield, from the Johnson Graduate School of Management at Cornell
University, and Professor Bryan Camp, who is a law professor at the Texas University. We
have the sponsors to run through very quickly, if you’ll bear with me. I’d like to thank the
Otherland Group, who built the island, built Metaversed Island, and are the main sponsor of
these shows. I’d also like to thank the Metaversed partners, the companies that are actually
walking the walk in Second Life and actually engaging with the Second Lifers at every
stage. They are Cisco Systems, Saxo Bank, Kelly Services, Sun Microsystems, Generali
Group, and SAP. I’d also like to thank, of course, SLCN.TV, who makes all of this possible.
One of the things that you may have noticed immediately is that we have a smaller crowd
here today on Metaversed Island by about half. This is because we are experimenting in
distributed events in Second Life, courtesy of SLCN’s wonderful technology. We are
broadcasting into five other sims simultaneously, so it’s quite an experiment and we hope
that it goes well. Please use the Metanomics group for backchat, and please feel free to IM
57 Miles, that’s 5-7, space, Miles, if you have questions for Bryan or Robert.
Without further ado, I’d like to hand over to Robert Bloomfield.
ROBERT BLOOMFIELD: Well, thanks a lot, Nick, and welcome everybody to Metanomics.
Let me point out right now, someone asked, “I’m not getting any sound; have we started?” If
you’re having trouble getting sound, make sure to click on the video button, or the audio--I
guess, actually, get the music button up and that way you should be able to hear the sound.
Welcome to all of you who are on other--that’s right, someone is pointing out if they have no
sound they can’t hear me. So that is irony and, hopefully, someone will pull up the chat and
start typing that out so that people know what to do.
I would like to thank all of you who are helping out with our experiment in distribution and
affiliation. I know that there are not only, still, quite a few people here on the Metaversed
sim, but I understand there are people on sims across Second Life. Please do say hello.
Just type a little “hi” into the Metanomics window so that people can see that there are
others they can communicate with during this session. Because my view is, and I think a lot
of companies are figuring this out now, the real power of events in Second Life is you’re not
just sitting alone looking at a screen like you’re surfing the web. You are actually in a room
with other people, even if they’re on another sim. So let’s keep that communication going.
Okay, without further adieu, my last thank you is to Professor Bryan Camp, professor of law
at the Texas Tech University School of Law. Hi, Bryan.
BRYAN CAMP: Hi, Rob.
ROBERT BLOOMFIELD: Thanks so much for coming on our show. Now, there aren’t many
law professors who are studying virtual worlds, much less the taxation of virtual worlds. So
I’m wondering how you got from what--I guess you used to study transactional constitutional
law, and now you’re talking about whether warhammers are taxable. How do you do that?
BRYAN CAMP: Well, actually, it’s a great segue because this is also transactional
constitutional law the way I look at it. I got into the virtual world topic from a topic in taxation
of gaming, of online gaming; casual gaming sites like WorldWinner, which has pretty much
soaked up all the other ones. I read Ted’s paper and I got interested because where there’s
money there’s tax. I got interested in thinking, could there possibly be any tax ramifications
to all this activity. And that’s what got me into it.
ROBERT BLOOMFIELD: Okay. Let’s not keep our audience in suspense. The answer to
that is yes, is that right, potentially? You know, I’m used to talking with lawyers now.
BRYAN CAMP: Yes, that’s very good. Or even worse than lawyers are law professors.
We’re the folks that weren’t able to be lawyers so we have to go answer questions like that
with such useful tidbits as, “It depends.”
ROBERT BLOOMFIELD: Yes, that sounds like an MBA student, as well.
One of the things I want to start with and I guess, as Halloween approaches, this is, I guess,
the scariest part of the tax code, which is--today we’re going to be talking about gross
income. So this is only when you receive something do you have to pay tax on that. You
may have deductions. But the scary thing here, as I understand it, gross income is defined
extremely broadly in Section 61 of the Tax Code. So I have that right?
BRYAN CAMP: Yes, absolutely. And you’re absolutely right to emphasize to our audience
that what we’re talking about is, is the activity that goes on within a virtual world--and we’ll
just take, specifically, Second Life--is that going to be considered gross income within the
meaning of the United States Internal Revenue Code in order to trigger all of those other
wonderful things that come after that, which is deductions or exclusions or credits or
anything like that. So your first step in figuring out a tax consequence of any activity is to
determine whether you have gross income within the meaning of the statute.
ROBERT BLOOMFIELD: People may not know, in a former life I actually was a tax
accountant, and I did that for a couple of years. And one of the first things I learned is that
the very first thing, really, in the Tax Code after you get through the boring “begats” is that
basically everything is gross income unless the Tax Code says it’s not and nothing’s
deductible unless the Tax Code says it is. So it’s the great “heads-they-win, tails-we-lose.”
You make the argument--one of the first things that you say in your article is that we have to
apply the legal concept of income, not the economic concept of income, to see whether and
to what extent online activity within virtual worlds is going to generate taxable gross income.
So my first question is, why would law deviate from economics?
BRYAN CAMP: Well, to answer that you’ve got to meet and talk to a few economists.
They’re even worse than law professors. If you don’t like the words “it depends”--how does
a law professor get married? They don’t say, “I do,” they say, “It depends.” How does an
economist get married? They don’t say, “I do,” they say, “I assume.” Economists, they
assume everything. And the economist is chiefly concerned with describing events in
economic terms. A lawyer and legislators are chiefly concerned with regulating human
activity. So you don’t want to necessarily regulate every single thing that you can describe.
That’s essentially my argument for why there’s a difference.
In fact, one of the aspects of studying this that I really enjoyed was coming to this realization
that precisely the reason why we don’t want the law to follow economics, pure economic
theory, is because that would run right up against values that we have as a citizenry or
values that we have in our Constitutional order. That gets back to the transactional
constitutional law. I mean, you don’t want the government--whether it’s federal, state, or
local--coming into your personal affairs any more than is necessary. Even though the
economist might say you have all kinds of activities which produce income, there may be
very good what I call operational reasons why you don’t want to write the law so that it is
ROBERT BLOOMFIELD: So actually can you just define quickly what this transactional
constitutional law is? It’s just basically keeping things easily administered?
BRYAN CAMP: Yeah. People think of constitutional law, and you think of Roe v. Wade or
Brown v. Board of Education. Or you think of cases that are in litigation, where the Supreme
Court issues some kind of ruling about a Constitutional issue. That’s really not the bulk of
constitutional law. Transactional constitutional law is the idea that people in government,
specifically lawyers, act and behave in ways to guide the government, to keep the
government actions, that is to keep the government employee actions within the boundaries
of the Constitution.
For example, when I was an IRS attorney, which I was for eight years, part of my job was to
make sure that my clients, the revenue collectors--the folks who went out there to collect the
revenue--to make sure they did it in a constitutional manner. So that’s what I call
transactional constitutional law. You don’t ever want to get to the litigation stage, where
you’ve already goofed up and now you’re just trying to do backtrack and try to convince
somebody you didn’t goof up when you actually did.
ROBERT BLOOMFIELD: Okay, that’s helpful. Before we get into too much detail on these
administerability(?) issues I should clarify. Our audience is, I suspect--well, actually I don’t
know; I’m guessing probably half American, at least. But probably a lot of people from other
countries around the world. So is it safe to say everything we’re going to be talking about is
strictly U.S. law?
BRYAN CAMP: Yes. The United States taxes all of its citizens on their worldwide income.
So since I’m a United States citizen, no matter where I live or where I earn income in the
world the United States takes first claim on that as a base for taxation. If I am not a U.S.
citizen, then the applicability of the U.S. tax laws depends, in part, on where I am doing
business. That gets into all kinds of location issues, which I very cleverly avoided since I’m
not entering into that debate on where is Second Life. Is it really in California, or is it
someplace that no one knows.
So most of my remarks today will have particular application to U.S. citizens. Non U.S.
citizens will take away some understanding of U.S. income taws, but it won’t necessarily be
as applicable to their situation because they don’t get taxed except on income earned within
the United States.
ROBERT BLOOMFIELD: You know, my guess is at some point we will have a Metanomics
session solely on jurisdictional issues. Because it’s not just tax; it’s all of these very
Let me just point out, by the way, those of you who are seeing this on the web or in an
archive won’t be looking at this wonderful chat that, in response to my comment that there
were people from other countries, we’ve get people in the backchat channel saying they’re
from--let’s see, we’ve got Canada, UK, USA, Poland, India, Finland, Texas--Rose, come on-
-let’s see, Iowa, more UK, Croatia, San Francisco--who says they seceded from the U.S.,
and I actually think there are some people who would agree with you--okay, let’s see,
Denmark, Belgium, Singapore. Wonderful.
Now that we’ve shown we have an audience that a lot of them aren’t that interested in the
U.S. tax law, let’s plow through. The first thing you talk about in this ability to administer and
identify income is the ascertainable market value of something that you’re going to be
getting in virtual worlds. You start talking about Mick Jagger and MasterCard commercials.
Can you walk us through that argument?
BRYAN CAMP: Sure. The idea, as I said, is that economic concept of income runs up
against some practical operational problems. Those operational problems, I submit, partly
have to do the degree to which we want the law to follow economics. Do we want the law to
actually require people to do things, or the government to do things? The U.S. tax system is
highly dependent on voluntary compliance. The IRS processes about 130 million primary tax
returns and cannot possibly police all of those.
So the first line of compliance is really with the population’s willingness to self-report those
financial transactions which ought to be reported and upon which tax ought to be paid. That
said, when you look at the broad reach of Section 61, what you find are three unwritten
exceptions to it. And those three exceptions sort of parallel these reasons we have for
wanting the law to deviate from pure economics. I set out those three. The three are: in
cases where there’s no ascertainable fair market value, there’s no Section 61 gross income;
in cases where there’s no realization event, there’s no Section 61 gross income; and finally,
in cases where there is simply imputed income--income imputed from activities, economic
income--there’s no legal Section 61 gross income.
So I’ll start with the ascertainable market value, Rob, because that’s where I came up with
Mick Jagger. Let’s say that you have an employee and you live in New York, an employer.
And your employer, as a reward for something, sends you out on the town for your birthday.
If there was a MasterCard commercial for this, the MasterCard commercial might go
something like this: “Rental of limo for the evening, $300. Dinner for two at Le Chic, $200.
Front row tickets to Rolling Stones concert, $500. Mick Jagger asking you onstage and
singing Happy Birthday to you and giving you a lick on the face, priceless.”
ROBERT BLOOMFIELD: And very, very vivid, I have to say, Bryan.
BRYAN CAMP: Well, thank you. Of all of those items, an economist would look at that and
say, “Well, all of those items are income,” right? The limo, you know how much it costs. The
dinner, you know how much it costs. The front row tickets, you know how much it costs. But,
you know, Mick Jagger asking you up and giving you a serenade, it’s hard to reduce that to
a readily ascertainable fair-market value. So the income that the taxpayer would have to
report from that evening is really $1,000: $500 for the concert, $300 for the limo, and $200
for dinner. That’s 1,000 bucks gross income, not a dime more. Even though there was
certainly, to an economist, the market value of rights, exercise, and consumption, the
consumption of a Mick Jagger serenade is an economic event and produces economic
And my economist friends tell me I’m really off the beam on this, and no rational economist
truly believes that any more. I just point them to the literature, and say, “Well, if no one
believed it why are people still writing on it?” You know, the idea for an economist is, the
ideal measure of income could include leisure and consumption of all goods and services
that are components of the utility function. And you certainly have that idea alive and well in
And there are other examples you can use, too, about readily ascertainable fair-market
value. Frequent flyer miles, for example, would be one. You know, frequent flyer miles
present a huge problem for the service, the Internal Revenue Service, because--there are
two reasons for it, but one of them is they’re very hard to value. If I have 25,000 American
Airlines frequent flyer miles, how much is that worth? Well, part of it depends on what the
market is for the air tickets that I want to buy at any given time from any one destination to
another. So it’s very hard for me to say how much those 25,000 are worth. Now, if I sell
those 25,000 to someone else through some scheme where I get cash out of the
transaction, well now we have an actual market transaction we can point to, and say, “Well,
your 25,000 was worth X,” whatever X was that I got paid for it. If we can find a good
market, that exception to Section 61’s reach goes away; we can find a value for the item
that’s been sold.
ROBERT BLOOMFIELD: You mentioned these three things. So it’s ascertainable fair-
market value, realization, and imputed income. I have to say, by the way, the backchat
when you said the terms “realization event” and “imputed income” suggested people hadn’t
heard those words before. Someone typed out, “Oh, my god, I think I just imputed.” I’m sorry
to hear that, but I’m sure a pill--and you’ll feel better.
But let’s just walk through the other two of those before we start applying it to virtual worlds.
So what’s a realization event?
BRYAN CAMP: A realization event, you can think of it as cashing out. It’s kind of more of a
timing concept. My typical example I give to students is stock market shares. Let’s say I
bought Google when it had its IPO and I bought it at 85. Now Google is trading at what,
ROBERT BLOOMFIELD: Well, it broke 600. It might have fallen back recently.
BRYAN CAMP: Six hundred, yeah. Yeah, well, you know, I don’t have any Google stock so
what the heck do I care. But let’s say I bought it for 85, and now it’s trading at 600. Fine.
That means, to an economist again, I’ve just gotten 515 of income or of wealth creation. Not
necessarily income, but wealth; I’m wealthier by that amount. Section 61 says that gross
income is income from any source derived. The Supreme Court, in a case called Glenshaw
Glass, has said that means when a taxpayer accedes to income--accedes to wealth, excuse
me--increases his or her wealth by a certain amount, an ascertainable amount, that’s
income. Well, my Google share has appreciated by $515. That’s easily ascertainable
because we see it traded every day. I can make use of that; I can go borrow against it, or I
can pledge it for some type of activity. My wealth has increased, but yet we’re not going to
tax me on that increase in value until I do something to realize it in a transaction.
So if I sell the Google stock and I get cash, great. I now pay tax on it. If I exchange the
Google stock for some other kinds of stock, that’s another way of cashing out, if you will, or
of realizing the appreciation of wealth. You separate out the realization whether you’re
talking about income from services or income from the sale of property.
ROBERT BLOOMFIELD: Right. And that’s, of course, a big issue in Second Life. Actually,
we’ve had Josh Fairfield on the show a couple of weeks ago. He was talking about the
difficulties of assessing whether the things that we get in Second Life is actually--you know,
are they services or are they actually property. Yeah, you want to walk through that?
BRYAN CAMP: The realization analysis is slightly different depending on whether it’s
services or property. The realization of income from services is best illustrated through
bartering transactions. What you need for a realization event is some readily identifiable
event--that is, a market transaction--that you can point to and say the taxpayer has
actualized the theretofore implicit wealth. You have to find a transaction. So let’s say I’m a
tax lawyer. I prepare tax returns. Let’s say I normally charge $100 for preparing a tax return.
And you’re a plumber, and you normally charge 100 bucks to show up and fix a toilet leak.
Well, if I ask you to show up and repair my toilet, and in exchange I prepare your tax return,
that is a swap of services, and we’ve bartered. That’s a direct exchange. And the fact that
we’ve just bartered services doesn’t make it any less income. It’s as if I prepared your tax
return and you gave me $100 cash, and then I turned around and gave you that same $100
cash right back to you to fix the plumbing leak.
That’s an example of a realization event from a bartering swap, a service realization. You
have to remember that my labor is not part of my wealth. My labor--now going back to
classic economics--my labor produces wealth. So I don’t get taxed on anything until I’ve
produced something. When I produce your tax return, that’s the results of my labor, that’s
my service I’m providing. And that has readily ascertainable market value, and I’m getting
something for that. I’m not getting cash, but I’m getting an equal amount of services.
ROBERT BLOOMFIELD: Okay, so if we put these two concepts together--the ascertainable
market value, and the realization event--then we think about bartering of services like this, if
you know the market values of these items, and there is this type of swap, the IRS is going
to definitely view that as taxable. Is that right?
BRYAN CAMP: That’s right. And if you look at the history of bartering transactions, a lot of
it goes under the radar. My sister has a small business in Austin, and she does a lot of
swaps and bartering. I just tell her, well, you’ve got to report this stuff. But some of that stuff
is going to be just flying under the radar. It’s going to be completely dependent on the
taxpayer to report it.
However, starting in the late ‘70s people became enamored of this bartering idea, and so
you had more and more formalization of bartering. Let’s say I want a plumber to fix my toilet,
but I can’t find any particular plumber that wants a tax return prepared. If I’m part of a
bartering club, I can now prepare a tax return to a carpenter, and I’ll get a trade credit, as it
were, in the bartering club. I can then go use that trade credit to acquire the services of a
plumber who belongs to the bartering club. This is, of course, the classic metamorphosis of
a bartering economy to a currency economy. Because the trade credits are now serving a
function like currency, you can purchase a variety of goods and services with the trade
So that’s the way that you would be able to then transform a strict bartering regime into
something that looks more like a currency regime. What happened in the ‘70s was people
started doing that all over the place, and the economics of it got to be huge. When that
happened, Congress intervened and said, “Okay, we’ve got to do something about these
bartering clubs.” And what did they do? They said, “Well, let’s put a reporting transaction on
it,” because, you know, when you’re doing this, this is all income. So we’re going to make
the bartering club--the owner of the club, the administrator of the club--report on a form to
the Internal Revenue Service the bartering activity. Now you can bet that people are going
to start reporting that because it’s the old, you know--
ROBERT BLOOMFIELD: I think you’re sending chills through the audience. Everyone has
visions of receiving a 1099-MISC form or something like that from Linden Labs.
BRYAN CAMP: Yeah, 1099-SL.
ROBERT BLOOMFIELD: Yeah, away you go. But I want to hold off on applying these ideas
to virtual worlds until we get them all out there.
Let’s go to imputed income now. What is that?
BRYAN CAMP: Before we do that, I do want to address the property issue because there’s
that whole debate about virtual property or not. Imputed income works similarly for property.
And that is, you have to remember there are two ways that you get income from property.
Property produces income in two ways. First, the use of property produces income. So if I
own apartment buildings in real life and I rent them out, the rental stream--the stream of
rental payments--is money that arises from the use of my property. Likewise, if I own a stock
and I get dividends from that, that’s income from the use of my property; the holding of the
The second way you get money from property, of course, is to sell it. And you sell it at a
profit, more than what your basis was. So that’s the two ways that you get money that
property can produce income from you. What you have in this imputed income idea is, I own
my home. Well, to an economist, that is an economic benefit to me, ownership of my home.
That is, instead of paying out rent, I’m foregoing rent that I could get from renting out the
home and I’m using it instead. So to an economist, that’s just like I am earning the rental
value of my home, and I’m spending it, then, on a personal expense; that is, living there.
That was a debate, by the way, in the 1860’s when the first income tax was conceived of.
So this idea of imputed income from property has a long, long history to it. Yet, the
Congress has never taxed the income imputed from property. A moment’s reflection will
serve to say why. The valuation problem is one problem but, more importantly, how much
do you use your property? How do you use it? This would require the Internal Revenue
Service to come put a level on scrutiny on people’s lives that you just wouldn’t want. That’s
the idea of--I’m sorry, I was talking about realization, wasn’t I? Not imputed income.
ROBERT BLOOMFIELD: I guess I’m seeing that that issue is actually both. And if I can
just, I think, push that to imputed income. It’s what if you spend a whole bunch of time, then,
in your house redecorating or doing things like that, which is going to increase from the
economist’s perspective, that is going to increase the value that you’re extracting from the
use of your home.
BRYAN CAMP: That’s right.
ROBERT BLOOMFIELD: Also, you would have to try to identify what the value would be if
I, what, went out and hired someone else to do this, and how much is that worth to me.
Again, it seems very intrusive.
BRYAN CAMP: That’s right, it is. And that would be why we don’t tax imputed income from
ownership of property. But we also don’t tax imputed income, or income that’s imputed, from
services. That is, if I prepare my own 1099, or if I prepare my own tax return, even though
that’s worth $100 on the market, I’m not going to get taxed on that because I’m only
benefiting myself. And I’m using my labor not to create wealth, but to create a self-
betterment, if it were. It’s a self-benefiting service. Even though there’s a measurable market
value, and even though I’m clearly realizing the benefit, we can point to the transaction. We
can say, “There, you finished out your return, you filed it. At that point you had an extra $100
of wealth, Mr. Camp, because you created that.”
You can take this to all kinds of extremes. My dad used to cut my hair, but my wife doesn’t
let me touch my son’s hair. We go to the barber, right?
ROBERT BLOOMFIELD: We got the number two attachment with a bowl over our head.
BRYAN CAMP: I could now put an example in about cleaning house too. You know, some
people hire people to clean their homes or fix their meals. I just read an article about
personal chefs, right? There’s all that kind of stuff that goes on, but tax administrators would
go nuts trying to enforce some kind of a regime that attempted to measure all the economic
utility experienced by every individual for every self-benefiting activity. I mean, can’t you
imagine Rachael Ray getting audited by the Internal Revenue Service and saying, “Well, I’m
sorry. You valued your self-prepared meals a value of McDonald’s, and we think they’re
valued a little bit more.”
ROBERT BLOOMFIELD: So clearly you’ve got a very consistent message here, which is
although the IRS may have the right to take lots of our money with a heavy hand, the way
they do it has to be light-handed. It can’t be intrusive; it can’t be highly subjective so that
they have to grill us on how we experience it and what we would personally be willing to
pay. So that’s coming together for me.
So let’s jump to Second Life. Let’s jump to figuring out exactly how we’re going to apply this.
Let’s talk about the ascertainable market value, for starters. Actually, let me take a step
back. It seems like it makes sense to split events in Second Life into two types. One is
where you are trading virtual goods for other virtual goods, or services for services, and the
other is where you’re getting Linden dollars. Do we have ascertainable market value for
either of those, both of those?
BRYAN CAMP: Well, that’s what raises the question in most people’s minds in the first
place. That’s what Ted’s paper got started on. And if everyone wants to blame Julian
Dibbell, you can blame Julian for calling the IRS, although he didn’t have the moxie to
actually send in a private-letter ruling request.
But this is why I got involved. I was looking at a private-letter ruling that the IRS wrote to
WorldWinner, a casual gaming company. It was WorldWinner who sent in the request to
figure out whether there was income to its clients that they had to send 1099s on. That’s
how the issue is quite more likely going to come up. And you’re right to focus on the
distinction between a virtual swap of virtual property and a, quote, sale, unquote of virtual
property for virtual currency, if you will. Neither of those can you make a plausible argument
that there’s no ascertainable fair-market value. I mean, Lindens are traded regularly.
If I’m in Second Life, and I’m in the business of creating wedding dresses--let’s say I have a
little wedding dress shop where I create virtual wedding gowns, and I sell them. Let’s say I
swap a virtual wedding gown for a virtual lightning storm. Those both can be sold for
Lindens, and Lindens can be linked to U.S. dollars. It’s just not credible to say there’s no
readily ascertainable fair-market value for items that are traded either for other items or for
virtual currency. So that’s out. I mean, you can’t use that escape hatch from calling what
happens in Second Life gross income.
ROBERT BLOOMFIELD: So basically, the IRS would say, “I went to this web site, or
searched Second Life, and I found that you can buy this particular lightning storm for 4,000
Lindens, or whatever it would be. So you lose that argument on the ascertainable market
BRYAN CAMP: Right. Because 4,000 Lindens trade for, what, 100 bucks?
ROBERT BLOOMFIELD: No, no, no. A lot less than that. You know, it’s so hard to divide by
265; I’m not going to try doing that on air.
BRYAN CAMP: Two hundred--yeah. Ten, ten bucks, something like that. I don’t know. I like
to use simple numbers myself. I’ve got a simple mind.
ROBERT BLOOMFIELD: No doubt we’re going to see a bunch of lawyer jokes popping up
here in a minute.
So let’s move on, then--realization.
BRYAN CAMP: So realization. Realization is a more likely way of getting out of Section
61’s reach. That is, you might say, “Look, what I’m doing on Second Life may have
economic value, but I’m not cashing out.” A Linden is a Linden; it’s not a dollar. A wedding
dress is not a dollar. A lightning storm is not a dollar. And here’s where Josh comes into the
picture in some sense. If you follow Josh’s argument that all of these things are truly items
of property in and of themselves, then the realization argument falls flat on its face because-
-you could say, “My lawnmower isn’t a dollar, and when I swap my lawnmower for a swing
set there’s no trade of cash there.” And that’s right, but there’s still a bartering transaction of
property, and there you’re going to have--if the value’s high enough, you would have
Now, normally, with used property like that you won’t have income because you will have
paid more for the lawnmower than you’re getting for it. That’s why I like to use the bartering
of services as an example because your base of services is zero. But you could make the
same thing. Go back to my plumber and tax preparer swap. The tax preparer said, “I didn’t
get any cash.” The plumber says, “Well, I didn’t get any cash.” And they both look wide-
eyed, innocent, and yet they both realized--
ROBERT BLOOMFIELD: Yeah, we know that will be taxable in the real world.
BRYAN CAMP: So there’s a realization event there.
ROBERT BLOOMFIELD: So you see that extending directly into the virtual worlds, right?
There are a lot of people who--
BRYAN CAMP: If you take the position, as Josh does, that each wedding dress is a virtual
item that is a virtual property--everybody has property rights. There is an owner of the
representation of the dress, and there is an owner of the script that produces the
representation of the dress. And that’s different from the owner of the virtual world, Linden
Labs. Now, if you take the position, however, that none of those is property in the sense that
the law means, but that the property is simply in the user account--that is, I click through my
end user license agreement, I create an account, and I create value in that account. If I sold
or swapped that account, if that’s the property, now you’ve got a pretty strong realization
argument that anything that happens short of that is not realization.
ROBERT BLOOMFIELD: Now, in your paper you talk about an argument against
realization, which I have heard I think a hundred times in Second Life. And by the way, I
should say you get props in the backchat. I don’t know if you noticed it, but people are
saying they’re impressed with your apparent knowledge of the types of transactions that
occur in Second Life. You’d have to do a little studying to know you can buy a lightning
Okay, so the argument that I’ve heard--
BRYAN CAMP: I like the ones that you can actually direct the lightning to kill somebody or
ROBERT BLOOMFIELD: I didn’t know about those. So the argument, you have Zelda, a
fictional taxpayer, saying, “Look, there’s just so much uncertainty if I’ve got assets, property,
whatever tied up in Second Life. I mean, who knows what Linden Labs is going to do, or
even if I have Lindens they may stop supporting the currency, and it will crash. Who knows
what will happen?” And you don’t like that argument.
BRYAN CAMP: Well, that’s right. The argument doesn’t work if you think of Zelda--in my
article I use her as a wedding dress designer--if she has property rights in her virtual
wedding dresses and her virtual wedding dress script. In that case her argument that there’s
no realization is pretty weak. Because a lot of times people think--I mean, the argument
about realization doesn’t depend on real-world economic events or any kind of world
economic events. Those are economic contingencies. Realization is talking about a legal
In the real world you can always make the same claim that either micro events, like I could
be in a car wreck tomorrow and die--or macro events, you know, George Bush might push
the button. That would be something that prevents a realization of income. Well, yes, but
that doesn’t make it not taxable. Those are simply economic contingencies that we all run
the risk of. Every small businessperson runs the risks of that.
So in some sense, Zelda’s argue, or people in Second Life’s argument, that Linden Labs
can pull the plug, it proves too much. If that was a good argument to escape taxation none
of us would have to pay taxation, at least as long as the current administration is in power.
Ooh, did I just say that?
ROBERT BLOOMFIELD: It’s okay. We can edit that out.
BRYAN CAMP: Yeah, okay. If you say, however, that Zelda has no property rights in the
virtual wedding dress or whatever, but she does have an account at Linden and that
account is governed by the terms of the contract with Linden Labs, and so long as her only
right is the contractual rights, which are actually a kind of property in and of themselves.
They’re called [chos?] action. Like Mark Bragg did in Pennsylvania, you can sue based on
contract. And that right to sue is itself a piece of property. You can sell your right to sue. In
fact, when I was at the Internal Revenue Service some of my clients, the revenue collectors,
would go out there and they would seize somebody’s right to sue. We once took a fellow’s
right to sue Exxon, and it ended up getting a $5 million judgment. Not only did he pay off his
tax liabilities, he ended up a millionaire. Not a bad result.
So that itself is a piece of property that can be bought and sold. And if that’s the level of the
property right--if the level of the property right is at the account level, then you can think of
that as, well, that’s just like a share of Google stock. So everything I do within Second Life
adds to the value of my account, but that’s not realization yet. That’s where you can have a
strong argument for realization. And Leandra Lederman, another tax scholar at Indiana,
Bloomington, who works with Josh, has made that argument. I don’t like the argument
because I think it leaves you too vulnerable to change.
So I like the imputed income argument best. That is, what I like to say is, look, Second Life
activity is confined to Second Life until you cash out. So everyone agrees that once you
cash out, once you trade the Lindens for U.S. dollars, that’s a transaction that creates
income. How much income? Well, that’s a debatable point because you then can argue that
you had to spend dollars to create the value in the account that you then cashed out for
Linden dollars. But I’m not too interested in that.
ROBERT BLOOMFIELD: Not the topic of today.
BRYAN CAMP: That’s off the topic, right? I’m not talking about deductions; I’m not talking
about basis. I’m simply talking about do you have an item of gross income. And certainly
when you cash out Linden dollars to U.S. dollars, those U.S. dollars are gross income to
you. If you cash out a wedding dress, that’s gross income to you if someone buys it from
you for actual U.S. dollars.
So that’s the easy part. The hard part is transactions short of that. What my argument is on
imputed income is that Second Life activity occurs wholly within Second Life. It’s like, “No,
duh.” But what that means for imputed income concept is, if you can look at this as just a
activity that enhances your ability to perform, or to conduct your activities in Second Life,
and goes no further, then it’s confined to self-help. It’s really a self-realization event or self-
benefiting in the same way that any activity in real life is that just benefits to you. So, for
example--and I call this my analogy to the stage. All the world’s a stage; well, Second Life is
a particular type of stage. As long as the items that are traded in Second Life stay on the
stage there’s no tax consequence. It’s only when they come off the stage--that is, cash out--
that there is a tax consequence.
I apologize to anybody that--I call it “play.” And I don’t mean play like gaming play. I mean
play like in “the play’s the thing.” That is, virtual worlds, including Second Life, are a platform
for role playing. You see me there, but what do you see? You see my avatar. I mean, I don’t
have a beard. Or maybe I do, I don’t know. I can make my avatar anything I want. And if I
had any skills, and I wasn’t a complete newb, I would be able to get up and dance a jig and
do all kinds of things while I’m talking. But I can’t because I can barely operate--you know, I
can’t even read the backchat here.
But it’s a role that I’m playing that you’re looking at in the Second Life. As long as that is
true, I claim, then we have the same imputed income issues that we have with real-life
imputed income, with the corporeal imputed income. So we don’t want the intrusion of the
government into this sphere so long as there is this sort of hermetic seal between what goes
on here and what goes on in real life. I like that argument--go ahead.
ROBERT BLOOMFIELD: In the backchat, actually, what people are saying--you know,
you’re talking about this hermetic seal. What a lot of the people are writing about, say
Johnny Kuhn(?), for example, is saying, “Well, what about the Metagrid?” I mean, this seal
is basically starting to become more and more permeable.
BRYAN CAMP: Well, it’s certainly permeable in some sense, but I mean seal in the
economics of it. In order to--
ROBERT BLOOMFIELD: It seems like we’re not going to be that far from the point where
it’s relatively common to be able to trade, for example, Lindens for Wild Gold or for non-
gaming worlds; you know, currency in another type of world that’s also commerce related.
Or, you know, I click a button in Second Life, and 10 minutes later Dominoes has taken my
Lindens and comes to my door and gives me pizza. Now, at that point it sounds like we’re
getting dangerously close to the barter-style economy.
BRYAN CAMP: That’s right.
ROBERT BLOOMFIELD: So that would probably be the type of event that would change
your mind on taxability?
BRYAN CAMP: Yes. Right now Lindens are simply what I call units of play. They simply
allow you to continue your role play in Second Life. And that’s what they’re good for: you
can buy virtual wedding dressing, lightning storms, butterflies, fountains, property--you
know, representations of all of that stuff--but you can’t buy pizza with Lindens. If you could,
well, that’s a crack. That’s leakage. If you could buy other things with Lindens, like Nike
shoes that you can put on your corporeal feet, that would be another leakage. What about
H&R Block? Instead of using Second Life simply as an advertising focus, what if you could
actually go into the H&R Block office in Second Life and have your tax return prepared?
You’d transmit all your financial information and they would prepare your return. You’d
receive the service, ostensibly, in Second Life, and you would pay--most importantly--you’d
pay with Lindens. So when H&R Block starts to accept Lindens for tax return preparation
services, well, that’s a huge leak. At that point you have to say, “Well, now these Lindens
are really looking like trade credits,” and we’ve had experience with trade credits.
ROBERT BLOOMFIELD: Yep, and they’re taxable.
BRYAN CAMP: That’s right.
ROBERT BLOOMFIELD: We’re just about out of time. I want to thank you so much for
coming on to Metanomics and talking to this audience about something that clearly, from the
backchat, is pressing a lot of buttons. You know, what I’m seeing right now is, really, people
are wondering whether the nature--whether what you’re talking about just then is really
going to happen so soon that you’ll have to get that paper published quickly so that you can
move on and talk about taxation in Second Life with a permeable membrane.
So the paper that has been the basis of our discussion is called “The Play’s the Thing: A
Theory of Taxing Virtual Worlds,” by our guest, Bryan Camp. I know that you can find that
on ssrm.com. You can just Google SSRM and Brian Camp--
BRYAN CAMP: Yeah, you can do a search function, and my first name is B-R-Y-A-N, last
name is C-A-M-P. You’ll pull up the papers, and in one of them you’ll see taxing virtual
ROBERT BLOOMFIELD: Now, that’s a working paper still? Is that right?
BRYAN CAMP: No, no. That’s going to be published next month, actually, in Hastings Law
ROBERT BLOOMFIELD: Oh, wonderful. Congratulations on that.
BRYAN CAMP: Thank you.
ROBERT BLOOMFIELD: And thanks to everyone who helped host a stream of SLCN’s
version of this. Thanks again, Bryan, for showing up, and thanks to metaversed.com and
Nick Wilson for running, you know, basically producing this event.
This is Beyers Sellers, Rob Bloomfield, signing off for Metanomics. Boy, I can’t even
remember what day it is today, so I’m going to have to check and see what happens next
week. But thanks anyway for coming, and check out Bryan’s paper. Bye-bye.
[END OF AUDIO]