Are profits from virtual businesses — selling virtual T-shirts or jeans to avatars inside a game world — actually income you have to report to the IRS?
Expect a muddy area of the law to get muddier: This morning virtual world IMVU, a PG-13 variant of Second Life with 600,000 active users, launched IMVU Music, a new service that lets that game’s avatars buy DRM-free music inside the game world and take it out — like onto their iPod. All four major music labels and many of the indies are participating. Which means people will be buying real-world goods (music) with fake-world currency (IMVU credits).
Previously, if you had a profitable business in a virtual world (and more than a handful of people make their full-time, real-world income doing nothing but running businesses in games like IMVU or Second Life) in order to buy anything “real” you had to convert your game profits into something like U.S. Dollars. Doing so keeps virtual world economies as closed ecosystems and leaves a paper trail (usually via a service like PayPal) a tax authority could follow. But buying real-world things with virtual profits before cashing out makes an end-run around tax laws, because virtual world companies don’t report profits to the IRS — only PayPal does. How can a company like Amazon (AMZN), which also offfers DRM-free music, compete with that?
Of course, IMVU Music is only just debuting today, and the number of IMVU users with serious profits is tiny. But if the idea of buying real world goods with virtual currencies catches on, expect a raft of new regulation to follow suit. China recently moved to tax its own virtual currency trade — Western governments may not be far behind.
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