Are virtual currencies becoming real?

Many people view virtual online currencies; the kind used in online websites such as Second Life for example, as being wholly different from their real life counterparts. Many online games have their own currencies with their own currency conversion rates but until now they have not been viewed in any real terms.

However that may change on a large scale if other countries follow the example of a ruling made by the South Korean government last January, which allows virtual currencies to be traded for real money. The previous year, the country also began taxing currency trading.

The practical ramifications of this could be that in-world transactions between players should be treated just as are the real world transactions we make every day.

Needless to say this has drawn lots of comments from gamers in particular all across the Internet. One fear is that  because such currencies are now viewed by South Korea as being on a par with real currencies, they will be taxable as such.

In the United States, virtual transactions aren’t being taxed — yet — because of questions about who actually owns the virtual property or currency, and whether the currency or property is limited in scope, said legal scholar Zachery Jones in an article for the Yale Law Journal.

However, as more people begin to find ways to convert virtual property into real world income it is becoming easier to establish an effective exchange rate and as such it seems like virtual currencies are becoming comparable to real ones.

Right now of course, this ruling only concerns South Korea. But there is every chance that other countries including Sweden and the U.S. will follow suit. It is not so much the announcement of this new ruling that is relevant, but how it will progress into the future that counts.

It is interesting to note in this instance that countries such as China are actually taking the opposite stance and attempting to suppress the commercial use of virtual currencies.

The general opinion among gamers seems to be that the ruling in South Korea is only going to open the floodgates for more countries to follow. Whether or not this happens – and how long it will take – depends on how other countries react to the ruling. Of course it will also take time to see how the fallout affects those who are living in South Korea and need to declare such earnings. This could be a story that will run and run.

One possibility is the currency trades will be taxed, but not in-game trades of virtual items, wrote Indiana University Law School professor Leandra Lederman in an article for the New York University Law Review.

“In virtual worlds that are intentionally commodified, such as Second Life, tax doctrine and policy counsel taxation of even in-world sales for virtual currency, regardless of whether the participant cashes out,” Lederman said.

Suffice to say, it will be interesting to see what happens and how governments decide is best to tax such an economy without killing off the very games which produce that economy.

Alex Johnson

Alex Johnson is a staff writer with CurrencyConverter, a free resource and information site dedicated to those who want to learn more about currencies and how foreign exchange markets work.

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