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Business - Written by on Thursday, December 4, 2008 18:13 - 5 Comments

Naumi Haque
Real tax on virtual currencies

In an unprecedented move (as far as I know), the Chinese government recently announced that it would be levying a tax on virtual currencies used in online games and Web communities. According to a recent Wall Street Journal article, the new tax will be 20% on all profits from virtual currencies. However, it remains to be seen how this will work in practice. The WJS notes that, “taxation officials are granted the right to determine the original price of online virtual currency if the individual fails to provide proof of an original price,” but as one interviewee noted, “it’s difficult to prove the original value of virtual currency.” It seems to me like this could lead to a great deal of ambiguity, including issues around double-taxation and over-taxation, and it’s no surprise that the initiative is drawing fierce opposition from China’s online population.

The proposed tax will affect activities like online gold farming (in World of Warcraft) and other situations where gamers profit from the buying and selling of virtual currency. It will also target individuals who use virtual currencies to purchase online services such as those offered by China’s popular Tencent Web Portal and IM services. Earlier this year Ming blogged about Tencent and the Chinese government’s concern that the virtual Q-Coin could undermine the value of China’s real currency, the Yuan. It appears as though those fears have intensified as the most recent move follows a government ban earlier this year on the conversion of virtual currencies to Yuan.



5 Comments

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Yin
Dec 4, 2008 22:34

It is very interesting to see how westerns think about China. Something is different here, as many people may think, unlike other countries with an adequate legal system, the one here is anything but enough to regulate its people.
so every time a pact or something is issued, don’t take it seriously, especially when it draws fierce opposition from the population, on such an occasion as which it will never be applied in practise.
Trust me, I seeing enough cases concerning.

Lars Plougmann
Dec 5, 2008 10:05

Considering that frequent flyer points are a virtual currency, the discussion about taxation has been going on for a while and I suspect several countries do tax frequent flyer rewards.

Tel
Dec 5, 2008 19:29

Can’t they just tax the proceeds when the conversion to real currency occurs?

Lars Plougmann
Dec 7, 2008 18:36

They can; and that’s what I believe happens in Denmark where you have a tax liability upon purchasing a ticket paid for with frequent flyer points.

Naumi Haque
Dec 8, 2008 10:45

Hi Yin, thanks for the on-the-ground perspective from China!

In terms of frequent flyer points; it seems odd to me that these would be taxed, since the underlying purchases you make to earn those points are taxed, and you are making those purchases with after-tax employment income. Not saying governments can’t do it – they certainly can – but it just doesn’t seem quite fair. Lars, sounds like what you’re saying though, is that in Denmark when you buy a ticket with points, you pay the ticket price plus sales tax. That would be different than treating points as income, subject to income tax right off the top.

In terms of China, it seems like what they are aiming for in an income tax on virtual currency.

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