China to tax virtual goods

Individuals who gain income from virtual-currency transactions in China are now expected to pay in taxes 20 percent of their profits, or 3 percent of the total value of the transaction.

While deflation hits the United States, inflation is hitting the world of digital assets in Chinese video games and virtual worlds.

Thanks to a new attempt at taxing virtual assets, in-game goods and currencies are experiencing the first signs of inflation.

The transaction volume of digital "assets" reached 9.36 billion yuan ($1.37 billion) in 2007 and is expected to hit 11.12 billion yuan in 2008, according to 5173.com, one of China's major virtual-asset transaction platforms. And now the Chinese government wants a piece of the action: 20 percent. Reports ShanghaiDaily.com:

After individuals gain income through virtual-currency transactions, they should go to the tax department to pay personal income tax within seven days of the day after the transactions. For those who can provide proof of the original value of the property, they will be charged 20 percent of their profits, and for those who cannot, they will be charged at 3 percent of the total value of the transaction.

You have to admire the tax authorities who think that this concept will work. Supporting the idea are game providers that want users to keep their purchases in-game.

"In principle, we don't encourage players to buy items offline," said Tao Junfeng of The9, the operator of World of Warcraft in China.

I have no idea how U.S. tax laws apply to virtual goods on sites like Facebook. Does Facebook have to pay taxes on the transactions? (If anyone knows, I would be interested.) But taxation gets complicated with point schemes, in which users buy credits instead of assets, and with resellers such as Chinese gold farmers.

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