Taxing time

Four years ago, a 29-year-old surnamed Li recruited six young unemployed gamers and started an online "gold farming" studio in Beijing.

Gold farming is the practice of playing online games with the purpose of earning in-game items and virtual currencies – used to buy virtual goods and services – and trading them to other users. The gamers in Li’s studio play 12 hours at a time, seven nights a week, and sell their harvest on Taobao.com, an auction website, for real currency.

"It’s a good business," said Li. After all costs are deducted, the studio brings in US$1,500-3,000 a month.

Like most of China’s estimated 200,000 "gold farming" studios, Li’s has not been officially registered, and thus pays no taxes. However, his time may be up. China’s State Administration of Taxation announced in late October a 20% personal income tax on profits gained through the trade of virtual money.

If an individual can’t provide proof of the price originally paid for the virtual currency, the decision will fall to tax officials. Official rates for QQ coins, the most popular online currency, are RMB1 (US$0.15) per coin, but many transaction sites offer discounted rates.

Hefty margins

"This policy targets studios that recruit people for gold farming," said Cao Honghui, director of the International Finance Research Center at the Chinese Academy of Social Sciences.

"The sector is very mature, with hefty profit margins."

Those profit margins contribute to a huge virtual economy. According to research firm iResearch, China’s virtual asset transaction market, of which virtual currencies comprise more than 50%, is worth more than US$1.47 billion, and is growing 15-20% annually.

Growth has been driven by convenience. Virtual currencies can be used to buy a growing range of electronic items, and can even be used to skirt local restrictions on gambling. A lack of other options is another factor.

"China still lags behind in online payment methods," said Peter Lu, an independent internet analyst. "Young people also see owning virtual currencies as fashionable, and this further drives growth."

The new tax has sparked debate online and in local media. In a survey by China Youth Daily, 38.6% of respondents supported the tax, while 61.4% opposed it.

"When the real economy is under pressure, a booming virtual economy is a positive development," said Zhang Fan, a professor at the China University of Political Science and Law. He thinks authorities are wasting time and resources.

Cao at the International Finance Research Center disagrees. Since all traditional businesses are obliged to pay taxes, he argues, there is no reason virtual currency studios should be exempted.

Control issues

Previous attempts at controlling online transactions have been unsuccessful. China’s central bank issued an order in 2007 restricting online transactions and prohibiting online purchases of real goods with virtual money. Lacking an efficient supervision system, the ban didn’t work.

Tax officials say transactions will be monitored with advanced systems under the new policy, but provide few details.

These problems are not unique to China. Kausar Ahmed, a researcher at the University of South Australia, notes the US Internal Revenue Service is watching the development of virtual transactions, but won’t levy taxes unless virtual goods are converted into real money. Most US game operators include clauses in service contracts forbidding such transactions.

In China, Li will keep farming, but his voice betrays a new worry.

"There’s almost no way for authorities to monitor us. But I need to be more cautious now," he said.