Tax liability concerning the online game 'Entropia Universe'

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Questions concerning tax liability in connection with participation in the game 'Entropia Universe'

The Directorate of Taxes refers to the tax assessment office’s letter dated 28 March 2007 with appendices concerning tax liability linked to participation in the online game “Entropia Universe”, as well as to the letter dated 4 December 2007.

Facts

It is understood that “Entropia Universe” (formerly “Project Entropia”) is a virtual universe with a virtual economy. ”Entropia Universe” has its own “monetary unit” called PED (Project Entropia Dollar). The game also has the “monetary unit” PEC, which is 1/100th of PED (Project Entropia Cent). 10 PED = 1 USD. The activity takes place in cyberspace. The “game” can be downloaded free of charge. In order to trade in “Entropia Universe”, you must use PED.

PED can be exchanged for USD and credited to a bank account. An ATM card has also been introduced which can be used in ATM machines or to make purchases in the same way as an ordinary credit card. “Entropia Universe” is marketed as “The first virtual universe - with a real cash economy”.

According to www.wikipedia.org development of the game began in Sweden in 1995. “Entropia Universe” has over 650,000 registered participants from over 220 countries. There are an average of 600 players online at any one time. The game has a substantial virtual economy.

Legal assessment

Leisure activity/hobby
From a tax perspective, participating in an activity in a virtual world will in most cases be seen as a leisure activity/hobby. Income from a leisure activity/hobby is tax-free. The Directorate of Taxes assumes that most people take part in "Entropia Universe” as a leisure activity/hobby.

Income which results from participation in “Entropia Universe”, such as the buying and selling of virtual assets and letting will therefore be tax-free.

Commercial activity
The Directorate of Taxes will not exclude the possibility that, in certain special cases, questions may arise regarding whether the income was generated through commercial activity; see Section 5-30 of the Tax Act. In order for income to be taxed as business income, the taxpayer must carry on an activity which is commercial in nature and which objectively is likely to generate a profit, if not during the year that the tax assessment concerns, then at least in the slightly longer term. The activity must have a certain scope and be aimed at a particular duration. The activity must be carried on at the taxpayer’s expense and risk.

If commercial activity is taking place, all income will be taxable. Costs which are incurred in order to acquire, secure or maintain commercial taxable income are deductible; see Section 6-1 of the Tax Act. National Insurance contributions and surtax will be assessed.

Taxpayers who carry on commercial activity must submit an income statement as an attachment to their tax return; see Section 4-4 first paragraph of the Tax Assessment Act. Anyone that is obliged to submit an income statement will be subject to the bookkeeping obligation; see Section 2 second paragraph of the Bookkeeping Act. Among other things, the bookkeeping obligation entails an obligation regarding bookkeeping, specifications and documentation. As regards when sole proprietorships are required to prepare annual accounts, see Section 1-2 of the Accounting Act.

Temporary income - gaming
Temporary gains, including gains made in connection with gaming, are taxable under Section 5-50 first paragraph of the Tax Act. Gains will be taxable when they exceed NOK 10,000.

The threshold amount applies to each individual gain. When calculating the gain, a deduction is given for the stake necessary to play the game concerned. Taxpayers must be able to document/substantiate their gains and the monetary stakes they paid in order to generate them.

At the present time, the Directorate of Taxes does not have sufficient information to assess whether it may be appropriate to tax income from “Entropia Universe” or a proportion thereof as temporary income under Section 5-50 first paragraph of the Tax Act.

Currency
There is a fixed exchange rate between PED and USD. Thus, there will be no currency gains or losses when exchanging money from an account in the game to USD.

Exchange rate considerations may arise between NOK and USD. 
Exchange rate gains are generally taxable. Exchange rate losses are generally deductible; see Section 14-5(5) of the Tax Act. Exceptions apply to gains and losses attributable to foreign means of payment for personal use, e.g. when travelling abroad; see Section 9-3(1)(b) and Section 9-4 of the Tax Act.

Wealth taxation
The virtual currency PED can be exchanged for USD. The value of a taxpayer's account in the game constitutes taxable wealth as of 31 December; see Chapter 4 of the Tax Act.

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