Virtual Currency: Commodity or Currency?

A policy issued in the real world created huge waves in the virtual world in October 2008. In its reply to the Beijing Local Taxation Bureau’s application to levy income tax on individuals who make money by selling virtual currency on the Internet, the State Administration of Taxation issued the following decision. Any individual who profits from reselling virtual currency purchased from online gamers should be subject to 20% personal income tax as the income arises from property transfer.

The news sparked a hot debate on the Internet. By November 8, over 50,000 responses had been posted under this news item published on news.qq.com on October 30. Many websites launched opinion polls, with 70% of all respondents against the judgment.

Opinions vary about whether income from virtual currency transactions should be liable for taxation “The State has begun to pay attention to Internet transactions carried out by individuals with virtual property. This is a prelude to improvement of related laws and regulations, and virtual property will be gradually integrated into the national economic entity and protected by law,” one industry expert said. Meanwhile, the reaction of proxy players (people who earn money by achieving skill levels for other players in online games) in several online game studios was not so welcoming. Most agreed that a 20% tax rate was too high.

The tax authorities and gamers have completely different views when it comes to tackling the virtual currency issue. The authorities are solely concerned by virtual currency, while gamers are more worried about transactions of virtual equipment. So the first obstacle is how to define virtual currency.

What is Virtual Currency?

Currency is commonly defined as a kind of commodity which can act as a medium of exchange, a unit of value, a standard for deferred payment, or a completely mobile store of wealth. By nature, currency is a universal equivalent. The main features of currency are its financial and circulatory characteristics on the basis of being a universal equivalent.

Since virtual currency is perceived as currency, it should have basic financial and circulatory characteristics. Based on this definition, the current virtual currencies in China include mobile phone top-up cards, Q-coins and online game top-up cards. Also called point cards or tokens, online game top-up cards are a special kind of virtual currency in broad circulation. But most of them serve only one specific computer game.

Many netizens are concerned about whether game coins are virtual currency. The function of a game coin is to assist exchange of virtual goods in a computer game and make mock transactions more interesting. It’s a kind of game prop, instead of a circulating equivalent in the real world.

“Although it’s called a coin, it is actually similar to glass balls in the game of marbles, or paper cards in Snap. These coins are a prop,” one expert analyzed, “Game players may purchase certain kinds of game coins with cash, but they still don’t have the characteristics of currency. Game coins are pure consumables in a computer game, and their value is totally determined by market demand. Nobody-not even their distributors-can guarantee their value. Furthermore, even the game setup changes, the way to obtain such game coins remains unchanged.” Therefore, since most game coins are not universally acceptable and can’t be used to purchase goods outside the realm of specific computer games, it can be concluded that they are just a commodity.

But the Q-coin is different. As the number of users grows, the Q-coin has begun developing generalized circulation characteristics. It can not only purchase various services provided by Tencent Inc., but can also be accepted by sellers as a payment currency for online transactions not related to Tencent. Both the point card and the Q-coin have now become proxy currencies which have stable exchange rates to the RMB in online games.

Article source:http://www.cbfeature.com/china_tmt/news/virtual_currency_commodity_or_currency