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Death and something, *ponders*... - Frag - 02-14-2007
(Reposted from http://news.yahoo.com/s/pcworld/20070130/tc_pcworld/128270)
Virtual Gold Could Draw Real Taxes
Julian Dibbel Mon Jan 29, 8:00 PM ET
Imagine getting a tax form and a warning to report taxable income from the IRS every time you collected rent on your hotel-stuffed Boardwalk and Park Place. Only in a bad dream, you might think; but don't underestimate the U.S. tax code's potential for surrealism. While the IRS won't be taxing Monopoly cash anytime soon, another variety of play money--earned and spent by millions of online gamers each day--may not be so safe.
Sometime in the next few months, the Joint Economic Committee of Congress will publish the results of an ongoing investigation into the economies of World of Warcraft, Second Life, and other massively multiplayer online game spaces (MMOs). The report's number-one bullet point will address a question that the inhabitants of these spaces may soon wish had been left unasked: Do the tax laws of the real world apply to virtual-world transactions?
For most people unacquainted with MMOs, of course, it's a mystery how the question could be asked at all. If you're among the mystified, you are probably unaware of the key feature that distinguishes most virtual game currencies from Monopoly money: an exchange rate.
Real-Money Trades
Real-world dollar values of (from left to right) a pair of magic gauntlets in World of Warcraft, 5000 EverQuest II gold coins, and a beachfront slice of real estate in Second Life. At this writing, the Azerothian gold coin--the in-game currency used by World of Warcraft's 7.5 million players to buy and sell the game's magic armor, weaponry, and other items--trades on eBay at an unofficial rate of seven to the U.S. dollar. Though most game companies try to ban or discourage these free-wheeling out-of-game markets, Second Life actively encourages a real-world type of economy with an official market-driven rate of roughly 50 cents per 100 Linden dollars (Second Life's currency). But whether the game companies like it or not, where there's an MMO, there's a way for players to buy what they want in the game with real money.
And naturally, where there is a way to pay real money, there is a way to collect it. From the player who sells his WoW character on eBay for a quick $300 profit to the laid-off factory worker making $7000 per month selling Second-Life animations he creates that let game couples dance and assume other poses, virtual worlds have blurred the line between work and play almost past recognition. Successful entrepreneurs like Second Life real-estate magnate and real-life millionaire Anshe Chung are the pixel-perfect face of a fast-growing "real-money trade" that is estimated by Steve Salyer, former CEO of online game item and currency retailer IGE, at nearly $1 billion worldwide--every penny of it as taxable as any other industry's real-money revenues.
Taxing Trades
But as any accountant can tell you, real-money revenues are not the only kind of income that draws the tax man's eye. The labyrinthine U.S. tax code includes many provisions that can leave you owing income taxes without ever earning a dollar.
American Apparel's Second Life store sells virtual fashions to players.Consider "bartering" and "prizes" as outlined in IRS publication 525 ("Taxable and Nontaxable Income"): Anyone who acquires goods or services either in trade or at play must report as income the "fair market value" of those goods or services. Give your plumber a rare baseball card in exchange for fixing your pipes, and you both owe taxes on the dollar value of your respective ends of the deal. Win an SUV on Wheel of Fortune, and the government will want its share of the sticker price, whether you sell the car or not.
So if virtual loot can be sold for real money and therefore has real value, what's to stop the government from concluding that every time a fallen virtual monster gives up its prize, or a fistful of Linden dollars is traded for a virtual hair weave, a taxable event has occurred?
Don't ask the IRS. Pressed for an official opinion on the taxability of virtual trades, IRS spokesperson Nancy Mathis would say, via e-mail, only that "whether exchanges constitute bartering depends on the facts and circumstances of each case." As to whether that magic helmet won from a slain dragon is a taxable prize, the answer was similarly noncommittal. "[The] bottom line," Mathis wrote, "is this: You can receive income in the form of money, property, or services. Generally, your income is taxable unless it is specifically exempted by law."
Translation: The IRS is keeping its options open. And according to former IRS lawyer Bryan Camp, now a professor of tax law at Texas Tech, those options definitely include taxing virtual gold. "Section 61 of the Internal Revenue Code says that gross income is any income received from any source," says Camp. "And if someone in the IRS thinks that a [virtual-world] transaction represents the receipt of either cash or services or property, and that has a fair market value, then yes, that's going to be income." When and if that that decision is made, Camp explains, there are only two ways to override it: Take it to the courts, which may or may not disagree with the IRS's interpretation of the law, or take it to Congress, which can pass new laws that leave no room for interpretation.
Congress Steps In
Enter the Joint Economic Committee, an advisory Congressional committee influential in framing the debates that shape many laws. When the committee launched its research project on virtual economies in October, then-JEC chair, Representative Jim Saxton (news, bio, voting record) (R-New Jersey), made it clear that he wants to restrict the IRS's reach into virtual worlds: "There is a concern that the IRS might step forward with regulations that start taxing transactions that occur within virtual economies," he said. "This, I believe, would be a mistake."
The antitax position isn't surprising coming from a solid Republican like Saxton, but there's more to it than that. His chief economist, Dan Miller, is a veteran gamer, with hours of World of Warcraft under his belt and the level 41 night-elf priest character to prove it. "We're not approaching this as a partisan issue," says Miller. "But if there's a new issue, you want to set the terms of the debate...to make sure that we're talking about this in a sensible manner, not waiting until it's too late. I don't think it's a good idea to wait until the IRS has already started writing rules."
That's not to say the JEC could forever banish the IRS from the economies of virtual worlds. Estimates vary, but some put the total wealth created annually within those economies (not just that part of it bought and sold for real money) at somewhere around $10 billion. And that figure will only grow as established businesses get in on the game: American Apparel now runs a Second Life store selling virtual versions of the clothing chain's fashions for Linden dollars. With serious money at stake, it may become harder and harder to resist the political imperative to tap into the wealth of virtual worlds.
Even Miller concedes the point. "Maybe down the road, it becomes something that's unavoidable," he admits. But in the meantime, he argues, any tax grab would be penny-wise and pound-foolish: "I just see so much potential in these virtual worlds, beyond simple gaming and social interaction, that it'd be a real shame to shut the door on these opportunities before they ever get started."
~Frag :blink:
edit: fixed the ")" at the end of the hypertext link that prevented it from proper redirection.
Death and something, *ponders*... - Delc - 02-14-2007
Why does second life get so much press? Its just an mmo version of the sims, and only has ~65k subscribers. This puts it well behind at least a dozen other MMOs that never get any press, with the exception of WoW.
As for the taxing gold. Good luck with that. It has no value and can be created at will by people in game and by Blizzard. Its in game value is about 1/10th what it was 2 months ago, try explaining why to someone at the IRS trying to maintain an exchange rate who has never played an MMO.
I blame second life and its real money <-> game money conversion. If it wasn't for the IRS would leave the rest of the gaming world alone with our piles of imaginary money.
Death and something, *ponders*... - Klaus - 02-14-2007
Quote:Why does second life get so much press? Its just an mmo version of the sims, and only has ~65k subscribers. This puts it well behind at least a dozen other MMOs that never get any press, with the exception of WoW.
As for the taxing gold. Good luck with that. It has no value and can be created at will by people in game and by Blizzard. Its in game value is about 1/10th what it was 2 months ago, try explaining why to someone at the IRS trying to maintain an exchange rate who has never played an MMO.
I blame second life and its real money <-> game money conversion. If it wasn't for the IRS would leave the rest of the gaming world alone with our piles of imaginary money.
Well, Second Life certainly made the problem worse by not officially disallowing the exchange, but games like WoW probably would have been enough to get this started. Even though it's against the terms of use to sell in-game stuff for real money, it happens, and lots. So, the IRS gets interested.
The comment about the fluctuating value of in-game gold is interesting: Suppose the exchange-rate to real moeny is dropping (in-game gold is worth fewer $$), under what scenarios can I claim a capital loss and actually deduct something from my taxes? I'm not a tax-law expert, but it seems to me that if I purchase 1000 gold for $40 today, then sell it next month for $20, that I've taken a kind of investment loss. Can I put this down on my schedule D?:)
This is all stupid. I hope congress and the IRS get a freaking clue and leave gaming worlds out of real-world tax laws.
Death and something, *ponders*... - Nystul - 02-15-2007
Quote:This is all stupid. I hope congress and the IRS get a freaking clue and leave gaming worlds out of real-world tax laws.
As stupid ideas go, this isn't nearly as stupid as people paying real money for virtual assets in the first place...
Death and something, *ponders*... - NiteFox - 02-15-2007
Quote:As stupid ideas go, this isn't nearly as stupid as people paying real money for virtual assets in the first place...Exactly.
And I think the IRS has actually found a way to do something most of us wish could happen - Putting a tax on stupidity:D
Death and something, *ponders*... - Rhydderch Hael - 02-15-2007
Quote:As stupid ideas go, this isn't nearly as stupid as people paying real money for virtual assets in the first place...Unfortunately, the exact same appellation can be applied to anyone who purchases a copy of Windows Vista, Mac OS X, Adobe Photoshop, or even Diablo II. You're paying money for computer data, a copy of program information.
Now, how one uses that purchased information is what gets hinky: be it for professional productivity, education, mercantile entrepreneurship, or farming for green dragons' eggs in the mythical realm of Catassia. You can argue the worthiness of the employment, but what is being employed is practically the same: time and money spent for computer information as a tool to attain some means.
Thus, I don't see this quite as silly. Then again, that means I don't see the taxation quite as silly, either.
Death and something, *ponders*... - Nystul - 02-16-2007
Quote:Unfortunately, the exact same appellation can be applied to anyone who purchases a copy of Windows Vista, Mac OS X, Adobe Photoshop, or even Diablo II. You're paying money for computer data, a copy of program information.
Those are not virtual assets. They are more along the lines of intellectual property. Companies spend real world time and resources developing the concepts into software, and we pay for the right to use a copy of said software, whether it be for something "useful" or mere entertainment.
You or I could develop the coolest item ever for World of Warcraft in a few minutes of time. The catch is that in order to maintain the balance of the game, such items must be rare and take a lot of playing time to acquire. Thus it is only for in game reasons that one must spend a lot of time in order to acquire vast wealth or rare items within the game. Thus you have something which is valuable in the game, and in order to be valuable in the game it must take a lot of playing time to get, and as a result it takes on a real life value equated to the amount of time one must spend acquiring it.
However, that (kill a monster, get a cookie, have fun *in the process*) is the very essence of the game. If it were not so, Blizzard could just give everyone maxed out characters with uber items and stockpiles of gold, charge $500 per copy, only develop end game content, and everyone would be happy. People are paying Blizzard for the game, and then paying other people to play it for them, all so that they can acquire a high status level in the virtual world. It is a very strange phenomenon, which erodes immersion and is detrimental to the gaming environment.
Imagine playing Monopoly, and someone whips out a real $20 bill and offers it to the player across the table for Park Place. It's within the rules, right? I would feel like, not only is this guy totally wasting his money, but he is kind of screwing up the game for the rest of us too. His $20 don't have any place in the virtual real estate world that I am trying to conquer.
Death and something, *ponders*... - Mithrandir - 02-16-2007
Quote:Imagine playing Monopoly, and someone whips out a real $20 bill and offers it to the player across the table for Park Place. It's within the rules, right? I would feel like, not only is this guy totally wasting his money, but he is kind of screwing up the game for the rest of us too. His $20 don't have any place in the virtual real estate world that I am trying to conquer.
This is actually a pretty convincing analogy, but I tend to disagree nonetheless. The difference lies in the fact that Monopoly games last only a few hours at most. Many of these MMOs have been around for a few years and will continue to exist many years from now - considering that the length of time is so substantial, is it really so ridiculous for someone to not mind spending $20 (or $100 or however much it may be) for something that has the potential to give them enjoyment over the span of several years? If Joe Blow has a 9-5 job, a family, etc. and will never have the time to acquire certain items/things that others with more free time can (but has some extra cash laying around the house), I can completely understand his desire to want to experience that aspect of the MMO that he otherwise would not be able to. Specifically addressing your Monopoly analogy, I agree with you that I would feel like that individual was wasting his money (unless he was just so rich that he doesn't care at all) but on the other hand, if he really wants that property that badly, more power to him.
The immersion-destruction aspect is a whole different issue that I can't really comment on since I never felt "immersed" in the first place playing a MMO, but I could understand how that could be a big issue for some.
Death and something, *ponders*... - Maitre - 02-16-2007
Quote:The comment about the fluctuating value of in-game gold is interesting: Suppose the exchange-rate to real moeny is dropping (in-game gold is worth fewer $$), under what scenarios can I claim a capital loss and actually deduct something from my taxes? I'm not a tax-law expert, but it seems to me that if I purchase 1000 gold for $40 today, then sell it next month for $20, that I've taken a kind of investment loss. Can I put this down on my schedule D?:)
This is all stupid. I hope congress and the IRS get a freaking clue and leave gaming worlds out of real-world tax laws.
The problem is that the IRS did in fact get a clue. If people are generating income for themselves through selling in-game items for real-life cash, then an investment market has been created. Just as the infomercial proclaims, trading currency can make you money by playing the exchange rate (using the standard buy low in order to get more dollars for your euro, and sell high when the rate swings and you get more euros back than you started with approach). Just because your WOW gold is only important in a virtual realm, it still can be used as an investment to play the exchange rate game.
If the tax code will be enforced on income generated in a virtual realm, then it should also recognize loss from that same virtual realm. If the sale of collectables and art must be claimed in terms of capital gain income, so should the sale of virtual items for real cash. The thing to remember is that income is only taxed when it is earned, and in the case of capital accumulation, this would be at the time of sale. So it seems to me that the accumulated online wealth is not so much in jeapardy as is the trading of such wealth for real world cash.
Death and something, *ponders*... - Klaus - 02-16-2007
Quote:The problem is that the IRS did in fact get a clue. If people are generating income for themselves through selling in-game items for real-life cash, then an investment market has been created. Just as the infomercial proclaims, trading currency can make you money by playing the exchange rate (using the standard buy low in order to get more dollars for your euro, and sell high when the rate swings and you get more euros back than you started with approach). Just because your WOW gold is only important in a virtual realm, it still can be used as an investment to play the exchange rate game.
If the tax code will be enforced on income generated in a virtual realm, then it should also recognize loss from that same virtual realm. If the sale of collectables and art must be claimed in terms of capital gain income, so should the sale of virtual items for real cash. The thing to remember is that income is only taxed when it is earned, and in the case of capital accumulation, this would be at the time of sale. So it seems to me that the accumulated online wealth is not so much in jeapardy as is the trading of such wealth for real world cash.
To be honest, if the IRS wants to tax me on the money I make when I sell that Krol Blade for real world cash, I would have no problem with that. As soon as I convert in-game items to real-world money, I can see paying tax. But charging me tax on the "fair market" value of the Krol Blade when I loot it is (I think) totally stupid.
Death and something, *ponders*... - Nystul - 02-16-2007
Quote:This is all stupid. I hope congress and the IRS get a freaking clue and leave gaming worlds out of real-world tax laws.
I think that is actually kind of the problem... the game worlds are out of the laws. As with many things in the realm of computer technology, the existing laws didn't really foresee what has come to pass. The potential exists here for people to make thousands of dollars in real money, but how are those transactions defined? Is it income for a service provided? Taxable sales? Capital gains? The IRS is obligated to apply the tax codes as Congress has written them. It becomes less a matter of common sense, and more a matter of which law actually applies legally to this situation. Since people are making lots of real world money for this stuff, it potentially screws the rest of us unless the laws are adapted to protect amateur gamers. When IRS finds some guy raking in huge money through a sophisticated ring of MMO players, they are going to want their piece of the pie, and they are going to have to apply whatever laws fit, and who knows what their lawyers will decide and what ramifications it could have on the rest of us.
Death and something, *ponders*... - Guest - 02-26-2007
now thats way out of line.just because online gaming is boomin,it doesnt mean they have to dip their filthy hands in it.they should think of other ways to squeeze their taxes from.:angry: