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How Long Till Virtual Currency Taxation?
GameDaily has a piece on the thorny issue of taxing virtual currency. From the article: "The current tax law has a clause, #525 to be exact, entitled 'Taxable and Nontaxable Income.' This verbose, meandering clause describes all manner of abstract (legal, illegal and otherwise) means by which you can earn income. Some of these obscurities can only be taxed by the speculative and vague term, 'fair market value.' ... This clause also includes a statement about goods acquired through barter or won (prizes or cash) in a game. Technically speaking this means those 'earnings' are taxable the very moment someone comes into possession of them, regardless as to whether or not they are sold for money. While no one knows the exact worth of all the virtual assets floating around the MMO gaming-verse, estimates for the sale of these goods range as high as $880 million a year. Step back and think about that for a minute... EIGHT HUNDRED AND EIGHTY MILLION! That's a crapload of real world money! Money made during what can be considered the infancy of the genre. Can you imagine how exponentially greater this amount will be in a few short years? "
Taxing in-game earnings has come up before and it'll come up again. In the U.S., the Internal Revenue Service will eventually take notice of the phenomena when someone who makes lots of real-world money by selling virtual goods gets audited by an ambitous Revenue Agent. Until then, unless you're actually converting virtual goods into real greenbacks, there's not much to say on the subject. Any scaremongering about taxable events occurring inside a game is just FUD. It may be fun to talk about, but I notice that no one has yet made the news after obtaining a private letter ruling. Until someone sparks a written determination from the IRS, this is really a non-issue. Someday it'll be an issue, but not for a while.
I know that X million people are playing such games as WoW, but a lot of players sort of keep in their "circles." People who don't play the games don't really know much about them or the "cash value" of the assets. It will be a while, if ever, before there are any issues about this brought up. It will take everyone playing WoW, including the legislators, before anything like this even can happen. But where there's free money, and they know about it, it *WILL* be taxed.
Wouldn't they just tax you when you 'cash out'? Thats where the profits are.
You slay some MMO monster, and it drops a small pile of gold, jewels, and several IRS forms for you to fill in.
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I will point the government to the EULA which typically state you are not allowed to sell these assets for money. Granted a large number of people do, but most of the EULAs for MMOs prevent people from selling goods or accounts. So, since you are not allowed to sell your accounts, it seems pretty hard to tax them. Also, this would just add another layer of trouble to tax agencies. They would have to retrieve account information from the companies running MMOs and then calculate how much money the accounts are worth at FMV. This would present issues since this varies by character levels, item levels, amount of virtual currency, class of characters, etc.
I think there are a great many things limiting the taxation of this "income." So, don't worry. This will not happen anytime soon.
"Some days you just can't get rid of a bomb."
Buy Steampunk Clothing Online!
Will the IRS allow a one time, tax free gift to your in-game spouse for up to 100k plat?
If you destroy a no-drop item can you get a refund?
How bout deductions for funding your own crafting business?
Are repairs business expenses?
So many questions... and why do I think all the CPAs are going to be Druids?
(Sorry, no WoW experience, all EQ1 based references...cept the repairs)
to just tax the transaction point at which point you have to convert the virtual currency into the real thing. For instance, an EBay or paypal sale. It's easier (and more profitable) to tax all of EBay sales or paypal transactions.
If virtual currency ever gains real value (that is... you'd accept your paycheck in WoW gold instead of cash) then you might see taxation systems required to be in the game. But I doubt that will ever happen (Okay that's 50 gold pieces for the broadsword and I see you live in California so that'll be an 8% sales tax rounded up or 54 gold pieces.)
Tastefully insightful. i really agree with the wow comment
They better make it legal for me to sell them.
If/when that becomes the case, I think we'll find that 'market value' will decrease substantially, since the only people selling game-money will no longer be those who do it professionally and surreptitiously, but those basement/dorm dwelling merchants of the sort that drive in-game markets down by selling at prices that amount to a loss.
There are certainly parallels between virtual economies and certain forms of commododities trading:
- The traders acquire commodities "on paper", totally intangibly. (Has a CBOT purchaser ever actually taken delivery of 2,000 tons of orange juice concentrate?)
- The system within which all this buying and selling occurs is pretty much self-contained.
- The fundamental method of buying and selling is a bid system.
- Trades in some systems occur in non-US currencies.
So, is an MMO virtual economy taxable economic activity? It certainly has some of the same characteristics.Welcome to the Panopticon. Used to be a prison, now it's your home.
As long as I'm paying my virtual tax in virtual currency. I'm sure the creative folks at the IRS will be able to figure out what to do with 1 billion gold. Maybe we can even get a bridge from Alaska to Kalimdor out of it.
I wonder if the next step is to hear bob_robertson make endless comments like "If you didn't vote Virtual Libertarian, you asked for this"? *Me ducks* ;)
I dont see in-game items ever being taxed. Sure some people sell them for money, but they are still worthless.
Look at it like this, some people sell human hair for money, for whatever reason. Almost all of us have hair. Are you taxed for having yours? I'm not. I could MAYBE see sales tax on items.. but a cost of ownership?
No way, they are WORTHLESS. Its no different than having a job. You get paid for your time, that doesn't mean you have to pay "property" tax on your free time.
Prices for in-game currency are so high because not everybody is selling. Once society decides that game money has equivalent real value, everybody will want to sell everything they "earn" in a game. Suddenly the "value" drops back down to Earth.
To say it another way, the only reason people are making money on this is because people are currently willing to pay that much. When JoeSixpack decides to sell his account below market value, the "going rate" will drop and everybody has to follow suit. Can you say Black Tuesday (Oct 29, 1929)?
Not to sound like a complete radical, but why don't we ask ourselves why the government is entitled to step in and get 'a piece' of a private transaction between two people to begin with? The medium is irrelevant.
If I trade you two chickens for a goat, are they entitled to take for themselves the drumsticks off one chicken and one udder from the goat? That's stupid.
Almost as stupid as everyone taking it for granted that if I pay you $10 to mow my lawn (or $100,000 to build my house), somehow, the government is entitled to a cut of that payment.
The moment they start taxing my 'virtual gold' I'm paying my IRS bill in WoW silvers.
-Styopa
stoopid comment. has NOTHING yet to do with the irs
Use the official conversion rate published by your government.
If they don't provide an official rate you should be free to choose a reasonable rate, as the EULA states they may not be sold one could logically argue the exchange rate is zero.
This may not work where there IS an official exchange rate.
Can you imagine how exponentially greater this amount will be in a few short years?
Maybe, maybe not. It is just as likely that a few years down the road, we've come back to realizing that games are, first and foremost, games and meant to provide entertainment and fun - not income.
Then again, maybe not. But right now, anyone claiming to know how it'll play out is simply a fool.
Assorted stuff I do sometimes: Lemuria.org
I really love games in general and RPGs inparticular. That said, I have to question why topics regarding the "real world" worth of game stuff keeps coming up. I think people like to imagine that, after all the effort they've put in, there's some actual value to the end result. There usually isn't. But when there is, don't we get excited at the prospect? I think if we're honest with ourselves, it's just a rationalization for spending an inordinate amount of time playing a fun game.
-Dave
When the giant dragon drops game currency, the player should not be taxed. The virtual currency has no real world value if it remains in the virtual world.
It only has value once sold for real world money. When the player sells their virtual currency on eBay or wherever, someone pays them money for it. That is income, and should be reported and taxed as such. Why the hell do we need special laws for crap like this?
"You spoony bard!" -Tellah
When you get an income, it gets income-taxed in the USA unless it is exempt. The fake-goods trailer was correct by reporting this income. I personally feel it should be taxed as realized capital gains, since it is worth nothing until sold for actual money. You should also be able to deduct the game cost. So, if game price is $50, and monthly fee is $10, and you sell something for $150 after 3 months, you've realized a gain $70. Plus, it is probably the seller's labor that is being traded (play-for-hire), not the virtual goods.
I was just having an interesting conversation about this last night. One point that came up was if MMOs could be used for money laundering. Whatcha think?
Monopoly money has no value outside of Monopoly just like my 'plats' in DAoC has no (real) value _outside_ of DAoC. I can't walk up to McD's and order 2 quarter pounders and shell out 2 plats.
I can see them taxing the selling of game money like any other item or service but, like Monopoly, the 'money' I make in DAoC stays in DAoC and has *0* bearing anywhere else.
AFAIK I shouldn't be paying tax on 'current market value' of the baseball cards or any other collectables I have stashed in a closet either (then again IANAL)..
To avoid this, simply do not convert your in game assets to real cash.
But what if so many people do it that the taxman decides to attribute a value to ingame assets. What if the taxman would say that a gold piece in game has value.
Well then it is very very easy. Just pay the taxman in goldpieces. IF they are supposed to have a realworld value then you should be able to pay in them.
I think it would open up a can of worms if they would set a virtual to real exchange rate that could not be easily matched. I am not certain how the american tax system works but for instance the value of land is usually not an absolute. It greatly depends on what it is worth on the market and not some fictional market you use to brag about your wealth but what cold hard cash you can get for it today.
It would truly be a nightmare to setup. The goverment would have to constantly check what the real value is of cash in dozens of games. Not to mention that most games have an inflation that makes african countries look well adjusted.
It could happen in theory but I think that the taxman has better things to do. The only people who need to worry is those who make money off their in game wealth. The taxman taxing the money you receive. Wow, what a concept!
MMO Quests are like orgasms:
You may solo them, I prefer them in a group.
Constantly saying that the IRS is going to tax in-game transactions is just scaremongering. You can consider it taxiable income once its converted into real-world cash and thats what would be seen as the transaction. Saying that any changing hands or acquisition of anything which can be considered a good would place such things like Monopoly under that area.
Since the article is focuses on U.S. tax theories, this post will as well.
Publication 525 is what the article refers to when it mentions "tax law...clause #525". This IRS publication is put out to help taxpayers interpret various code sections, case law, and the fundamentally vague term "income"
In general, "income" has been spoken about by the courts as an increase in economic position, and if this increases, the tax man wants a piece of it. This includes amounts paid to you for the services of your labor (physical or mental) or or your capital (monetary or physical). The government then specifies things that are NOT income, but the presumption is that if a person's economic position increased, then that increase is income.
If you sold MMO 'assets' in the real world, and received real value for those 'rights', then that IS income, and you WILL owe tax on that income. Whether or not the IRS has specifically said that "proceeds from the sales of MMO gold is income to the taxpayer". At some point, the IRS probably will issue such guidance (Rev. Rul.), but that doesn't mean it isn't income now.
Think of it as IP - you gradually increased your rights to some virtual property, and then sold those rights to a real person for real money. That is income. Easy to value: how much did they pay you in real world asets?
Gaining, but not selling, virtual assets would be trickier. If you are pursing the MMO game with the goal of making money, then even this might be income. The IRS has the concept of "constructively received income", which is income that you have rights to, even if you don't actually 'have it yet'. If you receive rights to virtual assets based on your effort, those rights are probably income, even if you havn't turned them into cash yet.
How much? For this MMOs with real markets in the real world, it is simple: look to equivalent transactions. Non-market-driven rights would be tougher for the IRS to claim as income, and tougher for them (and you) to value. There could be earned income for the initial rights, and then capital gains if those right appreciate in value over time.
Uncertain is what the Service might say if you play a game (with a real world market for virtual assets) for fun, never intend to sell virtual assets in the real world, and never do. That is like the Monopoly reference in the article. One might say that there is no increase in real economic position for the player, so there might not be income. Rest assured, that if there was a large, real market for buying and selling Monoply money or real estate, the IRS would tax those transactions as well.
Some states have an "ad valorem tax" (tax on physical assets) and some an "intangibles tax" (tax on intabgile assets, usually stocks, bonds, partnerships interests,etc.). Some are relatively small, like ad valorem taxes on your automobile, boat (not license fees, or tag fees, but based on the value of the assset). Ad valorem taxes on real estate can be more significant. MMO virtual property is probably not subject to ad valorem tax.
Florida, for instance, does not have an income tax, but raises its revenue through an intangible tax. Not based on income from those intangible assets, but based directly on the value of those asssets, whether or not they actually increased in value, or spun off income to you. So virtual assets that have a real monetary value might count here as well.
my thoughts... (which are not to be used as any specific accounting or legal guidance, I speak for myself and not my employer, IANA_CPA, IANA_L, etc.)
I'm not a tax lawyer, but I've recently had to learn about some related issues to do my taxes. I think most of us could legitimately argue that MMOs are a hobby for us, under the IRS definitions of a hobby versus a business. Any normal person wouldn't make enough dollars to offset the costs. If you did claim such sales as business income, you could also write off some expenses, such as your PC, broadband bill, ect... which the IRS does NOT want to get involved in.
However, I can forsee the government's argument that purchases of virtual currency are still purchases and may be subject to sales tax imposed by the state and/or locality of your residence. This accompanies the attempt by states to impose sales tax on internet purchases.
So, I suspect we won't have to worry about income tax issues here, but sales tax is a different problem.
In general, I got discouraged. I could just see the US Gov't regulating my additions to There's virtual economy to the point where the There adventure became a nightmare. Social experiments just invite regulation, to keep people from messing themselves up. I know my scruples; I cannot know my social experiments' partners' scruples and thus I'm pretty sure the regulatory agencies would come down on the experiments like a ton of bricks. Remember, if it walks like a duck and quacks like a duck, it's probably a bank and subject to real regulation (at least as soon as the governments wake up)
Well, that's assuming the US Gov't would be the only governemtn to assert its regulations inside the There environment. I'm pretty sure they won't be.
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You cannot be taxed on something you do not own, end of story. On the other hand, if a Second Lifer ever makes a vast sum of money...
I tried that already. All I got was a bunch of faded dollar bills. Oh yeah, and my Everquest CD was ruined. :-(
Hi,
I'm a politician seeking re-election. I plan on taxing your children for all the make-believe stuff they "earn" in online games.
I ask for your vote this coming November. If this still isn't enough to convince you to cast your ballot for me, I also plan on taxing kids in Little League who catch the baseball. Each time they catch it, I will count it as income since some people sell home run balls from the World Series.
As you can see, this is a winning issue for an elected politician that no opponent will ever use against him.
Best Regards, Your Incumbant Congressman,
Power Q. Hungry
(-1: Post disagrees with my already-settled worldview) is not a valid mod option.
If I trade you two chickens for a goat, are they entitled to take for themselves the drumsticks off one chicken and one udder from the goat?
Actually, yes. Well, not payable in drumsticks, udders or MMO silver, but....yes.
You'd owe taxes on the excess of the market value of goat over the market value of the two chickens. If equivalent tranactions value the goat at more than two chickens, then you just made a profit, and probably owe personal income tax.
Income doesn't have to be in cash, and bartering counts. An equal trade would probably be counted as a either [Revenue-Cost of Goods Sold=zero Net Income], or a like-kind echange of assets.
Reportable on Schedule C (profit or loss from a business-sole proprietorship), or Schedule F (farm income and expenses)
Nothing produced physically.
And on my internet bill. And airline reservations. And electricity (nothing produced, just electrons moving back and forth.) When I buy software for download.
The masses are the crack whores of religion.
For MOST of those playing MMORPGs its a hobby or a diversion. Like sewing, knitting, pottery, computer game design etc. A potter, can make a vase identical to the one that has been sold for $10 000 (US). If he puts flowers on it, and keeps it on his mantle, its not income. Just like if you were to write a computer game, until you convert it to income, its just a hobby.
Food not Bombs is a nice platitude but it breaks down when you notice that the Bombees are usually well fed
garage sales are also a multimillion (if not billion) dollar industry... and when was the last time you saw the irs busting down people's doors because they didn't claim their garage sale revenues.
when new ruels in regards to virtual moneys are passed, then it'll probably be relegated to a technicality the irs uses when they really want to put someone in jail, but can't find anything overtly wrong with them (like how most mob bosses were eventually tried and convicted of tax evasion and not the plethora of other offenses)
Remember, they all very carefully include, "none of this is your property."
Blizzard owns the character. Blizzard owns the character's gold. Blizzard owes the taxes, if any, on the gold. Not you. Conviently, since it is just bits on a server that Blizzard owns, and the fact that Blizzard does not sell those bits (they sell access to the bits) they could easily argue that the value of the bits is $0.00 and tell the IRS to stuff it.
The IRS could get away with hitting up a gold seller if the gold seller didn't report the income from ebay as taxed income (since it is), but that's little different than the hot dog vendor who's transactions are all cash and misses a few (or all) bux here and there.
However, this would be interesting if it did come to pass. If virtual gold is worth something, I wonder how long it will take some ambitious auditor to realize that then, obviously, ideas must be worth something too. Perhaps these IP firms should be paying taxes on the "worth" of their patents...? Might be a nice way to fight fire with fire, so to speak.
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In any game where the exchange of game items or money for real money is prohibited (and there is evidence that the game owners expend effort enforcing that prohibition), this is not an issue, as the game money (or items) doesn't have a fair market value; you're prohibited by your contract with the company running the game from marketing the stuff.
Chris Mattern
When I pay an NPC to train me, would it have to pay taxes too? What sort of rights and obligations does an NPC have then? If its a tax paying NPC, then maybe it deserves protection under the law too, right? So does that mean that whenever a Horde player runs into town and kills an NPC, we should call the cops? Its murder!
And if WoW gold actually has a fair market value, then isn't blizzard printing money every time a wolf respawns in the forests of Goldshire?
Look. It's a game. Just like monopoly is a game.
Yes, both involve currency. Both involve game transactions. Hell, you could even slip another player $5USD for a few of 'his' monopoly bucks, or gold pieces, or whatever.
Never, at any point, do you, the player, own the monopoly dollars, nor your WoW gold, or anything of the sort. For the entire duration of your time playing at Rob's house, Rob still owns every monopoly dollar; for the entire duration of your time playing WoW, blizzard owns your gold. You don't take your monopoly dollars home with you, nor your WoW lewt.
You never own 'your' game money. As such, you can't be taxed on it.
Wouldn't it be cool if the US Government bought up a huge chunk of land in WoW and declare it a national park?
It's a small world and it smells funny; I'd buy another if it wasn't for the money; Take back what I paid (SoM)
All you have to do is sacrifice them, forms and all. The government wouldn't dare to tax your transaction with God, would they?
awesome
;(
I can delete my 4 accounts and claim a huge loss to offset my taxes....
How about
They can tax it at FMV when it counts toward my assets for a loan? The credit union doesn't believe i have all that gold
This article also discusses the same topic. The author gives a good discussion on the topic and calls to ask the irs about the status of taxing his gaming income. The person he eventually talks with tells him that it probably is taxable income but that was just their opinion and its not covered by any existing ruling. He could pay a $650 fee to get a ruling if he wanted to.
But I was thinking of a sales/transaction tax above and beyond income sources. (Though I guess that makes this whole thing a moot argument...)
There are no in game goods, when you 'buy gold' for WoW, you are doing two things, first, you are violating the WoW ToS, second, you are paying for the service of having someone farm the gold and transfer it to you.
The same thing is true of when I do contract programming. I never sell the end product, I instead sell my services, paying taxes on the income. When I program for myself, there is no income and no tax.
For a more blatent example, there are people whose job it is to open doors and answer questions, taxes are paid on their income, but that doesn't mean there is anythin to tax if I take it upon myself to answer someones questions or hold a door open for them.
Realities just a bunch of bits.
What is the IRS going to DO with stores of in-game currency? Are they going to use it to pad the defense budget, to obtain milspec +6 orcslayers? (Actually there are some neat weapons they can use in Eve Online...)
In other news, the U.S. Treasury Department has hired a software firm to create a special MMO where they will be able to "print" as many magic swords as necessary to pay off the national deficit.
Seriously, though. Since it would be virtually impossible (like the pun?) to track all the magic swords and other assundary virtual objects, the more cost effective way for the government to manage this is via point-of-sale and income tax. That is, Ebay and other online payment systems will need to track all those little sales you make, then the IRS can audit you to see if you were actually making money, or if it were for some other "secondhand" endeavor.
What those who want activist courts fear is rule by the people.
If they taxed WoW gold, your subscription fee would also be tax-deductable. Fifteen dollars a month is a LOT of gold, way more than most players will earn (as opposed to buy) each month. If anything, it would discourage gold sellers, which would be better for the game overall.
Blessed are the 1337, for they shall pwn the earth.
More mainstream. So like maybe BusinessWeek running a cover story on virtual economies? With the magazine cover being an image of Anshe Chung, one of Second Life's biggest realtors?
The real question isn't the IRS's awareness - it's the amount of virtual money being turned into real money. I doubt you will see taxation of in game transactions, but sure real world money earned through virtual sales is taxable income. In the case of something like Second Life or Sony's Station Exchange you could argue that any state or federal Internet sales tax should apply.
Sometimes my arms bend back.
Notably Second Life, Project Entropia and Everquest 2 servers that support Station Exchange.
Sometimes my arms bend back.
Speaking of EVE Online, I think that qualifies as a legitimate first example of virtual taxation, entirely within the game universe. Player-run corporations which are de-facto nation-states are equipped with some options for directly taxing the income and transactions of their members, although back when I actually was playing, the tools were ridiculously clunky and effectively useless for real revenue-generation.
It's remotely possible that they fixed it since I dropped EVE like a hot rock a few months after release, so people may very well being taxed on virtual goods *right now*... just not by real-world governments.
"We have to go forth and crush every world view that doesn't believe in tolerance and free speech." - David Brin
If governments are going to tax virtual currency, then it'd be expected that social programs would kick in if your virtual income fell below a certain threshold. Translation: state-sponsered gil-buying.
Just like countries are able to arbitrarily set the exchange rate of their currency and then simply say they don't have the resources available to sell that currency (think USSR and present day China), game companies can do the same. It also has the potential to significantly affect farmers...
1. Declare your game's currency is worth $0.01 for 1 billion gold.
2. Acknowledge you don't actually have 1 billion gold anywhere within the game engine to trade, even if someone happens to have $0.01 to offer. Obviously you'd love to - you just don't have it right now.
Much as you appreciate that they'll give you $0.01 for even a single gold piece, as controller of the currency, you don't want to see runaway inflation and so you'll maintain the price.
3. Occasionally seize the assets of players you were going to ban anyway. Generously compensate them for the value of items on their accounts - with a full $0.01 off their final bill (granted, you don't owe them that much but U.S. currency being so pesky, you have to round up). Thus establishing your arbitrary exchange rate again.
4. Sure, a few people may wish to trade on the "black market" where your gold pieces and the items you can buy in game with gold pieces are worth considerably more than 1 billionth of one cent. But they're the black market and thus don't count. If the IRS wants to track down those people and prosecute, sweet - they do all the work of taking down farmers for you.
5. For everyone else, when tax season comes around, they have to calculate the worth of all in game currency and items acquired throughout the year. As it's under 1 billion gold, the official exchange rate says that's worth less than $0.01. You attempt to pay your taxes on that $0.01. Capital gains of, what 40%... That's under half a cent. If the IRS will let your round to the nearest whole number, they get nothing. If the IRS demands you round up, players give the IRS $0.01 for playing your game all year.
Final result:
The IRS gets nothing (or next to nothing) from your players, keeping your game desirable when compared to other games that permit currency trading and let the market establish its price.
The IRS kindly shuts down your gold farmers who trade on the black market as they're the only people with a non trivial income to declare. Thus your game becomes even more desirable as the farmers are now in the Federal PMITA prison system.
The place for the vernacular is in front of the water cooler, among your acquaintances. If you have an opinion you'd like to share beyond that scope, and you expect people to take you seriously, I suggest you remove phrases like "crapload" from you articles.
...I could actually see Congress doing just that and taking it seriously. They'd probably do Special Renditions of Orc chieftains, on demand, if asked.
It's a small world and it smells funny; I'd buy another if it wasn't for the money; Take back what I paid (SoM)
An interesting arguement. However, the listings on Ebay seem to indicate that they have de facto fair market value; it is merely not legal for them to be traded for real money. And illegal income is still considered taxable income, as Al Capone discovered.
The original piece by Julian Dibbell was more informative. I still think it's a pity he wasn't willing to cough up the cash to get a final ruling from the IRS.
//Information does not want to be free; it wants to breed.
They dont have enough staff *today*, but its a good excuse to get more..
...
This would also spill over to OSS, 'fair market value'
---- Booth was a patriot ----
I'd be peripherally interested (without prejudice) by what argument you would like to claim that a Terms Of Service agreement prohibiting such sale is not legally binding.
However, the legality of sale (or lack thereof) is irrelevant to my point: Legal or not, if it's any form of income, it's taxable.
//Information does not want to be free; it wants to breed.