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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.
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."
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.)
No, that's where the scaremongering comes in. Some transactions (and the myriad rules on such subjects are what keeps tax lawyers employed) are taxable when they occur, not when you finally cash out. So if you earn some magic sword that you could sell for USD$5K real-world dollars, it may be the case that you should be taxed on that USD$5K of income right now, before you sell it. Maybe.
Until such transactions become commonplace, however, nobody's going to go to the trouble of figuring all this out. For now, if people just report their earning when they cash out and pay their taxes accordingly, I feel sure it'll be years before the issue comes to a head, if ever. No one at the IRS wants to deal with that kind of complexity if they don't have to so no one is motivated to get all technical on the subject.
Now, if we find ourselves in a situation where large numbers of people are making serious money and trying to avoid taxes, then all bets are off and the IRS could come down on the whole thing pretty hard. I just don't see that happening.
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
So if you earn some magic sword that you could sell for USD$5K real-world dollars, it may be the case that you should be taxed on that USD$5K of income right now, before you sell it. Maybe.
If the market for those items were considered robust enough (not sure how you'd measure that), I'd say you're very likely going to be taxed at the time of acquisition, not the time of sale. Just like winning items on a game show, it doesn't take the sale of those items to generate a taxable event, merely the acquisition of those items represents income received. Just ask the people who got cars from Oprah...
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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.
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!
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You may solo them, I prefer them in a group.
"There are certainly parallels..."
/create five billion trillion plat and sell them, effectively transferring all invested wealth in that virtual world to themselves). Further, you'd get the problem with the possibility of easy money laundering, etc.
There are also, however, some very large differences; the first and foremost being that there is no fundamental scarcity (nor is it desireable to have such) of the virtual items in question, leaving them ultimately worthless.
I suspect the economic effects of allowing interaction between game and real economies may actually be damaging to the real economy; it opens up various speculation effects, and can create massive fraud distortions (for example, say some nasty people engage in a corporate takeover of a virtual world company and then proceeds to
And in the end; the fundamental reason free market economy works is because it shifts resources to the most efficient production of the desired goods. Channeling resources into the production of game-world items that are not in reality scarce effectively misemploys those resources (the purchaser could have _both_ the in-world item by means of a keypress _and_ something else for that money, without any loss to anyone), leading to an overall poorer economy, as the other thing will now go uncreated.
In most MMOs there is no transaction. The service contract clearly states that all items remain property of the service provider. Because the items cannot be traded for real money they have no value.
Justice is the sheep getting arrested while an impartial judge declares the vote void.
The most fundamental problem is that the people selling these items and gold are not the owners of the property, nor are they representatives of the owners of the property (such as on a stock exchange). The EULAs for MMOGs usually specify that users have only those rights granted to them, limited to use of the game on the developer/publisher's terms and that the folks running the MMOG retain all rights to the game (and, thus, everything in the game - including the individual characters). For the virtual items/money to be taxable, even theoretically, there would have to be a transfer of ownership from either the owner of the game to the person with the character, or from one character to another. Since that transfer never occurs in most MMOGs (I don't know about games like Second Life which seems to have a fairly robust crossover between virtual and real lives), there's nothing to tax.
Now, the people who sell these virtual items could theoretically still be taxed (even criminal income is subject to taxation, though it's also subject to seizure) but folks who are just playing the game and following the EULA never really "own" anything.
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)
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.
What you say actually applies to real money too.
People trade "real money" for WOW gold because they believe that it has some value for them within WOW.
People trade their labor for "real money" because they believe that it has some value for them within the real world.
Think about it... most of "your" money is just a bunch of bits in a computer - just like WOW money. The cash that's in your pocket doesn't belong to you either - it belongs to the government - just like WOW money belongs to WOW.
The only reason either of them have value is because you and other people believe it does. As soon as people lose "faith" in the value of a dollar or WOW gold, it loses its value - because it has little, if any, intrinsic value.
Do you ever own your "real" money either?