Virtual Economies Attract Real-World Tax Attention

doug141 writes to point out a Reuters story on the attention tax authorities are beginning to focus on virtual economies. From the article: "Users of online worlds such as Second Life and World of Warcraft transact millions of dollars worth of virtual goods and services every day... People who cash out of virtual economies by converting their assets into real-world currencies are required to report their incomes to the U.S. Internal Revenue Service or the tax authority where they live in the real world... 'Right now we're at the preliminary stages of looking at the issue and what kind of public policy questions virtual economies raise — taxes, barter exchanges, property and wealth,' said Dan Miller, senior economist for the Joint Economic Committee of the U.S. Congress."

Comments

Finally.

[Hubbell]

I'm surprised this wasn't done years ago when people were making real money off of Ultima Online and Asheron's Call. Good AC accounts, like Animal the first level 126 Battlemage which went for $5,000, were going for thousands during it's prime and even a year or two afterwards.

Re:Finally.

[SatanicPuppy]

What would the tax be, exactly? For the most part, most states don't require sales tax on internet purchases. And if you sell accounts for more than $400 bucks, then you should be reporting that income to the IRS anyway, same as with any other income.

I don't see any need for a special case. You make money off it, you're supposed to declare that money and pay taxes on it. Goes without saying that most people don't, but that's just an enforcement issue.

Re:Finally.

[Anonymous Cow herd]

What would the tax be, exactly? For the most part, most states don't require sales tax on internet purchases.

Most states also have what are known as "Use Taxes". Wiki here: http://en.wikipedia.org/wiki/Use_Tax

Re:Finally.

[truthsearch]

But enforcement is the issue they're trying to tackle. Enforcement is basically handled by either withholding or reporting (e.g. form 1099). It sounds like these virtual world companies aren't reporting (we definitely know they're not withholding). So the government will either tax the virtual world and trading companies or force them to report payouts. Don't be surprised if in the next few years they ask for your SSN. I recommend getting an alternate tax ID if they do enforce reporting and you still want to make transactions.

Re:Finally.

[DorianBrytestar]

Income tax is what's being discussed, not sales tax.

Re:Finally.

[mysidia]

What would the tax be, exactly? For the most part, most states don't require sales tax on internet purchases. And if you sell accounts for more than $400 bucks, then you should be reporting that income to the IRS anyway, same as with any other income.

Income Tax. For US citizens, the government has a tax for your worldwide income.

I for one am concerned of the possibility they might deem your exploits in-game to be taxable income, payable in US dollars, for instance, the moment your character enters the game, slays a boar, and gets 200 gold pieces off the corpse, that generates an earned income taxable event, and possible self-employment tax liabilities.

The amount of income depends on the going rate of how much the asset a 'gold coin' sells for by other players who have been selling them.

Re:Finally.

[arivanov]

Play as a company and expense all off your equipment and bandwidth purchases.

Dunno about the SSN, but I will be surprised if next year all major online games will continue to insist on a registration by a person.

Re:Finally.

[Typhon100]

• You really don't have to worry about that... you don't get taxed on things as they increase in value, just when you cash out on them (imagine buying a rare baseball card; as it increases in value you don't have to pay taxes on that)
• Where are these boars that drop 200g!?!?

Re:Finally.

[toomz]

I don't see how this would count as income at all. Unless you're selling gold, but who does that? Other than gold farmers, who can undercut any American by using cheap labor.

I can see them potentially wanting to tax the sale of accounts, yes, but given the above model of income, the game account itself is capital, and any profits from it's sale would have to be taxed as capital gains, meaning the initial cost of the account, and membership fees paid would be deducted from the sale amount before it could be taxed.

Re:Finally.

[TooMuchToDo]

I believe the limit for reporting income is $600 on a 1099.

Re:Finally.

[HappyEngineer]

I for one am concerned of the possibility they might deem your exploits in-game to be taxable income, payable in US dollars, for instance, the moment your character enters the game, slays a boar, and gets 200 gold pieces off the corpse, that generates an earned income taxable event, and possible self-employment tax liabilities.

If it made any sense at all then wouldn't it make more sense to tax the gold pieces? If you make 200 gold pieces from killing a boar then the government gets x% of that. If the government wants to try to convert that into real cash then they can go ahead and do it.

Of course, that'll flood the market and thus reduce the cash value of the gold pieces. It would really be like taxing a barter transaction.

Re:Finally.

[molarmass192]

Income Tax. For US citizens, the government has a tax for your worldwide income.

True enough, however, that means players can now deduct ISP costs, game purchase prices, monthly access fees, computer equipment depreciation, etc from their income tax since these are all required to make money in an online world. The gov is salivating all over the income potential without thinking about the THEN fully deductible costs associated with earning said income!

Re:Finally.

[Anonymous Coward]

That is incorrect. AMT tax on stock options is a good example of this.

Re:Finally.

[Dun Malg]

Play as a company and expense all off your equipment and bandwidth purchases.

Can't anymore. IRS has closed that "loophole". You may only deduct expenses incurred in the course of your majority source of income. That is, if you're not earning your living off selling Warcraft accounts, you can't deduct shit. Sucks for people like me who get 40% of our income off freelance work.

Re:Finally.

[Dun Malg]

that means players can now deduct ISP costs, game purchase prices, monthly access fees, computer equipment depreciation, etc from their income tax since these are all required to make money in an online world.

Only if it's your primary source of income. They disallowed the deduction of expenses incurred earning a secondary income a couple years ago.

Re:Finally.

[arivanov]

Possibly. Dunno about the US.

In the rest of the world if you register DunMalg LLC which does consultancy, freelance software and WofW "Character Development", the local equivalent of the IRS will have to allow you to claim expenses regardless of how much time you spend on each of these in a given taxation period. You will have to do proper company accounting though.

Re:Finally.

[mysidia]

Hm.. I think the trade of the gold for a sword may separately be taxable as barter exchange, oh boy -- you may note, that income from barter or exchange is not deferrable for tax purposes, beyond the end of the year, and estimated payments may be required.

Otherwise, you could start a consulting business and delay taxation of your business profit, by having your customers pay you in Barrels of Whisky, Japanese Yen, instead of dollars, E-gold or World of Warcraft money. But according to the IRS, the income is taxable immediately, all the same.

You really don't have to worry about that... you don't get taxed on things as they increase in value, just when you cash out on them (imagine buying a rare baseball card; as it increases in value you don't have to pay taxes on that)

Problem: when you slay the boar and get the gold, it's not a matter of something increasing in value.. it's a matter of you working and earning, acquiring control over a new possession that already has a market value at the time you earned it, that's what might get taxed, as an ordinary income asset, instead of a gain from selling a capital asset.

(The virtual currency did not start at a value of $0 when you acquired it, if there was already a market for the item.)

I know that once you already have the asset, the gold, it will be considered a capital asset (unless you are a dealer, and the thing is part of your inventory), I know future changes in value after you acquired it won't be taxable, until you sell.

I think there is a possibility the gold you acquire could be determined to be ordinary income property, at the moment you acquire it: much like a non-qualified stock option grant, may be taxed: if you're a treasure hunter, and you find a stash of USD, that's taxable, if you find gold, that is taxable also.

Re:Finally.

[NoTheory]

This is simply not true.

Most states DO (i.e. the ones with sales tax) require that any purchase made by mail order be reported when you file your taxes. Since states can't force organizations outside of their jurisdiction to collect sales tax for them, YOU are supposed to make sure you send your sales tax in. This includes mail order sales placed via the internet

Enforcement has been a huge problem on these self-reported taxes, and i know that a number of states are not happy about it. I did my taxes online this past year, and there were questions specifically about whether i had purchased more than 100$ worth of goods via the net this past year.

Re:Finally.

[mysidia]

That is incorrect. AMT tax on stock options is a good example of this.

The AMT is a good point -- I wonder if there aren't other nasty surprises in there?

I'm no tax lawyer.. but it does seem to me like there are a variety of reasons to have at least some cause to doubt that ordinary actions within a MMORPG will be tax free, if other players are able to make a market for game stuff (and by virtue indirectly associate all players' in-game activity with commerce).

Who knows what new tax rules will be made in the future, effecting these worlds.

Maybe there will be some protection if game makers will not admit that items in a player's possession are the property of the player that acquired it -- the risk of them deciding to take the item away or shut down the game are present, but at least it quenches the idea that i'm "gaining something" when i'm not.

I would find it extremely bothersome if I wound up getting annual 1099-B's for any MMORPG I play on; might ruin the game.

I agree it is most rational to keep things non-taxable until they are taken out of the game, so players can enjoy the GAME without worry of their fun being spoiled by undesired monetary value affixed to their game exploits, but the US government may not come to the same conclusion -- after all, they never get their cut, if I never cash out my game "assets", or if I gift assets, or my account to friends I meet in-game, possibly living in other countries.

Re:Finally.

[flibuste]

I'm not surprised the Tax Office jumps on the bandwagon. Now they should know that games like World of Warcraft forbid real-money transactions between players. Although not illegal, it is a mis-use of the game.

You can make a law for something that is forbidden, can you? Otherwise they should also tax transactions on drugs, laundered money, etc.

Re:Finally.

[Hubbell]

You need an illegal drug trafficking license in certain states like Tennesee(sp? who cares, rednecks anyways!) to traffick in narcotics or methamphetamines/crystal meth, they require you to purchase stamps for use in the sale of them. Just another law they can use to fuck you with afaik though.

Re:Finally.

[mysidia]

If it made any sense at all then wouldn't it make more sense to tax the gold pieces? If you make 200 gold pieces from killing a boar then the government gets x% of that. If the government wants to try to convert that into real cash then they can go ahead and do it.

I agree it makes more sense, but unfortunately, the government insists taxes always be payable in US Dollars, and be due on a time-limited schedule soon after income was earned, even if the income isn't available yet -- even if it is still tied up.

There are even more onerous examples. Consider how imputed interest has to be computed and reported every year on a Certificate of Deposit, an I-Bond which adjusts value for inflation (increase in value is taxable), or an OID bond; zero-coupon bond (You buy such a bond at a rate discounted from its face value, and every year, a portion of the discount has to be reported as income, even though no actual cash will be available from the bond itself until the note matures, since the bond has no interest coupons to redeem for cash, or until you can sell the bond.)

At least those are investments you intentionally bought, however, and you can presumably plan for those tax liabilities. When you're just gaming for fun, you just want to make a powerful imaginary character, in this fantasy world -- you don't necessarily need or want this stuff to convert into real-life gains.

Re:Finally.

[Neo_piper]

Well I went ahead and Looked up my local (Iowa) sales tax codes and everything seems to point in one direction Tangible property and services. http://www.state.ia.us/tax/educate/78539.html Tangible is used 41 times through the document. I really dont see how these data files hosted on a server out of state can fall under tangible property, or count as an amusment device.

But that's just me and I'm no Lawyer

Re:Finally.

[russotto]

That would suck if it were true. Fortunately, it isn't. At least, I don't see anything in the Schedule C or 1040 instructions about "majority" source of income.

Re:Finally.

[default luser]

You folks are taking the wrong tact on this.

This isn't an issue of taxable SALES, it's an issue of taxable INCOME.

It is true that, due to the intangibility of code, you cannot tax the SALE of that code. However, if you are making monetary gains, it is considered self-employment, and is subject to federal and (in some states) local income taxes.

Re:Finally.

[HiThere]

I don't think 1040 is the schedule used by a company for it's taxes.
If you file taxes as a company, I believe that you enter an entirely new level of the game...of course, this doesn't let you out of playing the old level at the same time :)

Re:Finally.

[malzraa]

Ah, there is the rub. There is no need for a special case. The whole purpose of dividing money into groups to allow different types of taxation is to create the illusion of less taxes. It's the same reason that stores price things in weird increments (what seems cheaper at first glance: $900.00 or $899.95). The same applies to taxes. By dividing taxes into all of these bizzare categories, you get to turn taxes into micropayments. 10,000 different $.10 taxes seems less than $800 at first glance, but...

Re:Finally.

[Macadamizer]

Technically, drug transactions and other illegal transactions ARE taxable -- but since they rely on self-reporting, or, as the other poster noted, the purchase of tax stamps, not many taxes are collected this way...

Re:Finally.

[osu-neko]

I'm not a lawyer either, but I do know that the financial and legal definition of "tangible" has nothing to do with an items ability to be touched. Rather, it has to do its ability to be converted into cash. Your accounts receivable on your books are a tangible asset, although they correspond to no physical item -- it's just money you're owed. Essentially, anything that has a readily verifiable market value is a "tangible" asset in the financial sense of the word.

Re:Finally.

[KDR_11k]

Rather, it has to do its ability to be converted into cash.

So since the items cannot be legally converted into cash, you can merely get paid for the act of transferring them to another account, are they tangible? The item sellers in MMOs declare the sales as services rendered (acquiring and transferring that data) in order to circumvent the "all items are property of the service provider" clause from the T&Cs. I don't know what the law says but I think that would mean the acquisition of those items is not taxable as you don't even own the item, it's like a rental car. You can use it when your account is logged on but you're still only playing with the toys the service provider offers you.

Of course, if items can acquire a value through illegal sales, can illegally downloading software and MP3s be taxable, too?

Re:Finally.

[KDR_11k]

Problem: when you slay the boar and get the gold, it's not a matter of something increasing in value.. it's a matter of you working and earning, acquiring control over a new possession that already has a market value at the time you earned it, that's what might get taxed, as an ordinary income asset, instead of a gain from selling a capital asset.

Yes but all items remain property of the server operator so you're just renting that gold (and your entire character).

Re:Finally.

[somersault]

I think I'd quite like it if the government started recognising money in a game as a real currency, I've got quite a lot in my GTA:SA save game :p Anyway, I know it would only apply to things like MMORPGs, but it's not that bad a thing being able to make money from playing a game in your spare time. Wouldn't they have to validate the currency somehow if they wanted to tax it? And then you could just make craploads of money in the game and convert it to real life currency.

Re:Finally.

[russotto]

If you have a sole proprietorship (a business owned entirely by one person), Form 1040 Schedule C is exactly the schedule you use for your business income and expenses. Nothing bars you from running such a business as well as having wage income, nor from having several sole proprietorships.

Re:Finally.

[petermgreen]

You can make a law for something that is forbidden, can you? Otherwise they should also tax transactions on drugs, laundered money, etc.
governments have found a clever trick, if you have money and won't say where it came from they can get you for tax evasion, if you admit to making it illegally they can get you for the original crime.

either way you lose, that is why you have money laundering in the first place to try and get money into the legit system (and quite possiblly pay tax on it) while hiding its true origin.

so does this mean

[jigjigga]

there will be a new profession for doing taxes? I bet it would make a lot more money than fishing.

yay!

[sarathmenon]

I can't wait to pay my tax in WoW gold.

Re:yay!

[ackthpt]

I can't wait to pay my tax in WoW gold.

Don't mention Gold. Tangible or not, it just gets Congress excited.

You know the paper dollars in your pocket are not backed by any gold or silver, right?

Re:yay!

[RichMan]

I can't wait for all my WoW repair bills to be tax deductable.

If earning WoW gold is income,
    then expenses incured must be deductable.

Comming soon:
    Tax Loophole investment gaming. Play the game for 10 minutes and get a $10k tax deduction.

Re:yay!

[devnull17]

If you're playing WoW, how do you have a job or wages for them tax you on?

Re:yay!

[cpt kangarooski]

Nice try, but the gamblers tried that with their lottery tickets, etc. and they were not successful.

Re:yay!

[russotto]

Lottery tickets are deductible as gambling losses. Gambling losses are only deductible to the extent of gambling winnings (in a given tax year). It's a special case.

Re:yay!

[cpt kangarooski]

Hm. I may have misremembered. Still, it's of little benefit to the average gambler, and I can see a similar policy getting implemented for this type of video game income.

Re:yay!

[KDR_11k]

You know the paper dollars in your pocket are not backed by any gold or silver, right?

Correct me if I'm wrong but doesn't the WTO forbid backing your currency with gold?

Re:yay!

[KDR_11k]

Videogames that allow monetary gain count as gambling, AFAIK.

Congress strikes again

[aafiske]

I think I speak for everyone who's ever played a MMORPG:

Oh shit.

Time to get the popcorn and beer and watch how badly Congress misses the point this time. And hope it doesn't cost me a 50% tax on all subscription fees.

Re:Congress strikes again

[sholden]

You pay your subscriptions right?

Hence it would be pretty hard to interprete them as income for you...

Re:Congress strikes again

[generic-man]

News flash: When you make money, you owe income tax on it. Doesn't matter if the money comes from real-world work, virtual-world work, services, corporate gifts, or even illegal activity. The second you get U.S. dollars for your work, the IRS gets to claim a chunk of them.

Re:Congress strikes again

[Anonymous Coward]

What are you talking about? I assumed that any money coming into government, no matter where it comes from, is a good thing by default. It's all just one big charity, right? The more money coming into government, the better, right? Please, somebody reassure me.

Re:Congress strikes again

[nine-times]

Wouldn't it be more likely to go the other way? If you're making money off of MMORPG, then I would think the subscriptions could arguably be a "business expense", and hence you would get a tax break.

Re:Congress strikes again

[Shajenko42]

I wonder if you could create a business and file your monthly subscription fee as an expense.

Re:Congress strikes again

[IAmTheDave]

"Gimme gimme gimme gimme gimme gimme..." "But I um, actually stole this money off of that old lady that I just shot in the skull..." "28% bitch! Gimme gimme gimme gimme gimme gimme..."

Re:Congress strikes again

[SatanicPuppy]

They don't give a damn about how much WoW gold you collect, but they DO care about how much that gold brings you in real money when you sell it on eBay.

Subscription fees are an obvious tax deduction, but the fact remains if you're making more than a minimum amount on it, and you live in the US (don't know about other countries), you owe taxes on it.

What I'd expect to see out of this is companies like IGE being forced to be more open about their cash flow, to make it easier to find people who are not paying their taxes.

Re:Congress strikes again

[The Dalex]

The article is discussing the idea that in-game income should be taxed, not just when items or currency are converted to real-world money. They are basically saying that if you get loot from a monster and sell it at the auction house for in-game gold, you could be taxed in-game.

Re:Congress strikes again

[jfengel]

True, but you usually have to materialize that money first. Capital gains aren't taxed until you sell the object. (That's for income taxes; property taxes are different.)

I can see the IRS taxing the income when you convert quatloos or whatever into dollars and have them transferred into a bank account, but trying to tax virtual money sounds like an administrative nightmare.

In theory one can use the barter system and step into massive gray area with the IRS. They usually ignore it simply because it would be too much work. Trading virtual goods for virtual dollars would probably be treated as barter, on which you DO owe taxes (under schedule C, business income).

Re:Congress strikes again

[hustlebird]

But this then raises the issue, if i trade some weapon that i could sell in real life for say $50, for a piece that is worth $100 in real life, even though no real money traded, will i be expected to pay the differance in taxes? Or what if i sold it in the game for a bunch of online currency? How do you decide what gets taxed and what doesn't?

Re:Congress strikes again

[Anonymous Coward]

On the plus side, your WoW account fees would become tax deductable as a business expense.

Re:Congress strikes again

[sholden]

Of course but that's true with everything and isn't a surprise. If you win money in a game a golf you're supposed to pay tax on that too...

If you sell some cocaine to someone you're supposed to pay tax on that too...

In the was of WoW I would suspect most of the transaction take place externally - one person sends another person a check and then some gold gets transferred in the game. Of course if the IRS can get details on people who seem to do a lot of transfers then they can do an audit and try and find all that undeclared income. (just like they'd love to do with all those offshore online casinos.)

Re:Congress strikes again

[CerebusUS]

Well, that's exactly what a lot of people are missing.

This is no different than other forms of income, and income is taxable.

By great coincedence, the money you spend to allow you to create that income is allowed to be deducted from the earnings to offset the total tax paid.

If you make $20K /month in Second Life, hell yes you should be required to pay taxes on that. But you'll be able to deduct the cost of your internet access, computer depreciation, office space rental, etc. from the gross income.

The IRS isn't going to worry about people making $20-100 / month online doing this stuff... they are going to go after the bigger fish.

As an aside, most people know that the money you win gambling is taxable, typically at a fairly high rate. Most people I've talked to, however, didn't realize that if you keep your reciepts from when you lose, you can mark that as an expense against your winnings to reduce that tax.

All this being said, IANATL, so check with a specialist :-)

Re:Congress strikes again

[Amouth]

i think the Treasuary department is just looking for a reason to pay WoW on the job

Re:Congress strikes again

[Anonymous Coward]

True, but you usually have to materialize that money first. Capital gains aren't taxed until you sell the object. (That's for income taxes; property taxes are different.)

No, you do have to pay income tax when you receive the object, based on its value at that time. Capital gains tax is to cover the difference in value at a later time, if the object is worth more when you sell it than when you got it.

The basic idea of capital gains tax is that if something is worth more when you sell it than when you buy it, then you have had income, even if is not earnings paid by anyone. And the reason for the long term capital gains rate to be so low is that it's a kludge meant to compensate for inflation.

Pretty much any kind of property is supposed to be subject to capital gains tax, but of course there are some exemptions to encourage home ownership and so on.

Re:Congress strikes again

[StarfishOne]

I wonder if you could create a business and file your monthly subscription fee as an expense.

Nice idea!

And as the other post mentions: what about your office space, or your new (:D) computer with a video card to run SecondLife smoothly.

Would it really matter for the IRS/Chamber of Commerce if one is developing virtual goods like software, web pages or virtual goods like virtual shops, clothing, furniture?!?

Re:Congress strikes again

[Reapman]

Already happens, FFXI Auction Houses charge a percent to put stuff up for sale for others to buy. In the major cities it's pretty pricey. I seriously doubt they're trying to tax virtual economies tho. So what, the IRS gets a billion gold in WoW because you filed tax on each of your toons. and whats the point of that? If they want to go afte rthe ebay'ers thats fine with me.

Re:Congress strikes again

[Sique]

This is quite different than for instance in Germany: There, income from gambling, lottery and similar games are free for the first year (the following year they are taxed as property though (while the property tax in the current form is no longer demanded due to constitutional problems, and a new property tax system is not in place yet)).

Re:Congress strikes again

[Anonymous Coward]

I wouldn't be so sure about that.

Re:Congress strikes again

[databank]

Not true.

When you make virtual (virtual meaning not-real) you should only owe (virtual) taxes.

Seriously though, the only time the government should get involved is when that virtual money is liquidated to "real money.". This is more the case where the government is trying to extend its funds by assuming that a "game-based transaction" has any bearing in the real world excluding the transfers of funds that occur when you put/take money out of the game.

You might as well try to tax poker chips in Vegas. Sure there are millions of dollars of transactions done on a nightly basis in vegas using poker chips, but that doesn't mean that you should tax every single game played using the chips. Especially since you're already taxed when the chips

Reasons - Can you imagine the repercussions when government funds are determined by virtual economies that are completely controlled by the game company????

Re:Congress strikes again

[KDR_11k]

What people are worried about are not the profiteers but the average gamer who never trades items for real money. If those ingame items were declared valuable finding phat loot in a game could be considered income. Of course the profiteers have to pay money, it's income after all but people are worried that game assets are counted as income, not just the money from the sale.

Re:Congress strikes again

[KDR_11k]

Does killing a mob and taking its gold count as inheritance?

Well

[Kelz]

Given that it is against the Terms of Service in WoW to exchange in-game currency or items for real life currency or items, I can't see that there would be any legal standing here.

Also, I believe Second Life's ToS explicitely states that Linden dollars have no legal value, also trumping any sort of tax law.

But then, neither was the income tax...

Re:Well

[drsquare]

Whether the game manufacturers say it has legal value or not, if you cash in, that's income, and you have to pay tax on it.

Re:Well

[The MAZZTer]

I think the US government overrides a small corporation's terms of service.

Re:Well

[spyrochaete]

Since Blizzard doesn't engage in any in-game merchandise transactions for real money, I don't think they're the ones the US Government would be trying to tax. Blizzard pays taxes on their income and that amount is reflected in the subscription fees.

So who is the government trying to tax? Offshore gold farmers? One-off eBay sales? Who, of the relatively few Americans who do this, would even claim this as income?

This seems like an issue best left to gaming companies anyway. It's not a developer's best interest to host an economy-based online game since the richest people, in-game and in real life, can defeat the poorer players with gear alone. That's why skill-based games like Guild Wars are so much better. In Guild Wars, farming is all but nonexistant, and whenever player elitism starts to rear its head they host a "triple chance of the best gear dropping" weekend to level the playing field.

Re:Well

[revlayle]

True, Linden Dollars HAVE no legal value themselves. However, Linden Labs/Second Life has a page stating the exchange rate for a Linden Dollar to some other real-world currency. The exchange rate is updated daily and determines how many, for example, L$ (the shortcut for a Linden Dollar, IIRC) a user can get for a US dollar.... AND VICE VERSA. If a user has thousands of L$ in their Second Life account, they can exchange that for a real-world currency, via a check or a deposit into a PayPal account (other methods do exists I believe, I just don't what they are, my wife played for a couple months then cashed out and quit playing).

Re:Well

[Anonymous Coward]

It's not a developer's best interest to host an economy-based online game since the richest people, in-game and in real life, can defeat the poorer players with gear alone.

Sure it is, they make money off the rich people by selling them things. Lots of Korean companies seem to do rather well with that model. Second Life also seems to do well with such a model. Face it, if someone spend more money than you on a game they are worth more to a developer than you all other factors equal.

Re:Well

[jasmak]

It is also illegal to sell marijuana but technically you are still supposed to pay taxes on them. These taxes were long ago found to just be a trap(i don't know who would be that dumb), but they still exist.

Re:Well

[Anonymous Coward]

it is not that simple
this is a legal can of worms that is going to explode

in order for the IRS to tax income from selling of virtual assets they have to assign you ownership of said items.
thus overturning the EULA, and now people have real life asset rights on virtual property.

granted our legal system is corrupt, but I doubt any judge would rule.
No you have not rights on the property.
But yes we can tax you on it.

Re:Well

[venicebeach]

I am going to send the IRS 3 gold every time I sell a Flask of the Titans.

Re:Well

[StarfishOne]

And what about international users?!?

Re:Well

[madseal]

Just remember Al Capone, in the end they got him for tax evasion...

Re:Well

[mysidia]

There is another possibility -- the court could look through the surface of the transaction, which appears on the surface to be exchange of in-game items, and because no ownership is being exchanged (having established that neither player "owns" any item), make the determination that What the buyer is REALLY purchasing from sellers "is a service", not a physical product -- to assist them in the game in a specific manner (by providing an in-game player enhancement, or powerup).

That service is providing the buyer the means to enter into their character data file (within the rules of the game), of the named item.

The fact that the player who "gives" it to them in-game loses the item they "sold" is not inherent, it is due to the way in which the game was programmed.

And it wasn't inherent that the holder of the item found it, it could have been received in other ways (through the rules of the game).

In this manner, players make exchanges, but there is no legal title involved, and there is no warranty (since the players don't set the rules of the game) -- the only thing bought or sold is an actual service.

Re:Well

[DDX_2002]

In Canada, in the famous case of R. v. Butler (well, famous amongst tax attorneys and law students at any rate), the Court held that the only reason a madam couldn't deduct the cost of bribing police officers to let her brothel operate as legitimate business expenses was that she hadn't gotten a receipt. Since she had no evidence of the payments, the Court wasn't prepared to assume that the police were corrupt so they said no. In principle, there was nothing to prevent claiming that as a deduction.

Similarly, in Canada (and the US for that matter - Al Capone, anyone) you're required to report ALL your income, whether gathered from legal or illegal sources. I don't really care if Blizzard says I can't deal with RMTs, if a real cash market for a product exists and profits are being made, they're taxable.

Re:Well

[Artifakt]

I am a tax pro, and it must be turning me into a general purpose humorless bean counter, because I almost took this seriously. I was a good two sentences through explaining just how much trouble that arguement could draw with the IRS before I caught that it was tongue in cheek. Gyaaahhh! Kelz, please don't post anything like this between April 1st and April 15th!

Re:Well

[tubs]

There was a case of that in the UK, an architect was bribing officials - one of the reasons they managed to "get him" was that he recorded all his bribes and used them for tax deductions.

The Treasury said that yes, that is correct - bribes are tax deductable if they have the correct reciepts.

http://www.guardian.co.uk/comment/story/0,,393135, 00.html - Looks like even if a Tax officer finds the bribe, they are not allowed to inform the police.

Re:Well

[KDR_11k]

Those are obviously not taxable (by the US government) beyond any taxes Linden Labs has to pay. Though they are most likely subject to their local tax laws.

Re:Well

[jazzraven]

>I believe Second Life's ToS explicitely states that Linden dollars have no legal value, also trumping any sort of tax law. Yes, I'm sure Linden Lab's TOS will trump US tax laws, good luck with that. Clearly income that you turn into real cash will be taxable income. You may be able to deduct direct expenses of playing (cost of the acocunt, etc) from the monies taken out.

Re:Well

[Pollardito]

there are a number of factors that make it unequal :
1. catering to a "buy your way to success" model may drive away more customers than it brings in, and even if the people you bring in spend more per-capita you might lose on volume.
2. selling items directly to customers places a real-life value on your virtual world, meaning that game downtime (or god forbid, hardware loss and incomplete data restore) may cause real-life damage to your customers, resulting in real-life lawsuits. as a result, most companies won't sell things to you directly, and phrase their ToS such that they forbid the attachment of real-life value to virtual property in their game. therefore, most post-purchase money exchange is not between the developer and the customer, but between a third-party and the customer and so there's no value in it to the developer. Second Life is a notable exception to this, but it'll be interesting to see what happens in that game if they have a significant outage or god-forbid they go to retire their game when less and less people are playing it (won't the remaining customers be owed a reimbursement for their property?)

Gov't Regulation

[DrWho520]

Dear God, no! Not that! Engineers will never be able to keep up with the Alchemist or Taylor lobbiests!

Losses

[mugnyte]

  Any time I'm due to pay taxes, I'm going to claim a loss on my virtual accounts to balance it out. Wheee!

Re:Losses

[Morphine007]

yeah, seriously. If you "invested", say, $10,000 worth of online currency into, oh... I dunno... this does that mean you can claim that online currency's worth as a loss?

To answer my own question: no

Now for a better question: suppose you first bought that $10,000 worth of online currency and "invested" it into that EVE Online ISK scam and lost it. Can you then claim your $10,000 investment as a loss? Since you invested the money into a business (some might argue this, but I'd argue right back that the EVE Bank had more chance of succeeding than some dot coms), with the expectation that it would make a profit (online) which you could then sell for real money (and hence pay tax on), but instead lost it?

I mean, just how different are these two scenarios:

• you invest real money into a business which makes a product, this business fails and you claim a loss
• you invest real money into a virtual business which makes a product, this business fails and you claim a loss

These are the reverse of the two scenarios the IRS wants to capitalize on:

• you invest real money into a business which makes a product, it succeeds, you make money and pay tax on it
• you invest real money into a virtual business which makes a product, it succeeds, you make virtual money which you exchange for real money and pay tax on it

Where does the line get drawn?

Re:Losses

[sacremon]

Probably in a similar fashion as gambling. The IRS requires you to pay taxes on gambling winnings, but you cannot claim a loss for gambling losses. Technically it is (IIRC) to the point of: You go to a casino and win $600 at the blackjack table, but then lose $500 of it as you continue to play. You owe taxes on the $600 you won, regardless of the fact that you proceded to lose most of it.

Re:Losses

[Gorm the DBA]

-1 Incorrect.

You are allowed to deduct any losses from your winnings for tax purposes. You cannot claim an overall loss (ie if I won $500 and lost $600, I can't claim a $100 loss for taxes). Any chip purchases, tournament buyins, or other money you gave to the casino can be offset against your winnings thereby reducing the final tax bill.

And yes, I would know, since I had to fill out paperwork for winning a poker tournament in Atlantic City. The $1360 I won is offset by my $65 buy-in, as well as the $300 in other buy-ins I had over the weekend, as well as the other miscellaneous losses I can document.

(Documentation is key, if you are going to gamble with any possibility of winning more than the $599.99 that doesn't trigger the paperwork, write down precisely when and how much you bought in for, and how much and when you cashed out for)

Re:Losses

[Knara]

I'm pretty sure you'd need to cash out your chips before losing $500 to owe on that $600, but I could be mistaken. Otherwise, people would pay on every blackjack hand they win.

Holy crap it's the Grinch!

[Deliveranc3]

Timmy: WOW a +2 Vorpal SWORD SWEET!

IRS: Hey Timmy...

This is increadible they are taking one of the LEASE PLEASANT ASPECTS OF REAL LIFE and imprinting it on the virtual world... for no reason, they can just tax the sale of the goods!

Re:Holy crap it's the Grinch!

[Anonymous Coward]

Let's try this again -- they're taxing *real* income, not in-game "income".

Re:Holy crap it's the Grinch!

[OverlordQ]

They tax Income. Period. They dont hate MMORPGs, they just hate that some people are generated large revenue streams and not paying taxes on it.

If you had some other way of converting virtual items into real currency the IRS would tax that too if you made money off of it. They dont have a 'thing' for MMORPGs.

Time for a new Classes and professions

[LiquidCoooled]

Lawyers, Tax inspectors and accountants.

Myself, I am a level 47 beancounter, I defeated the IRS during a daring raid. Many of my friends died in this battle :(

Re:Time for a new Classes and professions

[argStyopa]

I call BS.

You can't REALLY defeat the IRS; you can stun it, you can even perhaps get away - but nobody actually WINS except them. I don't care if you have the Sword of 1000 Truths.

Re:Time for a new Classes and professions

[jahudabudy]

Actually, look into Scientology vs. IRS. As Scientology is now a tax-exempt church, I'd say they won...

Re:Time for a new Classes and professions

[Hillgiant]

Do you have any idea how big Cheney's tax refund was last year? If that is losing, we should redefine "win".

It's all greed.

[krell]

Congress is awash in money. The only problem is that they waste so much of it. Is there really a need to find new ways to rob us?

Re:It's all greed.

[Anonymous Coward]

Huh?

Presuming you're talking about the United States, we're less "awash in money" than you think. We also owe creditors of the world something like $9 trillion. Yes, congressional spending is terribly wasteful in places, but there's not enough to go around in the first place. That's the real tragedy.

Another step towards blending games into reality

[tont0r]

I always felt there would come a time that if someone stole your 'virtual item', they could be arrested for stealing. This will be one more step towards reaching that goal. Because now this is something you would pay taxes on. But how does one decide how much to tax? Is it considered 'investing' if you decide to buy all the WoW gold you can and then raise the price of it when you resell it? Because in all reality, Blizzard can just change the amount of gold you have in their database and poof its gone. And how do you handle hacks and what not? Will that become illegal if you sold 'gold' that you achived through hacking?

A joke?

[flitty]

This can't be real. Are the virtual tax collectors gonna lock me up in Orgimarr if I don't file my W-2's? Does every purchase I make count as a deduction, since my "job" is killing things, and everying I buy helps me kill things? Will a tailor have to start crafting receipts?

Re:A joke?

[Anonymous Coward]

No, they'd probably lock you up for real. Oh, and it'll be really fun to think of just how many ways they will be able to not understand. "Your job is killing things...?...So...would you say you're a danger to society?" "No! It's a game!" "Ohhhh killing things is a game I see...."

Divide By Asshat Error, Please Reboot The Country

Re:A joke?

[Anonymous Coward]

No, no, no, nothing like that. They can't touch stuff you own in-game. But if you sell your Pristine Hide of the Beast on eBay for $700 (of real money), you'll have to pay taxes on that.

You are all missing something:

[Hubbell]

They can only tax actual income made from the sale of said items ingame. They cannot put a value on virtual goods until the actual event of purchase/sale occurs using real money.

Re:You are all missing something:

[guruevi]

So when I get paid my wages through bank transfer or something similar I shouldn't get taxed? All money these days is virtual and is just a number in a database and since all my payments don't happen in real life, I shouldn't pay tax anywhere?

They will find a way to tax it if they see there is enough value in it. I hope it gets outlawed to tax on virtual goods. Then I can ask my company to pay me in WoW gold or Linden dollars after which I can purchase stuff in certain stores or from e-bay, online with my online-virtual-money.

Another question: if your virtual stuff remains on out-of-state or out-of-country servers and all exchanges happen through virtual accounts, how will they tax that?

Re:You are all missing something:

[meringuoid]

They can only tax actual income made from the sale of said items ingame. They cannot put a value on virtual goods until the actual event of purchase/sale occurs using real money.

Define 'real money'.

Suppose an American conducts a business of some kind in, shall we say, Luxembourg. He sends instructions to his agent there, and receives feedback. He runs the business well, and an account in his name fills up with euros. The European Central Bank backs this currency and it is exchangeable for goods and services within participating member states of the European Union.

Now suppose an American plays a game in World of Warcraft. He sends instructions to his character there, and receives feedback. He plays the game well, and an account in his name fills up with gold coins. Blizzard backs this currency and it is exchangeable for goods and services within the gameworld.

Both currencies are also exchangeable for dollars - euros at any bank, gold coins on eBay - at the prevailing market rate.

So: would an American conducting his business in France be taxed only when, or if, he converts his euros to dollars?

Re:You are all missing something:

[Anonymous Coward]

Are you stating that if it is not American money (such as the Euro, German Deutchmark, British Pound, etc.) then it is not real money like the "gold coins" in WOW?

Re:You are all missing something:

[stile99]

No, you're the one missing something. Like TFA, which basically said assigning said value is exactly what they are trying to figure out how to do. My question is, if "no taxation without representation" is still valid, does that mean $ONLINE_COMMUNITY avatars get a vote?

Re:You are all missing something:

[Maxo-Texas]

For now, there is a distinction between "real" currencies backed by real governments and "make believe" currencies back by game companies.

For example- monopoly money has a certain value. I could sell a million dollars of it on Ebay and probably get $10 dollars.

However, the government doesn't tax all of the business that takes place in monopoly games - only my selling monopoly money for "real" currency.

Second life more exposed than wow in my opinion because they have a much more direct correlation.

Re:You are all missing something:

[meringuoid]

Are you stating that if it is not American money (such as the Euro, German Deutchmark, British Pound, etc.) then it is not real money like the "gold coins" in WOW?

Money backed by a government, money backed by a game company... The only difference is the size of the economy it represents and the trustworthiness of the guarantor.

I'd far sooner have $10,000 worth of pounds than of Warcraft gold, for instance. I trust the British government not to recklessly print endless pounds, and I trust the strength of the British economy, and firmly believe that the kingdom will still be here tomorrow. Blizzard, on the other hand, could readily issue as many gold pieces as they like at any time. The strength of the Warcraft economy depends solely upon their whim, upon their profitability, and upon the absence of a cooler MMORPG; I cannot be so sure that the kingdom will still be here tomorrow. All it would take would be an update, or a difficulty rebalancing, or the issue of new and extra-rare and supercool prestige weapons, or anything like that which seriously devalues the gold and the equipment people already have. Investments in gameworld assets could be wiped out. Since Blizzard's concern as government of the kingdom is that the game be fun, not that its internal economy be successful, there's no reason they would hesitate to do such a thing.

It's all just a matter of degree. In the end, there's no such thing as real money or pretend money, only money people believe in and money people don't. And it only takes a quick look at eBay to see that there are plenty of people who believe Warcraft gold has real value, and that there's a going market price for it.

Ummm....

[porkThreeWays]

This may have been an issue at one time when I actually knew people making a living on EQ. However, I really doubt it's a huge deal today. Because of the international aspect of most of these games, lots of people with lots of time on their hands have time to make most items and currencies almost worthless in real money. I used to know 5 people who supported themselves on EQ transactions. Today, I don't know any who support themselves via mmorpg.

Re:Ummm....

[Anonymous Coward]

This may have been an issue at one time when I actually knew people making a living on EQ. However, I really doubt it's a huge deal today.

It's a big deal today because Reuters opened a bureau in Second Life, and there's a lot of Second Life hype hitting the techie mainstream (like with Sun). It was in the papers this morning and on the news: it must be a real story - it was from Reuters.

It's a big non-story really, though. You make a living at something, you get to pay income tax on it. If it's pocket money, nobody really cares. It's no different to being a regular E-bay seller: if you trade enough, it counts as a job. Folks really are living in an alternate reality when they think making money online is different than making it offline.

It could go both ways...

[krell]

"This is increadible they are taking one of the LEASE PLEASANT ASPECTS OF REAL LIFE and imprinting it on the virtual world... for no reason, they can just tax the sale of the goods!"

Well, maybe we can have it go both ways. The real world might be improved by having guys dressed like Gimli scattered over the lawn killing rabbits. Or we can have crowd of griefers lurking at the key entrance points to all of our cities and towns (instead of just at Detroit like we have now). We could have real-life gold farmers making goods for real cheap in China.... oh wait.

Legal, or not...

[Nick Driver]

...income made in the USA is subject to federal income tax. Even your friendly local crack dealer technically owes income tax on his illegal drug profits.

Um, Duh?

[Omega]

Almost any time money changes hands it is subject to taxation. I don't get why selling a "virtual" item shouldn't be subject to taxation as well? I mean, if I sell software online only -- that's virtual too, right? So doesn't sales (or at least income) tax apply?

The real question is, "Is selling virtual property" subject to capital gains taxes (like selling a second home or shares of stock)? There's an argument to be made there -- and I'd be curious to see what Congress says.

Re:Um, Duh?

[Overzeetop]

Right now I'd say that this is a virtual environment, and cashing in and cashing out are essentially investing (though they might be considered gambling). If you were to track individual sales and purchases, you might get away with claiming cap gains, but if you put money in, "played," then cashed out at the "end" it would look like gambling, or worse - income. The latter would require you pay self employment taxes. The former would require you to claim it was an entertainment rather than a job.

My God!

[Anonymous Coward]

How do you tax that which has no life?

Yeah, but

[Lord Kano]

Is it considered earned income or a capital gain?

From a tax perspective, there's a huge difference.

LK

Re:Yeah, but

[Pop69]

Depends how long you play the game for.

If you play an account for 6 months, sell, rinse and repeat than I'd have said income tax as it's a trade.

Play for 3-4 years and sell up on quitting then it's a capital gain.

Of course, if they tax it as income tax then you should be able to deduct your expenses, cost of game purchase, monthly fees for game, proportion of ISP charges, etc.

deduct your expenses!!

[amigabill]

Just remember to deduct your expenses toward creating your virtual wealth. Buying the retail box or download, the monthly service fees, upgrade fees when new content is released, etc. should all be legit deductions to such a tax.So should some percentage of your electric bill to power the computer. Maybe part of that nice new desk, chair, and all that too. If they want a tax, they better recognize the business expenses we're ging to to create that income, virtual or not, and if they leave the deductions part out of this weird tax law they better be ready for a virtual revolution.

I wonder when Monopoly will stat coming with a per-game tax too...

Re:deduct your expenses!!

[Anonymous Coward]

> I wonder when Monopoly will stat coming with a per-game tax too...

When people start paying real money for extra Monopoly bills that they can use at the start of the game to gain an advantage over the other players.

This is an unintentional, but all-too-predictable consequence of bringing real world resources into a virtual world that really has no need for them. In the end, it may have the positive effect of acting as another deterrent against virtual resource buying/selling/farming, since the government would only get involved when it was converted to real money. People just playing the game wouldn't have to worry about filling out their 1040 VR form.

I Honestly Don't Care

[rhartness]

It will be tough for congress to a way to systematically tax those who are making money from MMO games. Part of the reason is because each MMO is it's own micro-economy and monetary transactions are handled differently both in and out of the game. If congress does try to come up with some (lame, I'm sure) method for taxing the profits of American gamers, an international banking solution for such transactions will most likely provide itself before congress has even signed the bill into law.

Given that most gold farmers appear to be Chinese.

[Channard]

.. I don't think this will have as much impact as they think.

Ebay is the key

[ackthpt]

I'm surprised this wasn't done years ago when people were making real money off of Ultima Online and Asheron's Call. Good AC accounts, like Animal the first level 126 Battlemage which went for $5,000, were going for thousands during it's prime and even a year or two afterwards.

You, nor many others are really getting it. They're not going to tax your stuff in game, they're going to figure out how to shackle eBay with a scheme to report all your personal sales to the IRS, then tax you on them. Won't matter whether you're turning a profit or not, they'll want a cut of it.

Re:Ebay is the key

[contrar1an]

>You, nor many others are really getting it. They're not going to tax your stuff in game

Why not? If the stuff has real world value, then trading it in the virtual world is equivalent to a real-world exchange of value.

It isn't exactly the same thing, but: if I have say baseball cards, and I trade them to you for some other baseball cards, we are technically required to pay taxes based on the fair market value of the transaction. It isn't difficult to argue that the same thing should apply with WOW gizmos.

Btw, I think it's crap. But, I think it will end up being so.

Re:Ebay is the key

[Free_Meson]

When dealing with illiquid assets (such as real estate or, in this case, baseball cards) you are only required to recognize and pay taxes on income when you convert the illiquid asset into cash or a cash equivalent. When you trade illiquid assets, though, you keep your original basis for tax purposes. If you paid a nickel for your baseball card and I paid $500 for mine, we can swap without being taxed but when you sell your card you will be taxed on the sale price less your original basis (.05) as will I, even though the card you're selling was bought for $500 and the card I'm selling was bought for $.05.

There's one cool tax consequence of this, btw. As a taxpayer, you can allocate basis when you receive both cash and an illiquid asset in exchange for your own asset. So, if I buy my card for $500 and you bought yours for $.05, I can sell you my card for $500 plus your card and not owe any taxes until I sell your card. For baseball cards that's small potatos, but for things like real estate it can make a huge difference in whether a transaction is profitable or not.

Re:Ebay is the key

[Wansu]

 
You, nor many others are really getting it. They're not going to tax your stuff in game, they're going to figure out how to shackle eBay with a scheme to report all your personal sales to the IRS, then tax you on them. Won't matter whether you're turning a profit or not, they'll want a cut of it.

On principle, selling your stuff on eBay ain't no different than selling it on a local newsgroup, newspaper classified ad page or a flea market table. They don't typically try to tax such sales.

Re:Ebay is the key

[Typhon100]

Ah, but newsgroups and classifieds would be difficult, if not impossible to track. With ebay, they just subpeona them for the information and voila.

Re:Ebay is the key

[contrar1an]

The tax is deffered until the final conversion to cash. I imagine that means that if you never convert, then there are no taxes. I wonder how this would apply if, say a baker and a butcher trade each other. Wouldn't their transactions be taxable? The butcher never sells the bread her receives from the baker, and the baker never sells the meat he receives from the butcher. I can't believe the IRS would let this go untaxed.

Imagine the basis-tracking nightmare for WOW. Virtual goods could trade hands dozens of times before conversion to cash.

Doug

Re:Ebay is the key

[ackthpt]

Ah, but newsgroups and classifieds would be difficult, if not impossible to track. With ebay, they just subpeona them for the information and voila.

Why bother with a subpeona? Just pass the law and order them to play ball with the government of they'll be shut down.

To please the stockholders they'd do it without so much as a whimper of protest.

Re:Ebay is the key

[vertinox]

For baseball cards that's small potatos, but for things like real estate it can make a huge difference in whether a transaction is profitable or not.

IANAL (and I'm not a real estate agent) but from my understanding if you sell your house and then take that money you earned to buy a new one, then the same thing happens. Had you just put the money in the bank instead of buying a new house, then you are taxed on that money.

Of course you still have to pay taxes on the house and property from whatever state and local authories deems needed for real estate ownership, but it is usually less than the Feds income.

Re:Ebay is the key

[contrar1an]

> if you sell your house and then take that money you earned to buy a new one
IANAL either, but I have sold my house before. Housing is a special case. There are a few subtle details, but the main point is that if you live in your house for more than two years, then you don't pay any taxes. There is a limit to how much money you can make (like over $1Million, you pay taxes anyway).

If you live in your house less than two years, then you need to keep track of your basis (how much money you have in the house) and pay taxes on the price at wich you sell minus your basis. If you make any home improvements, for example, you can add them to your basis.

If you use that money to buy a new house, then you don't pay the taxes (there is a time limit). But, you do need to adjust the basis. In other words, the profit you made rolls over to be profit on the new house when you sell it (within two years).

The most annoying part of the whole deal is keeping an accurate basis accounting. Get it wrong, or lose receipts, and you lose real money.

Re:Ebay is the key

[Macadamizer]

In the U.S., that's how it used to be -- if you rolled over any gains into a new house, you didn't pay taxes on it, but any amount NOT rolled over -- like if you bought a less expensive house -- would be taxed.

The rules are different now. Nowadays, if you live in a house as your primary residence for at least 2 of the last 5 years before the sale, then the first $250,000 of the gain is tax free for each taxpayer (so a married couple, or two partners, could deduct $250,000 each, for example). Anything above that is taxed as capital gains, whether you roll it into another house or not. Ditto if you sell without living in the house as your primary residence for 2 years out of the preceeding 5.

So, you can't defer the taxes anymore, but you also can take a pretty big chunk out tax-free if you want, so there are pluses and minuses to the new scheme.

IAAL, just not a tax lawyer...

Re:Ebay is the key

[Free_Meson]

Primary residences get slightly different treatment from other assets in order to stimulate home ownership. IIRC, the interest paid on the mortgage for your primary residence is also tax-deductable.

Re:Ebay is the key

[The_Mr_Flibble]

But can't the monthly fees be taken into account ?
ie you pay $20 a month to play you sell something for $240 once a tax year.
In esence you have bought and sold nothing for nothing.

Taxation, good luck

[Shihar]

The only case where I can see taxation having any success is when a company facilitates it in a direct way. So, if I can cash money out of the game directly, you might very well be forced to pay a tax in the same way you are forced to pay a tax when you get a paycheck from work.

That said, that sort of transaction where a legitimate business is facilitating a cash transfer is pretty rare. The real money trading hands in MMORPG economies is almost exclusively person to person transaction, non-legal companies, or legal companies outside of the US. In all of those cases you are about as likely to get a drug dealer to voluntary tax report his taxes as you are to get some guy working over e-bay to report his income.

The only reason I can think of to voluntarily report MMORPG income is if you are making so much that it makes up a substantial part of your income. In that case, you might report some fraction of it just to avoid looking like a drug dealer.

I expect the vast majority of people to simply ignore any efforts to improve taxation about as easily as they ignore laws against a few guys playing poker on Friday night and smoking small quantities of marijuana. Yeah, those activities are illegal if you are caught, but unless you are running an underground casino or smuggling pounds of drugs, no one really cares and the penalties for being caught are a slap on the wrist.

Re:Taxation, good luck

[cmdr_beeftaco]

who smuggles pounds of drugs?
We smuggle kilos my friend. The drug running business is all metric baby.

Re:Taxation, good luck

[w1cked5mile]

If you use an online payment system to sell the account/virtual equipment there is a paper trail. If you deposit a large sum of money in a bank in the US (online or otherwise) they are required to report it to the IRS. There again, it's a paper trail. Month after month, year after year, they start asking questions at which point you have to start answering them. Remember Capone... tax evasion got him.

Re:Taxation, good luck

[James McGuigan]

Cash is the poor man's off-shore bank account.

watch out for back taxes

[192939495969798999]

if you made a bunch, expect the IRS to be coming after you... income is income, and unreported income still can mean trouble!

Re:watch out for back taxes

[Jesrad]

Tax is theft, always has been, always will be.

On the subject of gold farmers

[Hubbell]

Some of you obviously have only played WOW and know nothing of what a major source of income account selling was in the old days. AC accounts regularly went for 500-5,000 (5,000 was the most any 1 account ever went for in AC)
I know one of the Blood monarchy's cores in AC made $30,000 in a year from selling AC accounts/items, as well as about $40,000 in UO items/accounts when he quit to move to AC.

Making a living

[EW87]

LOL a friend of mine makes an extra 500 a week from his Hovercraft business in There.com. I was always hopeless with it. I always just barely cut even. I doubt Congress will be able to tax the game transfer of currency exchange. It's like them taxing me for buying a couple Euro when it was 1-to-1 and then exchanging it for dollars when the Euro is worth more than the dollar.

WAR ON MIDDLE AZEROTH

[chowdy]

THE MIDDLE CLASS OF AZEROTH HAS HAD ENOUGH!
First exhorbitant repair rates, rising mount costs, and now this?

Not True

[Shihar]

Whether the game manufacturers say it has legal value or not, if you cash in, that's income, and you have to pay tax on it.

That simply is not true. You don't have to pay any income taxes on it if they don't know about it. Saying that you must pay taxes is like saying that you can't buy drugs. Sure you can. You just take some level of risk in doing so.

Re:Not True

[Maxo-Texas]

The "level of risk" you speak of is "the risk of punishment including fines and prison time for not paying taxes that the government requires you to pay on income". You implictly acknowledge that you can be punished for failure to pay in your own post. ironic, no?

So , actually it simply is true.

If you sell drugs, you are required to pay taxes on the income.

Remember, it was good enough for the original mob Al Capone, it's certainly good enough for you with the loot you got off your MOB.

Re:Not True

[ultranova]

Remember, it was good enough for the original mob Al Capone, it's certainly good enough for you with the loot you got off your MOB.

Al Capone wasn't equipped with Godslayer of Hit Points ;).

Re:Not True

[Dun Malg]

Al Capone wasn't equipped with Godslayer of Hit Points ;).

Good ol' Dug Fin!
Much cooler than Dick Saucer. "Sauuuuuuuceeeeeeer!"

The real issue is when is the income earned

[Registered Coward v2]

Let's say you accumulate items worth say $1000 if you sold them - does the act of accumulating them cause the income or does it exist only if sold? Can you deduct the cost of playing? What happens if you trade an item in game? Did you just create a sale?

While this may seem trivial, those are the type of issues I see the IRS struggling with when deciding what constitute income and when is it earned.

Personally, if no cash or other goods of value are traded only online and not for cash or other goods / services in the real world then in my mind no income was earned. The IRS may take a different view.; especially if you barter a game item for something tangible in the real world.

Re:The real issue is when is the income earned

[VxSote]

Let's say you do woodworking as a hobby, and are very skilled at it. Suppose you spent a month and a couple hundred dollars in materials crafting an exquisite dining room table. Suppose a guest came to your house for dinner, fell in love with your table, and offered to buy it for few thousand dollars. You accept the offer and sell your table.

Do you owe taxes on the table from the time you completed it? Not likely.
Do you owe taxes on the income from the sale of the table? Yes (assuming you have enough other income, etc).
Can you deduct the cost of materials? Yes, up to the amount of profit you earned from your hobby.

Disclaimer: I am neither an accountant nor a tax lawyer.

Re:Another step towards blending games into realit

[daveo0331]

Wouldn't this have to depend on whether the "stealing" is considered part of the game? No one's ever been arrested for stealing the blinds in a poker game, or stealing 2nd base in the World Series. But if you hack into a WoW server and give yourself 10 million gold, that might be against some real world law...

Will we get to the point where real-world courts are asked to decide whether someone's action in an online game constitutes cheating? Who defines cheating?

I could see this ending up like card counting in blackjack, where there's no law against it, but if you do it and get caught you'll be banned by the people running the game.

Really?

[Anonymous Coward]

Why yes, I also read fark

Re:Really?

[Anonymous Coward]

who are the other 2 who read fark ?

Re:Another step towards blending games into realit

[Harmonious Botch]

It's getting more real than we may like to contemplate.

These game writers are essentially bankers. They are printing virtual money with no real limits, and now there appears to be enough connections ( permitted or not ) to real money that they are increasing the real-world money supply ( M1 ). They are not, at the same time, increasing the supply of tangible real-world goods.

The increase in the money supply without a proportionate increase in real-world goods causes inflation. Inflation is usually followed by ( some say 'cured by' ) a collapse and long depression.

Sounds like a plan!

[Anonymous Coward]

So i want to anonymously transfer some funds to Al Quaida or Al Capone or Al Bundy, i just have to:

1. Register in told MMORPG
2. Buy weapons, land whatever on ebay(or other means, i am not too experienced yet)
3. Meet AQ/AC/AB in the game who takes away my stuff
4. He sells the stuff where it can be sold.

- No record who i handed the items (is there full log of these games stored anywhere?)
- I have lost in a game, i did not support terrorism/mafia/AB
- The receiving end made a fortune on gaming, not easy to prove he received donations

Great!

vajk

Re:Sounds like a plan!

[flitty]

AQ/AC/AB has to be my favorite new catch phrase for all things "bad"

DoD not IRS

[GodfatherofSoul]

I'd rather we declare war against these buttheads rather than sending them past due tax bills. Gold farmers destroy the economies of games like Warcraft, at least they make like damned hard on honest in-game farmers. They depress the prices on the resources you harvest and increase the costs of the auction house goodies you're looking to buy. I wouldn't mind seeing some of these guys waterboarded.

Tax?

[TheRooster_13]

How many of us play board games? Or card games? Why not tax all those transactions. What about borrowing items from friends?

The game company is already taxed for the profits they make. And there is a lot of money moving hands there.

I can see taxing profits from a game (i.e. if you make more than you spend in monthly fees or whatever) and taxing profits the company makes, but anything else is absolutely silly and greedy.

Re:Tax?

[KayElle]

"I can see taxing profits from a game (i.e. if you make more than you spend in monthly fees or whatever)"

I believe that's what we're talking about.

Re:Tax?

[Anonymous Coward]

It is not the playing of the game that incurs the tax liability. It is the selling of services or goods for real cash (not virtual cash, play money,etc.) that incurs the tax burden. Playing your board games is not taxable; selling your board game does count towards your income and therefor is taxable.

The way to handle this...

[bunyip]

...is to vote. Or have gaming lobbyists.

There are other types of income with real-world value that the IRS doesn't go after. What about frequent flyer miles? My employer buys my tickets to go to meetings, as abusiness expense and I get the mile. I have enough to fly around the world first-class, but aren't required to report them on my taxes.

Re:The way to handle this...

[cpt kangarooski]

Actually, they did go after them in the 90's. But for political reasons, IIRC, they backed off slightly. Still, it's not as though they couldn't tax them if they really wanted to. They're certainly income for taxation purposes, they just may be specifically exempted.

Re:The way to handle this...

[jroysdon]

Yeah, but you can't sell your miles for cash to anyone. The miles are just good for you (and yours).

Actually

[ad0gg]

If they consider selling wow accounts as capital gains, you could factor in costs per month. So if i sold a level 60 character for $300 but it took you a year to create him and factoring $20 month charge. Your taxes would be on 300 - $20 * 12= $60. Oh wait we are talking about the US tax code, you'll pay taxes $300 because the gamer community doesn't have enough money to bribe the politicians.

d2

[kevin.fowler]

This seriously would have sucked when I was selling stormshields, etc. on ebay three years ago. The only way the gvmt is going to even attempt to regulate this is if they weed their way into Ebay/paypal and monitor stuff from the inside.

I don't see a problem

[AxemRed]

It doesn't sound like they're taxing what you have in the game. They're just taxing you if you sell your game assets and make real-world money. This isn't something new. If I sell something for profit, I get taxed on the income, no matter how worthless the item is that I sold.

Re:I don't see a problem

[meadandale]

I don't read it this way at all. It sounds like they WANT to tax in game assets that never leave the game, to whit:

It is less clear how to deal with income and capital gains that never leave the virtual economy, income and capital gains that in the real world would be subject to taxes.

In other words, in Runescape, which I play, if I mine a bunch of ore and and sell it for 100k gold pieces, they are looking at the possibility that this could create REAL WORLD tax liabilities for me.
"Uh, yeah, this is the IRS, you owe us tax on the 2500 units of gold ore that you mined that netted you a profit of 100k gold"
"Well, I lost 500k worth of armor and weapons when I was attacked by a green dragon so I guess I can then write that off as a loss?"

yeah sure ....

[taniwha]

tell it to Al Capone

Mod parent insightful

[davidwr]

He's wearing a Helmet of Insight +5.

Deduct it

[Anonymous Coward]

Assuming you meet the minimum level for all your costs, you can deduct your subscription fees from your taxable earnings as a business expense.

It's exactly the same as real estate agents deducting the cost of their luxury cars on their tax returns because more than 50% of their mileage is business related.

Tax things they don't understand

[WickedLogic]

Why do government officials always want to tax things they do not understand? When it turns into real currency, people have to report it as income, or if your smart as a sale and thus you can write of legit expenses of generating that sale. Plain and simple.

Why not just put a counter on the tube marked for virtual currency currently untaxed, cause that's how the internet works right?...

EULA

[Joe The Dragon]

What does this meen for EULA's? Does it meen that US law trumps Eulas? It so this may be a good thing.

Re:EULA

[Darth Liberus]

US law trumps contractual agreement, yes.

Tax forms?

[Anonymous Coward]

Great, what would the tax forms look like for this?

Form WOW-E4-T
-------
[Box 1] Virtual World income for tax year: $530,040.34
[Box 2] Virtual World business expenses for tax year: $61,304.13
[Box 2a] Advertising expenses: $1,203.42
[Box 2b] Telephone expenses: $103.13
[Box 2c] Rent/lease expenses: $14,032.13
[Box 2d] Motor vehical expenses: $800.33
  - Note: Please submit virtual world receipts with tax return.

[Box 3] Virtual World dependants: 59
[Box 3b] Dependants under the level of 18: 34

[Box 4] Expenses NOT incurred due to sitting at home all day: $25,034.12
[Box 4b] Portion thereof for not taking your girlfriend out: $18,123.23
[Box 4c] Portion thereof for not showering: $921.12 ...
<head explodes>

Try taxing whuffie

[gaika]

It will take them a while to figure out how to tax reputation based currencies like Whuffie.

Let them raise a virtual army

[vulpes_fulva]

There's a question of jurisdiction. The host government has unquestioned jurisdiction over physical machines hosting the games, but the virtual worlds are different. They don't necessarily exist within the coordinates of the host government's borders.

To subvert virtual lands into colonies, governments will have to raise a virtual armies to assert rule.
The inhabitants will most likely resist.

Can anyone see reservations, re-education camps, trails of tears ...

10-K

[edusmoreira]

edusmoreira Corp. ("edu" or "the one who sucks at WoW") was incorporated in Brazil to develop entertainment activities, namely to play WoW. We discontinued our operations due to incredible lack of skill in the course of the aforementioned activities. We are also seeking to redeploy our existing resources to identify and acquire one or more players with existing or prospective taxable earnings that can be offset by use of our net operating loss carry-forwards (NOLs).

Et cetera. Let me know if you are interested.

Re:10-K

[Anonymous Coward]

Funniest post I've read all week on slashdot!

Re:10-K

[Anonymous Coward]

How can you suck at WoW? Do you fall asleep or something? It didn't seem like there was much room for failure.

Really, I want to know...

Re:10-K

[Anonymous Coward]

"Skill" in WoW pre-60 can be rounded down to merely how fast you can level in a set amount of time. Someone might go from 1-10 in an hour, someone else 1-5. Post 60 even that element of skill is gone and it's how much time you have, how obsessed of a raiding guild you have, and how many automated raid scripts you have. :P

Re:Another step towards blending games into realit

[meringuoid]

They are printing virtual money with no real limits, and now there appears to be enough connections ( permitted or not ) to real money that they are increasing the real-world money supply ( M1 ). They are not, at the same time, increasing the supply of tangible real-world goods. The increase in the money supply without a proportionate increase in real-world goods causes inflation.

Is a movie a tangible, real-world good? Or a song? Much of the American economy already depends on such things. I would say that a +5 Double Axe of Leetness is as much a real-world good as is a copy of Hit Me Baby One More Time. Any value that game money has is based solely on its ability to buy such things.

Does this mean...

[Samurai Cat!]

...those folks can write off their WoW account fees, and depreciation on their computers, etc. as "expenses"?

Re:Does this mean...

[Anonymous Coward]

If you had read previous posts you would know that the answer is yes.

Re:Does this mean...

[Anonymous Coward]

Yes, it does, but I don't know if you can deduct more in expenses than you made in gross profit.
Or in other words, I don't think you can pay less tax on the money you earned from your day job because you're deducting your DSL, your MMORPG subscription and your new video card from your income you earned from that "business". Besides, how many of us sell more than $300 worth of online items in a year, anyway?

OMG NERF IRS FTW!!!!1!1

[Maradine]

I, for one, demand that the devs give the taxpayers some love and nerf the IRS. Everybody bump until we see some blue text!

Re:OMG NERF IRS FTW!!!!1!1

[Anonymous Coward]

Just shut your hole, retard.

Re:Another step towards blending games into realit

[zotz]

And are you to get arrested for murder when you kill their in game character? (Arrested out here in the real world that is...)

all the best,

drew
Come on slashdotters, you know you want to...
http://www.nanowrimo.org/modules/newbb/viewtopic.p hp?topic_id=4146&forum=171&post_id=61131#forumpost 61131

taxes ? so be it !

[l3v1]

So pay them those taxes, but if they demand, make your demands too: deduct the costs of playing: cost of PC, cost of electricity, cost of buying the game, cost of monthly subscription fees, etc. :)

BTW, how will they know you had any income ? Who will tell them that you are playing, what is your character's id and how much money you made with it ? Will they ask every player's all data from the game maker ? Can they ask and will them give ?
 

Re:taxes ? so be it !

[jroysdon]

It seems to me that they just want it labeled as taxable. They don't care to watch the gaming servers, just that when there are people with large amounts of transactions flowing in, they want their cut. They don't want the person receiving the funds to say, "Ah, but this is untaxable money someone gave me for a game item."

You'll get caught. The US government knows every single transaction that hits any US Bank, and I'd guess any US-based credit card (since they're almost always backed by US banks).

The only want around this would be to have someone mail you the cash, and then you spend the cash without ever depositing it - but I'm sure there are some big bad federal laws about using the mail "illegally." Plus at some point you'd run into the same issues drug dealers have - you'd need to get the money laundered into some "legal" form that couldn't be traced. Why is it that drug dealers are caught all the time with loads of cash (at least in the local stories I read)? Because they can't put it into the bank without raising major eye-brows and risk getting it seized and/or arrested.

Just my two cents - I'm not a lawyer or a tax preparer.

Find out the tax laws. If you earn over X, you've got to report it. As someone else suggested, you probably deduct your ISP and gaming account as expenses, as well as your PC - since without those, you cannot earn that income. Again, I'm not a tax preparer - do your own research or hire one.

Canada kicks butt

[Kombat]

Probably in a similar fashion as gambling. The IRS requires you to pay taxes on gambling winnings, but you cannot claim a loss for gambling losses.

That's not entirely accurate. Regarding your example, you'd only owe tax on the amount that you "cashed out." If you won $600 in casino chips, then lost $500 of those chips, and cashed out $100, your "winnings" are just the $100. That's what you owe tax on.

Secondly, you actually can claim gambling losses, but only against winnings. See the IRS website.

Finally, I'll take this opportunity to plug Canada. In Canada, all gambling winnings are completely tax-free. Also, there's none of this crap about winning $100 million "paid out over 25 years, or you can have a $45 million lump sum." If you win $100 million, you get the whole $100 million, right now. And you don't owe any tax on it. Yay, Canada!

/random 1 100

[happyfrogcow]

Next they'll consider "/random 1 100" as online gambling.

Re:Another step towards blending games into realit

[Twanfox]

I disagree that they're essentially creating real world inflation. I base that belief on the fact that, no matter how much virtual assets exist in the world, one can effectively consider the real world currency ammount to remain the same during a small period of time. If 500 billion gil/plat/etc were injected into a VR economy, the change to the RL economy is nil. HOWEVER, the exchange rate from VR currency to RL currency is devalued (more VR currency per RL currency unit) because it is exceptionally easier to get ahold of VR currency.

Don't be mistaken. VR inflation does not cause RL inflation unless RL merchants honor VR currency as valid in a fixed 1:1 ratio.

Not too bad

[Anonymous Coward]

as long as, as with any transaction in the real world, you can offset the necessary expenses from the money.

So tax off your PC, software, electric, heating, "ofice" furniture, broadband etc. And depreciation of those tangible assets too. A top-of-the-line PC will depreciate quicker than 5 years and probably quicker than 3.

Whether you can offset some of your time to that as well and whether "virtual realtor" will become an acceptable government response to "what is your job" is still debatable.

Income Tax is Income Tax

[w1cked5mile]

In the event that you have set up a business model that sells virtual equipment/accounts from an online game you would treat your business as you would any other service oriented business. Income would be generated at the time of sale rather than at the time of acquisition of an item since market pricing would provide fluctuations in the value of the commodity. Accounting for your machine, home office expenses, percentages taken for online payment options, advertising, game costs, etc. you would file under a 1099 just like any other independent contractor who provides a service.

The problem is, the average gamer isn't looking to give unto Ceasar what is Ceasar's since they think it's just a game. It is just a game until you turn a real money profit, at which time you declare income less deductions and pay the percentage for whatever tax bracket you fall into.

This would not fall under a capital gains (15%) tax since it wouldn't be a regulated investment income or real estate sale. I would dare to guess that virtual estates aren't recognized under tax regs.

Quid pro quo

[EZLeeAmused]

And with the virtual taxes that the government collects, what services will they provide? I forsee:

• Public works - highways that use 5 times the number of prims that a private highway would use, are unnecessarily and inefficiently scripted, and go nowhere anyone wants to go
• A standing army - to protect Second Life from hackers (or to invade SWG)
• Welfare - L$ supplemental income for people who can't script well enough to support themselves.

Re:Quid pro quo

[Jesrad]

Welfare - L$ supplemental income for people who can't script well enough to support themselves.

You grossly misspelt "who can't script well enough to buy themselves digital, virtual luxuries." AFAIK your avatar needs not eat.

You this can only be bad.

[Anonymous Coward]

Raid leader:
Ok the sword of a thousand truths just dropped, roll need.

Samurai roll's a 99.

Samurai Woooooot.

2 week later at raid leaders house.

Knock knock.

IRS Schmuck.
Hi we're the IRS you owe us 2500$.

Raid leader:
What?

IRS Schmuck.
You let Samurai have the sword of a thousand truths it has an imposable value of 5000$ we get 50% so we want our 2500$
________________

I strongly disapprove of the purchase of in game items for real world cash. And if you think that the governments won't go to the limit regarding virtual goods your crazy.

When do you think the governments will be knocking on blizzard's door for missed revenues? So you think they will impose strict monitoring of their in game currency exchange to provide the governments with this data? What do you think this will do the the subscription costs?

In the end its the regular subscribers that will pay with higher user fees.

Tax write off

[CentraSpike]

Can i claim that i play games as a business then, thus write off my game purchases and broadband costs as expenses. Surely all i have to do is sell one character on eBay each year to show i'm making an effort - doesn't really matter that i'm making a loss, surely.

Sweet ;)

Re:Tax write off

[w1cked5mile]

As long as you have a viable business plan and show a profit 3 out of 5 years you can. The key is, if you do not show a profit in 3 out of 5 years and count your expenses as loss against your income you are subject to the IRS auditing you. Your business can also be deemed a hobby business in which all the expenses can be deemed unacceptable and you have to pay the taxes plus penalty. Self employment isn't hard. Proving that your hobby is actually a business is over time.

Re:Tax write off

[CentraSpike]

Spoilsport, but thankfully i'm not in the US so maybe tax laws are different here in The Netherlands. All i know is they're in dutch so i don't understand them.

After messing up my last 3 tax returns I now have a tax accountant and i got a rebate - think i'll ask him :)

Re:Tax write off

[russotto]

Even if its just a hobby, you can deduct all the hobby-related expenses up to the amount of hobby-related income. In other words, if your expenses and income are

Materials for Building Super Uber Game Machine: ($9000)
T1 line for Zero Lag: ($3600)
Selling Uber Swords on eBay: $10,000

Then while you can't deduct all $12,600, you can deduct $10,000 of that amount, offsetting the $10,000 in income you made.

(Slashdot thinks space is a junk character. Sheesh.)

For Sale - lottameez!

[lottameez]

Your post gives me an idea.....

Used slashdot handle "lottameez" for sale, just $5000-US.

This lightly-used handle is about 2 years old with an ID in the low 800K's and comes with Excellent karma. Occasional moderation and meta-moderation privileges provided. Clever sig not transferable.

Re:For Sale - lottameez!

[Anonymous Coward]

ill give u 200k ess

You got it. I want it.

[mc6809e]

Is there really nothing more behind the desire to collect additional taxes?

Carousel Fraud!

[dintech]

http://en.wikipedia.org/wiki/Missing_trader_fraud

1) Buy World of Warcraft.
2) Set up a World Of Warcraft goods import business.
3) Buy the most expensive swords and armour you can from the Chinese market.
4) Claim back Value Added Tax from Her Royal Highness Customs and Excise. :P
5) Sell them back to International Game Exchange.
6) ???
7) Profit.
8) Seriously, Profit. :)

Aside from that:

Can you still claim unemployment benefit if you play World of Warcraft?
Surely I won't have to pay tax if I'm a student right?
What about if you're a minor?
Will I get a tax deduction for using a normal mount instead of a gold guzzling epic mount?
How much gold do I have to earn per month before I change tax brackets?
Is anyone seriously going to implement laws like this?

Deductions for subscription fees

[Anonymous Coward]

If the IRS wants to tax any monies made off of virtual play, it seems natural that the subscription and one-time fees required to play the game itself would be deductible against your income.

Usually the general concept is that you can claim any fees as losses if the fees are required before you can make any money.

(I'm in a different country than the jurisdiction of the IRS, thus i can only speak in generalities)

This is probably the only way it could be implemented that would be palatable to people, but it would lose the government more money than it would gain, so I doubt it.

I want to pay my fees with pre-tax dollars!

Re:Deductions for subscription fees

[GodSpiral]

excellent point.
If you plan to ever make income through games, then all games you ever bought and the computer costs to play them improved your earning potential. Just being able to write off your computer software and subscription costs will cover most people's profits.

If anything, I've always thought of accounts as a capital transaction. You are reselling the game, the account is free. There is a capital gain equal to sale - accumulated costs.

Something else to tax

[minion]

Government officials find something else to tax, news at 11.

Are they deductable?

[NotQuiteReal]

I know that, say, a crack dealer, is supposed to pay income tax, even though his business enterprise is illegal.

Can the crack dealer write off his bail bonds, 22" dubs, and Escalade sound system as expenses? How about those crack whores - as an entertainment item, usual and customary in his line of work? I doubt the IRS will accept those deductions.

So, if selling in-game items in the real world is "illegal" (against the TOS), can you have legitimate expenses?

Any accountants for crack dealers out there? If they do pay taxes, don't they generally lie about where the money came from? (Thus making it a moot point of admitting to the "expenses" involved.)

Are there no Magic Players???

[gatesvp]

Hello, I'd like to introduce you to a game that generates thousands of dollars in sales daily (if not tens of thousands of dollars in transactions). That game is Magic Online.

Everyone here is commenting about WoW or EQ or AC, but this seems like small potatoes. People spend thousands of dollars to buy Virtual Cards in Magic Online. Of course, a virtual cottage industry has burdgeoned: dealers and independents operate on-line stores, complete with trading bots.

All of these bots effectively operate at a profit, which can net lots of "tix" (one online USD) for the seller. Of course, these tix need to be converted into actual dollars which is where e-bay comes in again.. Tix sell for an average of 90 cents on the dollar (to accomodate ebay and pay-pal fees). Many others offer tix for sale via Paypal directly from within the game, which cuts back on fees, but drastically increases fraud.

Add to this Wizards' "real-life to virtual life" stop-gap. Anyone who collects a complete set of on-line cards can cash in that set of cards for a real set of cards. This was done with good intentions, but dealers can profit from these intentions by converting their virtual card collections into real cards. Collecting a set can be difficult, but dealers can benefit from having a larger scale.

This means that sets sold in cash can go from virtual to pocket completely un-noticed, heck they were never even on the balance sheets.

Add to this that players play tournaments on-line. All of the prize is given out in product. But when winning a big 90-man tourney gets you two boxes of virtual cards (3.69 * 36 * 2 ~ $265), this is not an insignificant amount.

Given the above info that this stuff has cash value, I think that Wizards of the Coast (owned by Hasbro) has done quite well not only dodging the IRS, but also dodging all of the on-line attention. Collecting $600 for a WoW character is nothing compared to some bot-run Magic stores that profit in the hundreds per month.

$600 limit, is it really enforced?

[Anonymous Coward]

Was it just because you won a poker tournament that you had the tax paperwork for that $1360? I've won $3500 in a single spin of the roulette wheel, cashed out to regular chips (from the special roulette chips) and was able to cash those in without any paperwork. I've sat down at a blackjack table and won $2000-$300 in a few hours, took my chips, cashed them in, and wasn't required to fill out any paperwork.

If I sit down at a blackjack table, toss in $1000 in hundreds, play for an hour and run out of chips, go to another blackjack table and do the same, then go to a third and buy in for only $100 but walk away with $1000 in chips and they tried to make me fill out tax forms at the window when I cashed in, how could I prove I was actually down $1100 for the day, not up $1000 or $900? Its not like they give you receipts, and I only get players club cards at casinos I frequent, if I just walk over to Caesar's for the hell of it and play I'm not going to get a card there because getting comped with a free stay at Caesar's is worthless to me.

I remember once at the Mirage I was watching a friend play craps after I'd run out of my budgeted money for the night and he won $6000+ on a $500 buy in in a couple hours of play. He really needed to take a piss, so he asked me to cash in the $5000 chip for him (after he'd "colored up", and kept the rest for blackjack he wanted to play next) So I walk up to the window with my one chip and get 50 hundred dollar bills counted out to me, no questions asked.

Re:$600 limit, is it really enforced?

[Artifakt]

You'ld claim the losses on Schedule A, based on your honest recollection. In case your claim was challenged, I'd strongly advise you to print off a statement of bank account activity, canceled checks, or similar documentation that showed when amd how you had funded your losses, and to keep a year long gambling diary that records your wins and losses, locations, and dates. You should also keep non-winning lottery tickets, track tickets, inside casino ATM reciepts, or whatever else seems applicable, at least to the extent of your loss claimed. In an audit, you should expect the IRS to want more, often much more, than just your copy of a W2-G and your unsupported word.
          (Yes I am a tax pro - this is not official advice, and I am not charging anyone for it. If this were official advice, I would go into some necessary detail and maybe advise something a little different, based on the person's specific tax situation. Please, all readers, treat this as a general hypothtical case only - I wouldn't even comment on it if it wasn't a relatively straight-forward, simple question. I'm afraid that's all the advice on this point I should ethically give, and if it generates any more questions I'll have to refuse to go further.)

          Note too, if you don't have enough total expenses to itemize (you had to exceed a base of $5,000 per filing single or $10,000 Married, Filing Jointly, last year), then you still have to report gambling winnings even though you can't deduct losses. Large gambling winnings from legitimate casinos or state lotteries will result in the winner recieving a W2-G, which looks much like a regular W-2, but records gambling income. The government gets a copy of those too.

A W2-G should be generated for:
              winnings of $1,200 or more from slot machines and bingo.
              winnings of $1,500 or more from keno, minus the cost of the tickets.
              winnings of $600 or more from horse or dog racing.
              winnings of $600 or more from state lotteries.
              winnings of $600 or more from poker tournaments.
                (2004-2005 limits, subject to change)

W-2Gs are not required for typical wagers won from table games such as craps, blackjack, roulette, baccarat, etc., but there is other paper work (money laundering rules require cash transaction reports) which should happen if you engage in aggregate cash transactions of $10,000 or more in any one day. Note that your account puts you under that limit in all three cases you mention, but for your more hypothetical example, sometimes it is like they give you reciepts, as part of this bigger process, and that in turn would depend on the exact situation.

Cruise ships are notorious for not giving required paperwork, with some problems reported at Indian casinos. Vegas is generally immaculate about observing these rules.

Re:$600 limit, is it really enforced?

[Gorm the DBA]

Probably, yeah. Poker tournaments are tracked things, you sign up on a computer using your Poker Club card (at least at the Casino I was at), the payouts are calculated on the computer, the winners are given forms printed on the computer that are given to the cage to exchange for cash (or chips, I suppose). Since they don't have anywhere near that level of tracking available for casino table games, they have no way of proving that you didn't buy $4,000 in chips to cash out that $3,500.

Re:Another step towards blending games into realit

[ThosLives]

In order to answer your question, you have to clarify what you mean by "movie". If by "movie" you mean "a piece of film or other object that, perhaps when manipulated by another device, creates sounds and images" then a movie is in fact a tangible, real-world good. If you mean "the images produced by such an object" then no, a movie is not a tangible thing, but is an entertainment service. That is, playing a movie many times may have entertainment value, but it does not increase the number of pieces of film.

Interestingly enough, a virtual good does not actually increase the wealth of society, but it may have value. Remember, governments typically tax value, not wealth; there is a subtle, sneaky difference there.

Wrong question

[abb3w]

Right question: can they write it off without getting audited?

Cue Gene Hackman: "I don't care about an indictment. I just don't want them getting a conviction."

What about gold farmers?

[Slithe]

They seem to be able to support themselves just nicely, and I hear that they are increasing in number.

Foreign Accounts

[TheoMurpse]

It seems to me that, if we are going to consider that money in virtual worlds is taxable, that it should be treated like money in foreign accounts. I'm not a tax lawyer, but if you have more than US$10,000 in aggregate in foreign accounts, they may be taxable and you may have to file a U.S. Treasury Form TD F90.22-1 annually. A foreign country is defined as geographic areas located outside the US, Guam, Puerto Rico, and the Virgin Islands. Granted, this may invalidate prior case law where the internet was defined as being within the US, but I think it is very important to set a precedent that the internet is one unit that encompasses the whole world, and to rule that the entire thing is located within the US is folly.

The simpler solution is to say that while the virtual possessions are still virtual, they are worthless. However, once you make real money off of them by selling, the sales are taxable in the same way that plants you have grown on your property are not taxable, but as soon as you sell them the revenue is taxable. Otherwise, this situation is parallel and displays the idiocy of taxing virtual possessions as capital gains:
MMORPG : FPS Tournament ::
virtual gold : frags ::
cashed out value : tournament winnings.
Isn't it absurd to say you should be taxed on frags gained in pursuit of a tournament victory? Or, to put it in terms more old people (read: legislators and judges) would understand:
MMORPG : tennis tournament ::
virtual gold : points ::
cashed out value : tournament winnings.
Now, does Maria Sharapova get taxed on points she won in a match? NO! She is taxed on tournament winnings only. Thus, by analogy, a gamer should be taxed on real earnings made by "cashing out", and not by what he possesses in the virtual world.

World of Warcraft Terms of Service

[PeekabooCaribou]

Funny that they mention World of Warcraft, since it's against the WoW Terms of Service to exchange in-game items for real-world currency.

I've never known a Politician who

[xC0000005]

given a source of power didn't want to legislate to control it. Give a source of income they desire their portion of it. The irony is that some of these aren't considered corrupt.

Bush just wants some Runescape GP

[Wizzerd911]

I think Bush just told the IRS, they're missing a great opportunity to rack up some serious in game currency (like Runescape GP :P) through taxes. Then you'll have some high up gov supercharacters in all the games. I say this because technically if you can convert in game currency to real currency, you can pay your taxes with either. In fact, if they implemented a policy that taxes those transfers, I plan on paying my income and property taxes with Silkroad Gold (from SRO)

What about international transfers?

[Poromenos1]

Don't they tax international money transfers at the moment? How would they check that a US player doesn't transfer funds to a Chinese player or whatever?

(Correct me if they don't actually tax international transfers)

noooo!!

[NaeRey]

Leave us gamers alone! We've done nothin to you!!
And wtf.. they tax us for... what?!
and what will end up with that money?

Re:noooo!!

[/dev/trash]

yeah that's the atttitudde!

Mod parent up.

[squarooticus]

Simple and beautiful summary of so-called "democratic" taxation: two wolves and a lamb deciding what to have for dinner.

Didn't we have a war in the 1770's over taxes?

[abb3w]

The second you get U.S. dollars for your work, the IRS gets to claim a chunk of them.

Worse; barter income is also taxable. This has some silly implications.

Suppose your primary source of income is from working in the US as a hitman for a Columbian cartel, and the cartel pays you in smuggled cocaine -- in weights valued far more than the rest of your personal net worth combined. You owe tax on the income based on the street value of the nose candy, even though the employment behind the income is illegal, the income is barter instead of cash, your posession of the barter item is illegal, and that converting the barter to a legal tender medium for paying your taxes would require comission of a separate felony.

Don't you love this country?

Re:Didn't we have a war in the 1770's over taxes?

[generic-man]

And if you live in Kansas (or several other states) don't forget to affix your drug tax stamps to that stash.

You don't have a drug tax stamp? Well, just hop on down to the local government office and pick some up! They take cash, money orders, and cashier's checks. (No personal checks -- darn!)

The Azeroth Epics Party?

[ChibiLZ]

I can kind of understand charging people tax if they sell accounts, currency, or goods, but where does it stop?

Do they start taxing you for you new epic sword, or your new tier 3 chestpiece?

How do you estimate the value of something that doesn't actually exist?

Self employed taxes

[Anonymous Coward]

If you are providing a World of Warcraft services for a fee (selling WOW files for real currency)then you are operating as a self-employed business just like an independant plumber or shade tree mechanic. As a self-employed business you cannot claim unemployment benefits because you do not pay unemployment taxes.
      If you hire an employee to assist you in selling WOW files for legal currency, then you would have to deduct unemployment taxes from your employee wages and your company would have to match those taxes.
      And yes, as a student you would still incur income tax liability. Just because your a student does not mean you don't pay income taxes earned while working at McDonalds or Burger King.
      As a minor you still incur income tax liability. Ask any child actor.

      All in all, I think you should leave income tax concerns to your parents. This will give you additional time to play WOW and to post on slashdot.

More about tax systems in virtual economies...

[RunzWithScissors]

I think many readers missed the point of the article, which is not that gamers have to report any IRL income from the game on their tax forms, but rather, how do you make a suitable tax scheme within virtual environments. Many virtual economies suffer from either significant inflation or deflation, which has a tendency to benefit the uber rich players, and penalize the more normalized income players. Which is not unlike IRL economies in different countries around the globe.

I for one think that using virtual economies to experiment with tax reform ideas is an idea far overdue. For example, wouldn't you like to see the The Fair Tax put into practice to see what ramifications it would have on a functioning economy? I mean, that is legislation that is posed annually to the US Congress. Or even implementing a tax system like what a country currently employs, then mucking with it to see if there is a better option.

Unfortunately, while this is a worth while goal, many virtual economies do not have the same market forces as a real one. For example, barrier to entry into a industry is very low. You're an enchanter in WoW and want to be a Tinkerer? No problem, drop your skill and work up points in another. IRL it's not so simple. You want to be a automobile producer? You can't simply aquire skill points and make it happen. You need to purchase capital, expensive capital. Plus virtual economies suffer from other problems as well, such as the ability for people to gain significant market monopoly power. Those of you who play WoW on Arthas and are Horde. Um, sorry about running the Auction House prices on gems up 500%, but the game let me... Game manufacturers and GMs really don't regulate the economy as much as say the Federal Reserve would, and they allow players to establish Cartels and other organizations that will allow them to set prices and control the flow of goods.

While virtual economies are not perfect, with some effort, we could really use them as models to test economic theories without affecting our IRL economies. This would be great for Economists who work on tax reform and other areas. Kudos to someone else finally figuring it out.

-Runz

Re:Another step towards blending games into realit

[Dun Malg]

They are printing virtual money with no real limits, and now there appears to be enough connections ( permitted or not ) to real money that they are increasing the real-world money supply ( M1 )

Your understanding of economics is for shit. Unless it can be readily used in place of real money, it's not part of M1. At present you can only exchange it for real money, which makes it merely either a "virtual good" or "promise of service". A glut of virtual dollars drives the price of them, in real dollars, down. Because it's all essentially entertainment, none of the "real world" economy is dependent on these virtual dollars and therefore sees no inflation when they are devalued.

Why?

[Anonymous Coward]

You ask, "And wtf.. they tax us for... what?"

They would tax you for real earned income. When you sell that Wow virtual money for real currency you have gained earned income in the real world. You know, that world that exist when you look away from your computer screen.

And you state, "Leave us gamers alone! We've done nothin to you!"

  And I ask you, why should a gamer earning $15,000 USD annually from selling WoW accounts,etc, NOT be required to pay income taxes; whereas, a hamburger flipper earning $15,000 USD annually must pay income taxes?
  Is there a geek/gamers'income tax deduction I haven't heard of?

No taxation without representation!

[nephridium]

Would be fun so see a bunch of orcs and necromancers raid congress though.. ;)

SL/WOW Sales Tax

[Sean0michael]

I think the simplest solution that protects consumer privacy, prevents MMORPG companies from collecting Tax IDs and issuing W-4s is to have a virtual sales tax. If indeed these sales do constitute legitimate income for real people, then I think SL should simply bargain with the IRS and say "there's no good way to tax people who cash in from their virtual earnings, so we'll just collect a tax in Linden dollars, convert it to real currency, and send you a check and call it good." Sounds like the easiest solution at this point. It also prevents real governments from getting too involved in what are essentially virtual foreign nations. If we can keep taxation issues at arms length like this, I think it's a good way to start addressing the issue without raising a terrible ballyhoo.

What about laundering?

[Bertie]

Now, I don't play any MMORPGs, so excuse me if I'm talking ignorant nonsense, but aren't these games perfect for money laundering? Here I am, a small-time drug dealer (note to The Man: I AM TALKING HYPOTHETICALLY), wanting to buy a load of gear off my local kilo man. I put a load of money into the game, carry out some transaction between my character and his, he takes the money out at the other end, clean as a whistle.

Is there any reason why this wouldn't be possible ?

Re:What about laundering?

[Anonymous Coward]

Ever hear of Casinos, Poker games, etc. That's what they're mostly used for. To launder criminal profits.

If the IRS bills you...

[RareButSeriousSideEf]

TFA was referring more to virtual assets that get converted into physical currency, but your point raised a question for me: If you got a tax bill due to the IRS considering virtual gold as a real asset, then could you pay that tax bill in virtual gold?

Don't brag

[tacokill]

If you win $100 million, you get the whole $100 million, right now. And you don't owe any tax on it. Yay, Canada!

Dude, that's like $1.87 US. I wouldn't be bragging...

I'd be happy to pay them in Linden Dollars

[MadJo]

or in WoW Gold...

Ummm, you know

[Anonymous Coward]

The only way that IRS can track ppl's income is through their W-2,1099 etc.

i mean, illegal immigrants who dont even have a social could slip by with cash payroll if no one ever reported them.

unless IRS somehow trace the transaction to the seller and ID who he or she is (provided they live in the United States and/or the transaction was in the United States) they can't collect on them.

There's a precedent

[Anonymous Coward]

Imposing a tax on whimsical items which are consumed in a place whose residents have lost touch with reality? How is that new?

I mean, there's a tax on fancy coffee in Seattle, isn't there?

- RG>

Yet another reason to go to the "Fair Tax"

[jafo_2001]

Only pay taxes on items when they are sold at retail. Sell what ever else you want (including your virtual services) and make as much money as you want tax free.

The Income Tax Is Illegal

[Anonymous Coward]

See http://www.americafromfreedomtofascism.com/

The income tax was originally a corporate tax and was not intended to be levied on wages and labor. There really is no federal law (and probably most states as well) that requires individuals to have money withheld from their paycheck and extorted to the federal government. The fact that there is no law mandating an income tax will not necessarily stop the gestapo from busting your door down and seizing your assets (in fact, the movie shows some of these cases).

Rule by brute force and ignoring laws where they exist and the Consitution constitute a true turn towards fascism in this so-called "freedom and peace loving country." (pardon me while I barf).

What about CA state tax?

[Randym]

If I convert my lindens to US currency, and Linden Labs is in California, am I actually *earning income* in California before I transfer the dollars to my actual bank account in another state? It seems that I would have CA income tax liability (and thus have to file CA state tax) as well as Federal income tax. The article is confusing in this particular, as it refers to "or the tax authority where [you] live in the real world" as well as Federal tax liability.

Can I deduct the monthly fee then?

[wolfing]

If they tax me for $ I make selling virtual stuff... will I be able to deduct the expenses I incur in gaining those $? I would love to add a $180 deduction to my yearly taxes

Clarification

[DanMiller]

The Joint Economic Committee has issued a press release to clarify the purpose of the Committee's planned study. Here are the headline and and some text from the release:

VIRTUAL ECONOMIES NEED CLARIFICATION, NOT MORE TAXES

WASHINGTON, D.C. -- The past few years have seen a dramatic increase in the popularity of online gaming and the virtual economies that accompany them. The population of these online worlds has been estimated to exceed 10 million people worldwide. Because of their newness, some uncertainty exists regarding taxes and intellectual property rights.

...if the transaction takes place entirely within a virtual economy, then it seems there is no taxable event. Such distinctions should be addressed and resolved in a common-sense manner.

And here is the link to the full press release: http://www.house.gov/jec/news/news2006/pr109-98.pd f