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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."
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.
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...
Dear God, no! Not that! Engineers will never be able to keep up with the Alchemist or Taylor lobbiests!
The cancel button is your friend. Do not hesitate to use it.
Any time I'm due to pay taxes, I'm going to claim a loss on my virtual accounts to balance it out. Wheee!
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!
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
liqbase
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.
For more information, click here.
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?
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.
If an officer ever threatens to taze you, say you have a pacemaker.
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.
Is it considered earned income or a capital gain?
From a tax perspective, there's a huge difference.
LK
"Hi. This is my friend, Jack Shit, and you don't know him." - Lord Kano
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?
A feeling of having made the same mistake before: Deja Foobar
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...
.. I don't think this will have as much impact as they think.
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.
A feeling of having made the same mistake before: Deja Foobar
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.
"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..."
Excuse my speling.
Making The Bar Project
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.
ad logicam Claiming a proposition is false because it was presented as the conclusion of a fallacious argument.
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.
She was like chocolate when she drank... semi-sweet at first and then increasingly bitter.
He's wearing a Helmet of Insight +5.
Knowledge is how to play a game, intelligence is how to win, wisdom is knowing what game to play.
Well, that's exactly what a lot of people are missing.
/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.
:-)
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
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
...those folks can write off their WoW account fees, and depreciation on their computers, etc. as "expenses"?
"People" using "unnecessary" quotes should be "shot".
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!
Like woodworking? Build your own picture frames.
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.
Some see the vessel as half full; others see it as half-empty; We pour it out on the floor and laugh
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.
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.
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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.