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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."
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...
Any time I'm due to pay taxes, I'm going to claim a loss on my virtual accounts to balance it out. Wheee!
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?
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.
ad logicam Claiming a proposition is false because it was presented as the conclusion of a fallacious argument.
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
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.
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.
Most states also have what are known as "Use Taxes". Wiki here: http://en.wikipedia.org/wiki/Use_Tax
Ita erat quando hic adveni.
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.