Taxing Virtual Gaming Assets

rijit writes " It appears very likely that taxation of online games assets is inevitable. Quote: 'That's because game publishers may well in the not too distant future have to send the forms — which individuals receive when earning nonemployee income from companies or institutions — to virtual world players engaging in transactions for valuable items like Ultima Online castles, EverQuest weapons or Second Life currency, even when those players don't convert the assets into cash.' "

Comments

Taxes suck, but why not?

[QuantumFTL]

Why do governments tax anything in the first place? It's because public services cost money, and that's a convenient way to of collecting said money (and because they are usually the ones that have all the guns).

I personally don't see how this is any different than, say, taxing sales of Beenie Babies, whose value (like so many things) is also largely virtual.

As a registered Libertarian, I can't say I'm too happy with trends towards new taxation (internet sales tax, etc), but this type of thing may be inevitable as more and more people make significant portions of their income in online environments. Maybe this should be targetted only at assets that can be legally converted to cash?

Re:Taxes suck, but why not?

[KDR_11k]

That's usually because of a disparity between two groups within the population where one group has the power and uses it to exploit the other. The state needs its money, when the aristocracy is nice enough to the government the money will be leveraged from the plebs instead. If the aristocrats exploit the plebs to a degree where the plebs feel they cannot survive like this and wouild rather risk their lives in a revolution than take these taxes a revolution starts. We're far from the point where taxes take so much of our money that our livelyhood is threatened.

Today's mass media and psychology knowledge as well as immediate feedback on the population's oppinion allows politicians to do their thing in the way that causes the least unrest and as such I doubt we'll see a revolution in a modern country unless the government becomes too arrogant and makes mistakes in their decisions. Instead of taxing the poor directly they raise taxes across the board and then give tax cuts that reduce especially the taxes that benefit the aristocracy (in a modern political system that would be the personal friends of the government bigwhigs and of course the lobbyists). Want to gain more power? Don't just go out and grab it, set up an atmosphere where the public will think giving you new power is the best way to handle the situation.

Hitler managed to install a despotic government by instilling fear and making the public believe that granting him dictatorial powers was necessary to defend against the Polish menace.

Re:Taxes suck, but why not?

[theghost]

In order to win an anonymous argument on the internet you just wished (perhaps hypothetically) for your opponent, his friends, and all the innocent bystanders near them to be killed. Think about what that says about you.

Regardless of the validity of your claims, you have lost all credibility because you have proven that you don't have a sense of perspective.

And since this is an article about (primarily) mmos...

GG L2Argue Nub. Pwnt!

Re:Taxes suck, but why not?

[Anonymous Coward]

On the contrary, there IS a definitive, objective answer to the question "why does government impose taxes", or more precisely, "why does government take its revenue by force". The answer is found in economics.

The answer is quite simple, although certainly not obvious to the typical taxpayer who knows nothing but government: because force (coercion) is the only tool government has. (If government was voluntary, it wouldn't be government -- it would be free enterprise.)

Let's explain in detail. Government is defined as the organization holding the unique "right" to employ coercion as its means within a given territory. (Anyone else who does so, without the blessing of government, is a criminal.) That is the ONLY unambiguous, 100% objective definition of government which applies to all governments, past, present, and future. This "right" to employ coercion is the one thing all governments MUST have in common. (Note that whether you consider government necessary, or beneficial, or even "compassionate", is entirely irrelevant -- you cannot deny the fact that government is founded on the principle of coercion.)

Therefore, being forever propped up by this foundation of coercion, government cannot produce anything of value on its own merit (for example by trading voluntarily with others as an honest businessman would do), because everything government has was taken by force in a zero-sum transaction. In order for government to gain, somebody must lose. The loser, of course, is the taxpayer who has no choice in how much to "donate", let alone what laws he will be subject to.

In a voluntary instance of trade, each side benefits from the transaction (+1 and +1) and therefore the net sum is positive: wealth is created (there is more wealth existing after the transaction than before). In taxation (or -- and take note -- theft), one side gains (+1) but ONLY at the expense of the other side (-1) who couldn't chose for himself to engage in trade but was rather coerced. The net sum is zero, and therefore no wealth is created, only moved around or transferred from one party (taxpayer) to another (government). The fact that government insists that it's for the taxpayer's benefit does not, in any way, remove the element of coercion from the transaction, nor does the so-called "social contract" theory which claims that individuals volunteer themselves to be subject to coercion. (Is it possible for an individual to coerce another individual into volunteering? Why not? How then is it possible for an individual to volunteer to be subject to coercion?)

With that, we can see how government cannot actually produce anything of value on its own because it has no means of generating a positive net sum on its transactions. (Again, if government was voluntary, it wouldn't be government.) Even where government claims "profit", you have to remember that government achieved its means for that "profit" through pure coercion, not voluntary association.

If government didn't collect its revenue by force, government couldn't exist.

Re:Taxes suck, but why not?

[SatanicPuppy]

I don't mind income tax so much, though it does piss me off when money gets wasted on stupid crap. Not surprised you posted as A.C however. Funny how people whose arguments boil down to "People who are poorer than me don't matter, and shouldn't get a dime of my money if they were starving in the gutter" don't like putting their name on their opinions.

Yea, the McDonald's employee with the Rolex is a real common problem.

Yea people have screwed up priorities. Some poor people blow money on non-essentials, just like the rest of us. Then there are the people who place so little value on other people, that they begrudge the tiniest amount of their tax money that goes to other people.

Everyone jumps on the same examples: Schools and poor people. Out of the entire federal cash income (less than half of which comes from income tax), outlay for education, job training, employment and social services total a pathetic 3%. Almost all of the money that goes to those programs comes from property taxes and local/state sales tax.

But that 3% is such a big deal to you, that you'd like that 1.5% of your income tax back more than you'd like poor kids to have an education, or than you'd like the government to put money toward soup kitchens, or whatever. I paid an obscene amount of income tax last year, and 1.5% of it is still less than 500 dollars...Not much of a TV, by modern standards.

We pay 3 times as much paying the interest on our goddamn national debt...Why don't you complain about that, eh?

virtual money

[El_Muerte_TDS]

If they want to tax virtual assets then they should also accept virtual money to be used for tax payments.

Also, do players actually own the virtual assets? Because aas far as I can tell it's the game operator that actually owns them since they can always take those assets away from the player (for example by cancelling their account).

Unemployment and Social Security Benefits?

[gaspar ilom]

If it's taxable -- or otherwise treated like "income" -- does it then get treated like any other "work:"

When I loose my loot, is that now a write-off? (is it like investment depreciation, or a gambling loss?)

Am I running a "business" -- and can I hire in-game "employees" ?

When my skills decline, can I consider myself unemployed?

Can I avail myself of anti-discrimination laws?

Can I retire and collect social security?

When you think about it, it's pretty absurd.

I'm not paying a dime for my WoW character...

[A Name Similar to Di]

As blizzard has made incredibly clear, all characters, items, and gold, belong to them, and anyone buying/selling gold/characters/items is breaking the policy.

In reality, I think that all MMOs /need/ to make the same claims as blizzard and fight to protect them. Once the IRS starts to tax virtual assets, what's next? If I get someone killed in game can I now be sued for financial hardship? IANAL, but it seems like I would have effectively cost them some of their personal assets. How about Eve and all of the financial scandals we've had stories about. If the in game currency is recognized as having "real world" value, are all of those folks going to court? In short, I think it would destroy most MMOs.

U.S.?

[EMeta]

The biggest hurdle I see is that (of course) individuall countries can only tax people residing there or making sales there. And the game companies have no business (and certainly needn't) find out where people are playing from. (Ignoring for the moment region-centric consoles.) If servers in some said country are being taxed internally through the system, then such transactions will move to international servers--really, what big games have only servers in one country?

The problem boils down to this: Game companies are not enforcing anything about their players' locations. Therefore, their location cannot be proved taxable. (Unless somehow you give all your real contact information to them, which I find unlikely, as they don't want to require citizenship to any one country to be a player.)

Re:taxes on virtual goods?

[Anonymous Coward]

I agree. I don't understand their idea either, as it's not fair when compared to most real world counterparts.

For example, if you purchased your home 20 years ago for $56,000, and it's worth $210,000 today, you don't pay tax the difference *until* you sell it. Property is admittedly not a good example, since there is property tax, but there are other examples. A business does not pay tax on profit of an item until the good is sold and then only in accumulation (profit/loss). Similarly, holding stocks is not taxable until the stock is sold.

Someone with a better understanding of property tax can comment, but my impression was that property tax was a holdover from the days when owning land was considered a special privilege (similar to only land owners had the right to vote for a time there).

How can we be taxed on something we don't own?

[IflyRC]

Every single MMOPRG states in its own EULA that the virtual goods received in game are their own property. Now, even if they can't stop all E-bay auctions, web sites selling currency or characters it doesn't change the fact that the sellers do not own the property to begin with. If anything, its trafficing in stolen goods. The EULA loans you the virtual item for gameplay then you go and sell it for real world currency? Tax the sell, not the game company so those people who do not sell it don't have to pay it. Even in some states illegal drugs are taxable which is enforced on top of a fine in some cases.

Re:How can we be taxed on something we don't own?

[Cruise_WD]

I think this going to be key - how much do you truly "own" anything in a MMOG? If the parent is correct in saying these items remains at all times the property of the games companies then there is surely no issue - you have no assets in the game world.

If your neighbour lent you his lawmower, and you sold it, do you get taxed on the sale or prosecuted for theft? And while it isn't technically "theft" since the game company still has full access to said item, you're still recieving money for something you don't own, and isn't therefore an asset.

IANAL, but I really can't see how this could work, ever.

What about deducting the cost of gaming

[StarkII]

I would have to assume that if they can tax you for virtual earning, you should be able to deduct virtual expenses. If this is considered a viable economy, your monthly subscription fee should be deductable. I would assume that if this moves forward, there is far more money spent on the game than is ever earned in it. It seems like it would be an overall loss for the government.

Let me get this straight

[Reapman]

Little 8 year old Johnny, who plays a game, who's virtual assets are in fact owned by the company that runs the MMO, has to pay tax, on stuff he doesn't own? With no physical attributes?

Last I remember, most MMO's it's against the ToS to trade for real money, so doesn't this law go against the ToS?

Fine tax me, and watch the mmo market burn. I ain't payin tax on stuff I don't own.

Game-changer for Grey/Black RMT Markets?

[miller60]

This is a key point. We're starting to see the first few legal cases concerning property and ownership in virtual worlds, which may create precedents about who owns what and what property rights players can expect. There's really a two-tier economy at the moment, as some worlds allow/encourage ownership and real money trading (Second Life, some EQII servers) and appear to be operating under different rules than worlds in which the ToS bans asset trading, which then moves to grey/black markets. It'll be interesting to see if the notion of IRS interest in real money trading prompts more game operators to create official exchanges than allow them to manage the economic activity in their games. It could also send them in the other direction - outlawing RMT and forcing the IRS to shake down eBay sellers. Either way, this is probably a headache for IGE.

This won't work in Warcraft

[Kindgott]

I don't know about the EULAs for other MMO products out there, but Blizzard is fairly explicit in pointing out that every last character, item, piece of copper, and other property "your" character "owns" is the sole property of Blizzard Entertainment.

Yes, people do sell their accounts on ebay and such, and I do agree that such a transaction is indeed income, but officially there is no value whatsoever to the currency and items in game. If anyone were to be taxed for these in-game assets, it should be Blizzard, since they have sole ownership of everything in their game world.

What's next, the IRS is going to have a WoW account and send tax letters in game to collect my gold pieces?
Then they'll turn around and sell them for $15 per 100gp!

Deductions

[ragefan]

This could work out for the best. Just think , then the cost of buying the games plus expansion, and monthly fees could be deducted as expenses. Not to mention in the case of WoW, the GP spent in training abilities and getting epic mount so I can run the instances and BGs that get the loot to pay taxes on.

Honestly, though how could this work? I could potentially form my own company to play WoW and sudden the cost of meals while eating and playing, electricity and computer upgrades all business-related. Now, I'm looking at a net loss as a company therefore no taxes.

Very US centric thinking.

[mattpalmer1086]

These games are global, I am not a US citizen and I don't live in the US. Good luck to the US government trying to tax me for playing a game.

Taxation on real income earned through playing a game - fair enough - then it's just normal income. Although the volume of people earning significant amounts of real money from a virtual world in any given country is surely so low that it's not worth considering.

I realize this seems counterintuitive...

[Gorm the DBA]

But if I was a Gold Seller on an MMORPG, I'd very much be in favor of the IRS declaring that the gold was my property and I was to be taxed on it.

Why?

Because then the government has declared it's *mine*, therefore despite any statements in the EULA or elsewhere, the Developers of the Game could not arbitrarily close my account for gold selling. They could not fix bugs in the game that I was exploiting to get more gold faster. They couldn't do anything to prevent my business from operating, or else I'd have a nice little conversion of property suit, or restraint of trade, or even an Anti-Trust suit.

The taxation rate would be consistent, so I could factor it into my pricing and business plan and still remain quite profitable. And it would be completely legal and they could do nothing to stop me.

So, if I were Blizzard, Turbine, or any other game maker attempting to control the Gold Reselling market, I would fight this tooth and nail and claw and frostshock.

Re:Oh, I know.

[RingDev]

Good call, what if my under 16 year old child wins some uber digital item that the IRS deams has a real world value of $125,000. Then we take that item and donate it to some Disabled Vets NFP (ie: Tax shelter organization) in game guild. Can I claim that $125,000 fair market value donation on my tax return?

Heck, if so, anyone with a fat pile of capital gains may start looking into sponsored events in MMOs. Sure, pay a couple of college kids $5/hr to play a game they enjoy and to turn over any high value items. Donate the high value items for tax write offs and blammo! For a couple grand in labor you have a huge tax incentive!

-Rick

Re:Oh, I know.

[Kenja]

Even better. If the virtual money is taxed as income, then my expenses in game are tax deductible. Raid repair costs, epic flying mount, sword of a thousand truths, all right offs.

From the FL dept of revenue

[Overzeetop]

From the FL dept of revenue:

What is Intangible Personal Property Tax?

Florida's intangible personal property tax is an annual tax based on the current market value, as of January 1, of intangible personal property owned, managed, or controlled by Florida residents or persons doing business in Florida. (empahsis mine)

Now, currently, intangible property is limited to stocks, bonds, etc., but there's no reason that the state couldn't extend that to property in a game (though it's unlikely). Remember, too, that businesses are often taxed on business property, which is valued every year at current market value or at depreciated value, depending on the type.

There are lots of pitfalls in the way things are taxed - mostly to get around people who try and get around the system, or to extract revenue from other/new sources (FL has lots of retirees, retirees have low incomes but high net worths - intangibles is a way to get at that money).

So when a game goes down I can report a loss?

[Maxo-Texas]

Earth & Beyond was shut down.

Do I get to report lost income on my lost starship? It was top of the line and fully upgraded.

How do you determine fair value for obtaining an epic weapon?

Inflation and deflation in online games is horrific. One day I might have a worthless blue diamond. The next, they introduce a new recipe that uses blue diamonds and it is suddenly worth about 25 dollars. A month later, everyone has farmed them so heavily that they are only worth about 25 cents again.

I don't see how they are going to get a handle on these things except at the point of transfer to real dollars.

If second life goes out of favor then that million dollars of virtual real estate could become worthless overnight.

Re:Be careful if you live in FL

[Anonymous Coward]

Which brings me to this question.

Why does the Government feel it needs to tax everything possible? Can the absense of tax, and rule of tax law for a given commodity exist in a free market? Is it so hard for economists, the IRS, and politicians to grasp that just because you can tax something, doesn't necessarily mean you should?

Here is a simple answer to the above: If the total taxes collected from this commodity is greater than the amount of expenditures required by the Government to a) write the tax code b) implement said tax code and c) punish those not in compliance with the tax code, then its not worth taxing it. To go deeper into that, if the Government can't begin to fund other programs from the taxes collected after the expenditures have been extracted, then it is REALLY not worth it.

This sounds like Government sticking its nose into something which it a) will likely not profit from and b) does not fully understand the limited timeframe involved with which said commodity might exist.

Score another point for idiocy by our elected officials!

Not without your SSN

[klossner]

The form that reports non-employee income would be one of the Form 1099s, such as http://www.irs.gov/pub/irs-pdf/f1099msc.pdf. It cannot be filed without a taxpayer information number, which for most of us in the US is our social security number.

Can you imagine somebody handing over their SSN when buying a game?

Other consequences?

[Anonymous Coward]

If the law recognizes virtual goods as taxable, then what other laws will get tweaked as a result? Is that player who ganked you for that item just playing the game, or a thief? Consider the EVE online scam with the guy who ran off with all the ISK. If ISK were a taxable commodity, would there now be legal grounds to prosecute him?

What about item duping? How would this be handled?

This story may be a troll, but consider all the ramifications if such a thing did happen.

Re:Say you're an Artist ...

[rrhal]

Those are examples of realizing tangable assets in the real world.

I would think that if I exchange a small fortune of in-game currency for a +7 sword of ogre evisceration that I still haven't realized anything in the real world. I'm merely engaging in my hobby.

Re:Oh, I know.

[RingDev]

It's been a while since I was young enough to worry about it, but don't minors under 16 have some form of exemption? And wouldn't there have to be some form of exemption on this? Imagine low/middle income class Ma & Pa's suprise when they get a $50,000 bill from the IRS for past due taxes because their 14 year old kid went on a bunch of raids over summer break the year before.

-Rick