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Taxes, Second Life and Warcraft

Posted by CmdrTaco on from the get-on-the-ype-train dept.

An anonymous reader wrote in to say that there is "...a new law review article that explores the tax treatment of players in Second Life and World of Warcraft. The bottom line is that commercial activity that occurs in virtual worlds should be taxed the same as in the real world. But purely personal activity within virtual worlds should not be taxed."

29 of 441 comments (clear)

  1. Only one answer by Stumbles · · Score: 1, Insightful
    The bottom line is that commercial activity that occurs in virtual worlds should be taxed the same as in the real world.

    BULLSHIT

    --
    My karma is not a Chameleon.
    1. Re:Only one answer by UbuntuDupe · · Score: 4, Insightful

      Wah! I'm a geek who loves closing tax loopholes for the rich until I realize that means taxing my nerdy activities too!

      --
      Apology to Ubuntu forum.
    2. Re:Only one answer by drinkypoo · · Score: 5, Insightful

      Wah! I'm a geek who loves closing tax loopholes for the rich until I realize that means taxing my nerdy activities too!

      Taxes on activities carried out in the Real World (tm) are taxes because those activities depend on certain services which are funded by tax monies.

      If the activities take place only in a virtual world, and the entire transaction is carried out within the private sector and without government involvement, then precisely why should they be taxed?

      The truth of course is that there is simply less government involvement. Thus such transactions should be carried out at a reduced tax rate.

      --
      "You're right," Fisheye says. "I should have set it on 'whip' or 'chop.'"
    3. Re:Only one answer by Surt · · Score: 4, Insightful

      Yes, the virtual world is totally non-dependent on telecom fiber lays supported by our governments, don't use any government subsidized power, and never rely on the roads to move server equipment. They'd be totally unaffected if our national government laid down its arms, gave up having a military budget, and let other countries invade at will. And the people who participate in these things are totally independent of the social benefits network, as none of them have any children, or parents or ...

      Anyway, you get the idea.

      --
      "Who is the Journal of Quantum Physics going to believe?" --Stephen Hawking
    4. Re:Only one answer by tomhudson · · Score: 2, Insightful

      You mean you don't realize that money is taxed at every step where it changes hands? This is how it has always worked- why should the internet be any different?

      doh - maybe because money ISN'T changing hands until you actually "cash out"?

    5. Re:Only one answer by theckhd · · Score: 2, Insightful

      Except that "commercial activity" implies trading virtual content for real-world money. The article (hell, even the summary) goes out of its way to point out that as long as a transaction involving real-world money isn't involved, no tax would be assessed.

    6. Re:Only one answer by SL+Baur · · Score: 2, Insightful

      In fact for games like WoW that is the only way I can see that you would be able to tax it, since there is no generally agreed upon standard for converting WoW Gold into US dollars. Third party out of country gold farmers do not make for a nationally recognizable conversion rate. If you had read the article you would have seen that those gold farmers are the only ones she is proposing to tax.
    7. Re:Only one answer by WaXHeLL · · Score: 4, Insightful

      If virtual property was taxed when convered back to real money, then you'd also have to account for the expenses incurred in obtaining that virtual property.

      Deductions for my World of Warcraft monthly fees?
      Deductions for my ventrilo server?
      Deductions for the costs incurred in developing a SL object?
      etc

      I don't think anyone has really taken a look at that issue, but much of it is already covered under existing US tax laws (business expenses).

      And if I cash out less than what I originally put in, can I write off the loss?

      --
      The troll with karma.
    8. Re:Only one answer by Maxo-Texas · · Score: 4, Insightful

      And the problems with doing a) and b) is that a primary role of corporations is to externalize their costs.

      http://www.thirdworldtraveler.com/Rachels/The_Corp oration.html

      So you have two groups of people (citizens and government employees) who sorta, kinda want to tax fairly and one group of people whose entire purpose for existing is to push those costs on to the other two. Who is going to win in this struggle?

      Our problem with b) is that if you want a swimming pool and I do not. And I want a recycling program and you do not, we both end up with a swimming pool and a recycling program. Extend that to 300 million individuals and you end up with all sorts of wacky stuff. I think you would get a better result if you fixed the tax rate (which would require a constitutional amendment) and then let everyone scrabble over that fixed amount.

      And then we have the problem of words.
      If we say we tax activity "A", then people doing that activity find a way to change it just a little and then call it activity "A1". That applies in this case. Likewise, if we had a constitutional amendment limiting taxes, they would define a new word (usage fees, service fees.. who knows) instead of the word "tax" to get around the amendment.

      You have people working 8 hour shifts to make a product that they sell for real money to consumers. But because it is phrased as "playing a game", they have managed to get away untaxed.

      Likewise the gambling issue in S2 where lindens could be won gambling and then sold for real cash.

      And let's turn it around... Say I start mowing lawns for 100,000 platinum in EQ? That's $21 value for a lawn mowing but it's just "EQ Plat", not "real" money. It takes me about 120 hours to earn 100,000 platinum so it's a very good deal for me, removes taxable liability.

      The more virtual worlds we have- and the more time people send in them- the bigger this issue becomes.

      I don't go to a real movie, out to eat, or to a real ball game- instead I spend 30 hours in a virtual world that week. Provided food, a place to live, and a good computer/network connection I could probably go 10 to 15 years doing almost nothing as far as the real world is concerned.

      It's a fascinating issue.

      --
      She was like chocolate when she drank... semi-sweet at first and then increasingly bitter.
    9. Re:Only one answer by UbuntuDupe · · Score: 4, Insightful

      You make a good point about the wastefulness and complexity that attaches to taxation under democracy. But:

      a) I think you give citizens and government employees way too much credit. They, too, are self-interested and intend to enrich themselves at the expense of everyone else.

      b) I think your characterization of corporations as being *for the purpose* of externalization of costs, is misleading. Yes, it is possible (though rare) that a corporation can impose costs on others that its current assets can't compensate for, and the victim could be stiffed while wealthy silent partners (passive shareholders) are immune. But this happens all the time with poor criminals. Johnny Thug kills someone and doesn't have to pay a dime (because he's too poor to be worth suing) and gets his incarceration paid for by his victims. To the extent that we can't enslave him to pay compensation to his victims, is that too an externalization of costs?

      --
      Apology to Ubuntu forum.
    10. Re:Only one answer by Atlantis-Rising · · Score: 2, Insightful

      An argument that seems to make sense but is logically fallacious. 'money' itself is nothing but a medium of value exchange. 'Money' is indeed changing hands.

      --
      "It is possible to commit no errors and still lose. That is not a weakness. That is life." -Peak Performance
    11. Re:Only one answer by drinkypoo · · Score: 3, Insightful

      b) this is silly anyway because we all know that corporations exist to separate the corporate offices from responsibility. There is no other need for them to exist.

      --
      "You're right," Fisheye says. "I should have set it on 'whip' or 'chop.'"
    12. Re:Only one answer by Endo13 · · Score: 3, Insightful

      Except you're just confusing the issue by using "virtual income" when what you really mean is just plain old "income" generated from virtual goods or services rendered. Virtual income is an income in-game that has not been converted to real-world currency.

      Taxing virtual income is pure insanity; taxing real income generated from virtual goods or services rendered only makes sense.

      --
      There is no -1 Disagree mod. Slashdot.org/faq defines mod options. USE IT.
    13. Re:Only one answer by Kijori · · Score: 3, Insightful

      OK, so life isn't fair. But that doesn't mean that we can't try to make it better. It's a fallacy to think that the only reasons that someone won't have put aside money for retirement or healthcare are stupidity or poor planning; recent research has shown the US to have lower social mobility than a lot of developed countries - should we really punish people for being born into a poor family? And as I pointed out before, people from minorities are massively over-represented by those under the poverty line - are they just stupider?

      What incentive is there in it for ME to work hard to succeed (measured solely in $$'s earned for my expenditure), if I basically have to give it back to the country to support those who earn less, especially due to above mentioned stupidity?

      If you really succeed - whether by working hard or by being born into money and power - you will be in the top tax bracket. You will pay 35% tax on an income of at least $336,551, leaving you $218,758 per year to live on. You've taken a hit, but you're still not going to be groping behind the sofa for food money - and by European standards this is very low taxation. On the other hand, if you make $11,340 a year, with 2 dependant children, you will receive $4,536 a year in assistance through the EITC scheme. This is quite possibly the difference between eating and not eating. (again, by European standards, this seems very low; even in the UK, which has a comparatively conservative policy regarding benefits, the same family would receive $8,200.) Now take into account John Rawles' veil of ignorance; imagine you haven't yet been born and have no idea where in society you will end up. You have (rounding to the nearest integer) a 22% chance of earning less than $12,500 and a 43% chance of earning less than $25,000. Your chance of earning more than $50,000 is 29%. Things look even worse if we take into account other possibilities - what if you have an accident, or are unemployed? Nationally, you have a 4.8% chance of being unemployed, roughly the same as your chance of earning over $100,000. If you were making your decision based on these chances, rather than in the knowledge that you aren't in a position to need Government assistance to stay alive, would you still think that people shouldn't have to lower their living standards to put food on someone elses plate - despite the fact that otherwise, that plate might be empty?

    14. Re:Only one answer by budgenator · · Score: 2, Insightful

      I'm not sure what this has to do with the price of tea in China, but here goes, everything you mentioned is either taxed or not taxed without regard as to whether the bits connect to WoW, 2nd life, sleazey-porn.com, BrotherJim-bibleThumper.org or OMGponies.com. If the IRS was able to legaly tax imaginary money, I'd be totally screwed because the wife keeps dreaming about winning the lottery. Seriously the guy is a law professor, when he says "commercial activity" he talking about somebody preforming real-world labor, i.e. playing a game and exchanging the fruits of that labor for real-world "valuable consideration". Whether your getting paid for digging ditches or playing WoW, the IRS wants you to pay your fair share as determined by congress.

      --
      Apocalypse Cancelled, Sorry, No Ticket Refunds
  2. That pretty much nails it on the head. by Churla · · Score: 5, Insightful

    It's the difference between an amature/hobbiest and a professional. Once you start making real world money off things you are at that point a professional and income from your profession should be taxed.

    Don't tax me just because I have 10k in gold in WoW... But if I sell that for the $1,600 or so I could get wholesale for it, then it's income and I should give unto ceaser and all that..

    --
    I'm a fiscal conservative, it's a pity we don't have a political party anymore
    1. Re:That pretty much nails it on the head. by UbuntuDupe · · Score: 5, Insightful

      Don't tax me just because I have 10k in gold in WoW... But if I sell that for the $1,600 or so I could get wholesale for it, then it's income and I should give unto ceaser and all that..

      The problem is that under that principle, investors could evade taxes. Basically, investors have long salivated at the thought of deferring taxation of all intermediate gains (reinvested dividends) until spent on consumption. (Yes, you can do this with retirement accounts, but I'm talking about once those are maxed out.)

      If you exempted those good-as-money gold transactions from taxation, investors could do something similar. Basically, they could set up "pseudo-dollars" that are instantly redeemable for real dollars (and vice versa). Then they would be exempt from dividend taxation until they want to spend the dollars on consumption.

      Now, I actually support the idea of allowing deferral of taxation on dividends that are re-invested, but I just wanted to point out the problem (from the IRS's standpoint) of exempting WoW gold.

      --
      Apology to Ubuntu forum.
    2. Re:That pretty much nails it on the head. by khallow · · Score: 2, Insightful

      Wake me up when they're hiding millions of dollars of investments and transactions by using WoW gold or the equivalent. I imagine in a few years, there will be some game stable enough that one could launder some amount of money through it. But you still have the problem of extracting the "money" from the system.

    3. Re:That pretty much nails it on the head. by cowscows · · Score: 2, Insightful

      If rich people want to hide their money in video game currencies, I say let them. That'll last until somebody loses a few million dollars worth of real money when their account gets banned, or a database server crashes and the data is lost, or a company suddenly folds and takes their game offline.

      Every MMO out there has a user agreement that lets them shut down your account for any reason, and no company is dumb enough to take legal responsibility for safeguarding your in-game currency. Second Life is doing some weird stuff with the ownership of in-game assets, but if they ban your account, they're not going to cut you a check for the real world equivalent of your game money.

      Even if you're not worried about your money flat out disappearing, don't forget that MMO economies have all sorts of built-in ways for the game developers to influence them, in drastic ways that the fed only wishes it could affect the US/global economy. Inflation, deflation, and in-game taxation can be very unpredictable, and truly could change at the whim of a single individual. No one intelligent would put serious money into a situation like that. If I ran a game and suspected of people using it to harbor money from taxes, I'd be awfully tempted to mess with them, just for being so dumb.

      --

      One time I threw a brick at a duck.

  3. What's the story here? by east+coast · · Score: 5, Insightful

    So if you make real money from virtual goods you'd have to pay taxes?

    Am I missing something here? So you make real money for selling a virtual product. I don't see this any different from paying real taxes on other virtual products in the past such as profits gained from 1-900 numbers. Why is there even a question as to the taxation of these funds?

    --
    Dedicated Cthulhu Cultist since 4523 BC.
  4. Re:What is this bitch smoking? by esme · · Score: 2, Insightful

    Obviously she's unaware that something cannot have "real market value" when it's illegal to sell.

    Right. Just like illegal drugs have no market value, and nobody's ever been busted for income tax evasion because they didn't report their drug dealing income...

    -Esme

  5. This is not hard by Sycraft-fu · · Score: 5, Insightful

    It is real, real simple: If you make money doing something, you owe taxes on that. That's really all there is to it. You can cover all the in game situations with that. Spend hundreds of hours in WoW getting gold to spend on things in game? No tax, you didn't make any money. Spend hundreds of hours getting gold, that you then sell to another play for actual dollars? You owe tax (income and perhaps sales depending on the location) because you made money.

    It really is just that simple. You don't pay tax on what you do in game, any more than you pay tax for coding on your computer. You pay tax when you sell something in game. If your time spent in game is not for profit, there's no tax. Likewise if you write something and release it in to the public domain there's no tax.

    This is not a hard concept, and from everything I've seen the IRS agrees. They want people to report profits made form games, just like they want profits from eBay and so on. However no, they aren't going to start taxing items in the games themselves, that makes no sense.

    This doesn't require an economics degree, doesn't need all kind of theory related to what the game is like and so on. When you make money, you pay tax. No money, no tax.

    1. Re:This is not hard by CastrTroy · · Score: 2, Insightful

      This may work, but can you count your time invested as a write off? Can you pay yourself a salary for the time you spent in the game, essentially negating all your profits? Maybe even put yourself at a loss to offset that you don't want to pay as much taxes on your real income from your real job. If they want people to pay taxes for stuff that they do in a video game, then the time spent on the video game should count as working, and should be deductible as such, as should the fees for playing said game, and the cost of the game, and the computer to run the game on, and the internet connection required for the game. See where I'm going with this?

      --

      Anthropic principle: We see the universe the way it is because if it were different we would not be here to see it.
  6. You're missing an important point.. by zyl0x · · Score: 2, Insightful
    Everyone here seems to be thinking that she's only talking about taxing real profits from virtual sales.

    "..the taxation of exchanges within the game, such as the exchange of a virtual sword for gold.
    Read this statement carefully. She's not talking about bricks of gold from Knox, she's talking about in-game currency. For those of you familiar with World of Warcraft, she's talking about taxing player-to-player trading. Example; I find some cool world drop, and trade it off to another player for 500 gold. She's saying that in this situation, I should be taxed for making a virtual profit!

    It's insane!
    --
    Blerg.
  7. Bwahahaha by Leroy+Brown · · Score: 2, Insightful

    I can't wait to see WoW game and monthly subscription, PC hardware, video cards, internet connectivity, etc. written off as business expenses!

  8. Re:Write Offs by Anonymous Coward · · Score: 1, Insightful

    More interestingly, I'm "investing" $15 a month to play WoW. I haven't turned any profit from that yet so can I claim that as a loss on my income taxes?

  9. VISAbucks by Anonymous Coward · · Score: 1, Insightful

    Blizzard bans gold sales in its Terms of Service (partially to help avoid this kind of issue) so Ill use Second Life as the example of the concern. Linden labs itself will exchange lindens for US cash.

    The issue is not one in which I go create some must have item for second life - sell it - then convert that to real money. The issue is what happens when money stays in Second Life - but is used to purchase in real world items. To use an example - say I run a business selling clothes in second life - and I have employees who help me create and sell second life clothes. We then sell those clothes in game, earning lindens. However I pay my employees for their time (time is a "real" resource) *in lindens*. I have not paid them in US cash. Thus even if the lindens were to be immediately exchanged for US cash we did not the various taxes on "real" income such as social security. Take the example a little farther - now not only do I pay them in lindens - they pay other retailers in second life for out of game items - say real clothes - in lindens. Out of game no money changes hands - there is nothing to tax. Carried to its logical extreme all monetary transactions could be handled by linden labs - all tax free. Its also backward compatible - if you want to buy something which does not accept lindens you simply get your lindens exchanged for dollars.

    This is not a scenario that government in general is prepared to handle. Unfortunately for them there is no technical reason why something like this could not be done. Even if its not a game currency whats to stop say ... VISA from offering their own internal "money" - exchangeable for "real" money on demand? Furthermore the prospect of eliminating some, or possibly all, taxes means that people get real immediate value. There is little to no legislation having to do with how to handle a scenario like this - thus if and when such a thing starts happening expect a lot of panicked government officials scrambling to adapt to the removal of their primary source of revenue.

  10. Earning value by WPIDalamar · · Score: 2, Insightful

    Earning real money for selling in-game stuff. Taxable. Generally everyone agrees.

    Devil's advocate time...

    a) Real money is taxable.
    b) You can sell virtual gold for real money.
    c) Virtual gold therefore has value.
    d) Receiving something of value is taxable as income. Example, if you win a car worth $20k, you have to pay income tax on that $20k. Or if you win a trip to outer space worth $200k, you have to pay taxes on that $200k.
    e) Therefore, receiving gold in game is taxable.

    For second life, it's almost obvious. Since you can transfer dollars to lindens easily and legally those lindens obviously have value.
    For WoW, it's not as obvious, but the same argument holds.

    Luckily... if I earn 2000 gold in WoW, then spend that 2000 gold on repairs, consumables, gear, etc, I should be able to write the value of that gold off making it a wash. (2000 gold earned, but 2000 gold spent) Or even better, if I start the year at 2000 gold, and end the year at 500 gold, can I claim a loss?

  11. This is hard by manekineko2 · · Score: 2, Insightful

    This is not hard for you because you have a grossly incorrect view of the income tax. You get taxed on any income, not just monetary. I'm a dentist and you're a lawyer. You agree to write a will for me in exchange for me cleaning your teeth. Boom, income tax on both of you for the fair market value of the services. And it has to be this way if you don't want to return the economy to the Stone Ages and the barter system.

    It does make sense to tax items in game, it just is that we haven't reached that point yet. Spend hundreds of hours in WoW getting gold to spend on things in game? Is using that gold to buy a Sword of 1000 Truths really different from using that gold to buy a piece of software which is equally "virtual"? If you setup a shop in game selling software for gold, should you be exempted from income tax just because you're receiving gold (a cash equivalent) instead of cash?

    Deferring taxation until the gold is sold for dollars is equally problematic. There are a huge number of tax shelters out there that exist simply for deferring taxation - time equals money. That money could be sitting in an investment earning dividends for you rather than going immediately to the IRS. The entire benefit of a traditional IRA is that you aren't taxed on the money until you take it out. Under the scheme espoused by a lot of /.ers, where you don't tax until gold is converted to dollars, suddenly anyone can make their own IRA without the IRS' help or permission.

    None of the US virtual economies are stable enough that people are using them to tax shelter, but that is a very short-sighted criticism. A number of Asian "virtual" currencies can now be used to directly exchange for goods and services outside of any game context.