Slashdot Mirror
Taxes, Second Life and Warcraft
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."
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
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.
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.
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.'"
Also, note that in Warcraft, nothing about cashing out is ILLEGAL. It's just against the Terms of Service. When you sell gold, or a character, or anything else, you're not selling anything physical: you're selling access to that (it never leaves Blizzard's servers).
While is is completely within Blizzard's rights to cancel any accounts associated with such activity (afterall, they technically own the accounts), there is nothing illegal about it.
"People who think they know everything are very annoying to those of us who do."-Mark Twain
Does this mean if I have an epic ninja looted from me I can write it off?
I'd only want to pay this tax, if I can pay these taxes with virtual money.
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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.
Hypothetically, I could live in Canada while the WoW servers I play on are housed in the U.S. but do business with a guy in Germany whose playing through a proxy in France.
OK, so thats a bit of an improbable example.
Try this on: In Canada, I can buy computer hardware from Alberta - which has no provincial sales tax - and have it shipped free to my house in Ontario - which has some of the highest provincial sales tax in the country - and pay (*drum roll please*) zero provincial sales tax. Thats not improbable; it's real. I built my last computer using components I purchased in this way. I'm sure lots of people in lots of countries do this. This is because governments cannot rightly decide where the tax needs to be applied, and frankly, the federal government cannot force any province to implement a sales tax to solve the problem.
So whose tax laws apply, and how do we enforce them?
This article might work in theory, but rarely do authors like this think about real world application.
Sadly, they often end up in government.
Obviously she's unaware that something cannot have "real market value" when it's illegal to sell.
Hey, look a slashdot comment about something that is 'obvious' that is entirely wrong!
You're wrong. Your first problem is that sale of WoW items is not illegal - it's merely against the terms of service contract you have with the service provider, which is NOT the same thing. Income earned in violation of a contract is still income, and you still have to report and pay taxes on it. If this were not the case, I could just have a contract with anyone who gives me money that says I must live in Trinidad and Tobago to get paid, and then turn around to the IRS and say that since I earned that money in violation of the contract it's not taxable. Clearly this isn't the case.
But let's say, for the sake of argument, that sale of WoW was actually illegal. Guess what? You're STILL wrong!
Income from any commercial activity is taxable, whether is is legal or not. And that's how the government often gets people involved in illegal activity - they don't prove necessarily that they were doing something illegal, they just prove that they had income that they didn't declare on their taxes and get them for tax evasion.
For example, if you make $1 million selling cocaine, even though the activity is illegal, you're still liable for the taxes on the income, and can still be criminally charged for tax evasion in addition to narcotics distribution.
A more mundane example is illegal immigrants - even if you're working here illegally, you still have to pay taxes, and that's one of the big reasons the IRS started issuing individual tax ID numbers - so people using fake social security numbers could still file their taxes. And believe it or not, a lot of illegal immigrants do pay taxes.
As a more general comment on the topic at hand, it seems logical to me that you'd only be liable for taxes on WoW and other virtual items if you actually sold them for real money. And if you did, you'd at least be able to deduct your subscription fees. But if you only keep your virtual items in the virtual world, I don't see how you have tax liability there any more than you have tax liability if you sew your own clothing. Start selling that clothing to others though....
Regardless, maybe you should go back to arm-chair quarterbacking and leave the arm-chair lawyering to the professionals.
paintball
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. ...The truth of course is that there is simply less government involvement [in MMORPGs].
Oh, I basically agree, but this opens up a new can of worms: it commits you to:
a) separating businesses based on how much government they use, and taxing them differently (at least to a coarse approximation)
b) taxing the economy *only* at the rate required for the government provice the services needed for it to exist.
a) isn't so bitter a pill to swallow, but b) means much, much lower taxes, since very little tax revenue is spend on ensuring the necessities for the modern economy to exist, at least when honestly appraised. For virtually every government program, you can find a country that does without it, or has much less of it. (I can't sell items on ebay unless the government has a presence in Iraq? Come on!)
Apology to Ubuntu forum.
Less government involvement???
You've obviously failed to account for the effort governments expend in monitoring all online activity so they can enforce those taxes.
Sheesh!
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.
Secondlife however has a money market and maintains an up-to-date exchange rate of Lindon Dollars to US Dollars. It would be entirely possible to tax earnings in Secondlife in real dollars, although 99% of the time the tax would come out to pennies per month (effectively not worth the government's time), some of the larger Land Barons however could easily make enough to have to pay taxes on it.
I read the internet for the articles.
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
The term "virtual world" should not be taken literally. It's not like these people are playing from their apartments on Mars or something. They are in the real world, and where their virtual actions touch real world money, the government has a legitimate interest in recouping its expenses, e.g., law enforcement concerning online fraud. This is what's meant by "commercial"
Where transactions are purely virtual - i.e., the transaction does not touch real money - the transaction has zero value in the real world, and the taxes should also be zero. But if you're talking about RMT, whether it's sanctioned by the game developer (Second Life) or not (most MMOGs), then the transaction is no longer purely virtual.
This isn't exactly what the article author indicates - she believes that if you are dealing in Lindens, then you're essentially engaging in barter with intangible property - but I would argue that Lindens are worthless until there is an interface with a non-virtual good, service, or money, and that's the point at which tax could be assessed.
Whether or not from a public policy perspective it's a good idea or not to tax online transactions is another question entirely (e.g., tax moratoria, etc.).
Whoa - all that "national" stuff is paid for, either directly by taxpayers, or indirectly through bond-holders, or as "consumers." There is no such thing as "government-paid" anything - it all ends up coming out of your pockets, or your kids pockets.
In other words, taxing transactions that don't involve the exchange of legal tender - you know - REAL money - is pure BS, because nothing or REAL value has changed hands. Or will the IRS start accepting payment in Linden Dollars and WoW points?
Go look at New Jersey (google for "new jersey the armpit of the world"). Then tell me that letting another country invade it wouldn't be a "Good Thing". Heck, they're probably praying for a hurricane or other natural disaster. http://gilded-messiah.livejournal.com/2004/12/06/0
From the Article (Context in bold):
Most people should have been able to pick up from the omitted opener to that sentence that she was discussing those two issues. Discussion is not the same as supporting a given subject.
If you were tired or drunk you might have missed that, so we have the very next sentence to let us know she's not an idiot. She very clearly, in other sections as well, states that she believes attempting to tax transactions that are purely in-game is unreasonable.
Unless you're playing WoW to make money, I don't know why so many people seem to be out to get this woman when she's basically defending us in our desire to play WoW-like MMORPGs without having to fill out a 13-37A Tax Form for our gains.
Thunderclone: ONE MAN ENTERS! TWO MEN LEAVE! ONE MAN ENTERS! TWO MEN LEAVE!
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.
And the problems with doing a) and b) is that a primary role of corporations is to externalize their costs.
p oration.html
http://www.thirdworldtraveler.com/Rachels/The_Cor
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.
If people actually realized what the government spent money on, it would be a little easier to have them put a stop to frivolous spending and costly wars. Not to mention selling a war with a cost of $1,000 tops with cashbacks (oil sales) of most of that and then an annual cost upwards of 2000 dollars would've had the average voter thinking whether it was worth it or not versus sending others kids out to die.
http://www.house.gov/schakowsky/iraqquotes_web.ht
http://www.washingtonpost.com/wp-srv/politics/int
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.
I am an accountant and you are correct. There are a few issues here though. One is showing intent to turn a profit. This will allow expenses to be used as business deductions.
Alternatively it can be looked at as an investment. As an investment active/pasive rules would apply hence losses can only be set against like category gains. Another problem here is determining the costs basis for the virtual items sold which could be very complex to determine but it possible. It comes down to determining the portion of you stake in the game that was sold and your "investment" in the game. If you want to try to deduct your cost basis maticulous record keeping is the key, both as "investments" are made and the % of your stake in the "investment" sold at the time of sale.