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."

Comments

That pretty much nails it on the head.

[Churla]

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..

Re:That pretty much nails it on the head.

[UbuntuDupe]

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.

Re:That pretty much nails it on the head.

[nickname225]

I'm an attorney and I do some work in the tax area. Your thinking is not the way that tax works. The rule is - you are taxed on all income from whatever source. Income is the receipt of anything of value. As long as the value is reasonably determinable, you are taxed on that value. If the value is not reasonably determinable, you are taxed on it once the value becomes reasonably determinable. Of course, if you play WOW and earn income, it is as a small business, not as an employee. So all your costs, such as fees to play, and a portion of the depreciation on your computer, and a portion of your internet service fees, etc are deductible against that income. Then you get into a sticky question - if you buy a special weapon, to help you earn more gold - it is a capital expenditure and must be amortized - so what is the amortization period of a virtual weapon? Best thing to do - is not hold it past the end of the calendar year and dispose of it at a loss and take the full loss as a deduction against your WOW earnings. In practice, I think, few people when looked at in this light are profitable playing WOW. But beyond a doubt those who are are subject to the tax laws, although it will not prove profitable for the IRS to pursue these cases, since the amount is so small.

What's the story here?

[east coast]

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?

Re:Only one answer

[drinkypoo]

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.

Re:Only one answer

[MadJo]

I'd only want to pay this tax, if I can pay these taxes with virtual money.

This is not hard

[Sycraft-fu]

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.

Re:Only one answer

[UbuntuDupe]

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!)

Re:Only one answer

[tomhudson]

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?

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.

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

I'm from New Jersey. That's right, New Jersey. The Armpit of America. The sewage capital of the world. New York's retarded little brother. You can keep your pity, however, because I'm here to defend it, mostly. Like many escaped New Jersey inmates, I have a unique variant of Stockholm syndrome when it comes to my home state. I've fallen in love with my captor.

Don't get me wrong. New Jersey is a cesspool, just as you might have suspected. There really are girls with big hair and awful accents living in malls, women so awful that they turned the governor gay. These women really do have 400 pound boyfriends with hairy backs and low IQs. Turn signals are considered worthless luxury features, and, God help me, the whole state really does smell. However, it's New Jersey's consummate crappiness that ultimately makes it so great.

Radio personality Jean Shepard once said that New Jersey was "the most American of all states. It has everything from wilderness to the Mafia. All the great things and all the worst. For example, Route 22." Route 22, for those of you who don't know, is- I kid you not- a 24 hour strip mall that runs the length of the state. What is more quintessentially New Jersey- nay, more quintessentially American- than that? It's also the only place to go at 3 AM when you decide it's a good time to get some coffee and disco fries, or perhaps visit White Castle, the only burger joint with the gall to call their visibly greasy laxative rat-patties "Sliders."

While not unique to the state, White Castle's hamburgers share a few characteristics with New Jersey: they're both guilty pleasures, they only appeal to a small portion of the population, and they're both ironically nicknamed. New Jersey is, after all, the "Garden State," which in New Jersey-speak means "densely populated paved hellscape." In fact, New Jersey is the most densely populated state of the union, which might lead you to believe that the state is crowded and polluted. It is. But the large population isn't all bad. Because of its population density, New Jersey serves as a cultural microcosm of America as a whole. It is the proverbial "melting pot," where Godless, homosexual, French hippie crackheads live just a stone's throw away from inbred, racist, unwashed redneck crackheads. I know, because they're throwing stones at each other all the time.

I know what you're thinking. You're thinking ,"This still sounds completely awful." Like I said earlier, it is awful, and everyone there knows it. For a while, New Jersey considered changing its state song to Bruce Springsteen's "Born to Run." Not only would this have been the only state song to contain the word "suicide," but also the only one about trying desperately to get the hell out of the state.