Congress to Revisit Virtual Goods Taxation

News.com has the word that congress is set to re-visit taxing virtual goods, a concept they shelved a while back in order to consider the matter more fully. That's given the Congress' Joint Economic Committee time to come to a decision about what exactly the value of virtual goods means for players and game-makers. An economist with the group told CNet to expect their report sometime next month. "What that report will say is unknown, as the committee has kept entirely quiet about its thoughts. However, it's clear that something will happen. 'Given growth rates of 10 to 15 percent a month, the question is when, not if, Congress and IRS start paying attention to these issues,' [senior economist Dan] Miller, who is a fan of virtual worlds and economies, told CNET News.com in December. 'So it is incumbent on us to set the terms and the debate so we have a shaped tax policy toward virtual worlds and virtual economies in a favorable way.'"

Comments

Live with it...

[__aaclcg7560]

Even in the virtual world, you have death and taxes.

Re:Live with it...

[spirality]

Really though can't the government just but out and leave things alone once in a while?

I think President Reagan said it best:
"Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it."

Re:Live with it...

[RealGrouchy]

"...And if it stops moving, subsidize it."

So that's why politicians are always voting themselves pay raises!

- RG>

Re:Live with it...

[edwardpickman]

"Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it."

I take it a dead body rolling downhill would be taxed, regulated and subsidized and in some states allowed to vote.

Re:Live with it...

[jez9999]

Seriously, only a madman would even conceive of such an idea. Personally I say put every single person who is involved with this into an insane asylum and throw away the key.

They're already in congress.

Why not do it yourself?

[MSTCrow5429]

If you're going to tax virtual items, why not just use the approach used to eBay, in which you are responsible for tracking and calculating your taxable burden, and reporting it on your tax return? Of course, almost no one will do this, but people have a habit of not paying taxes for what they don't want or need, or view as illegitimate. Which is something the government should have to deal with in a more civilized fashion.

Re:Why not do it yourself?

[fishthegeek]

You kind of answered your own question. People do not honestly report income from those sales. What is the American state or federal government to do when the game is sponsored on the intratubes by a foreign company? This isn't a very practical idea at all. The value of a virtual piece of property is only extant when there is a population willing to pay real currency for it, and by the nature of the tubes that population might only exist for the lifespan of an African fruit fly! Unless the government is going to get fully into banking and force everyone to receive funds directly through the central bank and assess taxes there this is really a no starter.

Awesome

[CrazyJim1]

I can't wait to do tax write offs for giving gold out to newbies.

Big deal

[weave]

I'll just remit my copper to the IRS via in-game mail. They can use the gold they collect to buy more Fel Iron shells my engineer makes for shipment to the troops in Iraq. That will drive the cost sky high. I'll be rich and can get that elite flying mount soon!

Its really really simple....

[3seas]

....pay the taxes in virtual money/value and let the government trade it in for something they can use, like virtual weapons of mass destruction or virtual anti-terrorist defence, or for the more domestic spending, virtual road repair, virtual food stamps, virtual housing for the poor, etc...

Re:Its really really simple....

[Original Replica]

So when I sign up for a game I will have to play on a pre-taxed server, where everone's gold intake is lowered by 25% and the difference is deposited into a IRS avatar account. The in-game economy will be effected 0% and Uncle Sam will lose money paying someone to spam the trade channels with "BUY 5mil CREDITS ONLY $24 @ IRS.gov/mmorpg"

Re:Flat/Fair tax

[daeg]

If the rich don't spend any money, sure, they get a break. But what rich person doesn't spend a lot of money? Sure, they save a lot of money (that's how a lot of them get rich), but they also spend a lot of money.

Remember, savings help the economy, too. Savings are reinvested in economic growth.

FairTax does target some individuals aggressively, sure. But so does our tax system now. Pardon me if I weep for a handful of wealthy people that don't pay any tax now that suddenly will have to pay taxes.

I'd probably pay more in FairTax than I would under Income Taxes, yet I still support FairTax. With FairTax, I can directly control my taxation through spending. Politicians will be unable to alter the taxation rate without it being highly visible. If the tax rate went from 23% to 24%, EVERYONE would see it on EVERY receipt. Right now they can hide tax increases in all sorts of places while simultaneously throwing money back as "tax refunds".

This is proof that income tax is a fraud

[JoeShmoe]

So, not only is the IRS adamant about taxing "all income" ...they are now stretching it beyond the boundaries of absurdity.

Basically, what is happening here is that someone is saying "I have 1,000,000 hippo bucks" and the IRS is trying to establish some metric of determining how much a "hippo buck" is worth in US dollars so they can tax it. OK, Slashdot: I'm offering those 1,000,000 hippo bucks for sale...who's going to buy them from me and establish the official conversion rate?

Oh wait, nobody because even a billion "hippo bucks" aren't worth anything. So then if I give someone 10,000 of my hippo bucks, has a transaction occured? Choose your own adventure:

Answer YES: Then guess f'ing what...every game of Monopoly is income and so, in aggregate, the population of the US probably owes trillions in unreported income to the IRS for all the games of Monopoly that have been played since its creation.

Answer NO: Then you're instantly smarter than our entire Congress and IRS because you realize that ITS A FREAKIN GAME. As soon as the game is dissolve, said "income" evaporates into thin air. That's the point. Sure, MMORPGs may run a lot longer than your typical game of Monopoly but guess what...if Sony went out of business and Everquest turned off its servers, then what would be left? Nothing but memories and bragging rights...which is all that's really left after a game of Monopoly.

Virtual taxes should be paid in virtual dollars. All the servers and the space the occupy, you know...reality, are already taxed at every possible level. Otherwise, what's to stop the IRS from taxing your score in Pac-Man? Couldn't that spot on the Hi-Score list have value and be auctioned on eBay? (L@@K YOUR INITIALS ON TOP!!! NO RESERVE!) Or how about those packets currently flowing into my computer...don't those have value? If someone idiot buys a single packet from me for $1000, then we are all screwed. ...

As a closing note, I'm uncomfortable with how easily my analogy about fictional money and invented wealth matches a description of the current US currency system. Hrm. Maybe the entire US banking system is already an MMORPG.

-JoeShmoe
.

Re:This is proof that income tax is a fraud

[Aladrin]

Your newly created Hippo bucks probably are worthless. But 'gold' in WoW is not. The proof is that businesses exist only to sell it for real money. http://www.google.com/search?hl=en&q=wow%20gold&bt nG=Google+Search

According to the sites I just went to, 1000 gold is worth $60-100. So it does indeed have value.

The problem is not taxing someone's income, it's trying to tax it before it becomes income. If the person sells that gold on EBay (or otherwise for real USD), it -should- be taxed. If they merely hold it on their character and do nothing, there should be no tax. Oddly enough, the current tax laws -should- cover this already. If people aren't paying the tax, that's the government's fault for not cracking down on tax evasion.

Blizzard has a very real problem if the government starts to tax the virtual goods directly. That means that the characters, items, and gold on their servers have real value, and if they take that value from someone, or deprive them of access to it, they can be sued. That means that if someone cancels their account, they have to either continue to provide access to it, or pay them out. And if there's a data failure, they have to reimburse everyone. (Luckily, they could do so in WoW Gold, which they can make freely.)

Blizzard does have one ace up their sleeve for this fight, though. They have already made it clear that selling gold for real USD is against the TOS and is not allowed. This is quite clearly saying that it has no real value.

At any rate, the summary is deliberately starting a ruckus. They have said they are looking into it finally, not that they favor taxing it or any such thing. At -some- point they had to meet, even if only to say 'not taxable' and lay it to rest.

Re:This is proof that income tax is a fraud

[insignificant_wrangl]

O.k., lets take a deep breath. I don't like paying taxes either, but if you read the articles, you'll see that Miller is proposing taxing players who have accrued millions of real world dollars:

LaPiana said that there is little question that the transfer of such assets could be taxable, since it is property. However, he did say that the taxes would accrue only if the total value of the estate's assets, at the time of death, exceeded the limit set by the state in which the deceased had lived. In most cases, he said, that amount is $2 million, though some states, like New York and New Jersey, have lower limits.

There are not that many instances in which someone has that level of virtual assets, although the recent reports that Second Life land mogul Anshe Chung had amassed $1 million in virtual land and other holdings certainly suggest her heirs might have some interesting inheritance tax issues if she dies.

If people are selling virtual goods in real markets, then I don't see the big deal taxing them. Yes, sometimes that money goes to things we don't appreciate, but other times it goes to things like education, research, roads, and all that other fun stuff. And if we want the government to support issues such as net neutrality, then we're going to have to let them get their hands dirty. I do think its a bit funny that they can't understand how to craft sane intellectual property laws yet are ready to tackle virtual taxation, but this thread already has its share of bitchin' and moanin'.

Re:This is proof that income tax is a fraud

[KiahZero]

This post is more indicative of your ignorance than the ignorance of policy-makers. Then again, your subject line pretty much demonstrates that you have no idea what you're talking about.

The income in question isn't your virtual income, it's your real-world income that comes as a consequence of that virtual income. Unlike Monopoly money, you can sell your virtual currency for real money... that means that it has a real-world value. Even if you don't plan on selling your currency, it still has value because there's a market for it. If you did know what you were talking about, you would know that virtual currencies aren't a new thing... the IRS has dealt with the issue in the past when people created private bartering notes and exchanged those instead of U.S. currency. Despite being "funny money," those notes were nonetheless taxable income and needed to be declared.

A better comparison would be two poker websites. One is completely for fun; while you play for "Bucks," that money is completely fake and cannot be cashed out in any way. Another uses "PokerChips," which you can exchange for money at a fixed rate. It's clear that the first shouldn't be taxed... the "Bucks" have no real-world value. On the other hand, the second should certainly be taxed as income, as the "PokerChips" are simply a form of private currency. MMORPGs like WoW much more closely resemble the latter than the former, and there's really no question when it comes to SOE StationExchange-enabled games, where the selling of virtual property is explicitly allowed.

With that said, rather than directly taxing in-game income, it would make far more sense to only reinforce the necessity of paying income tax on the proceeds from sale of virtual goods (perhaps working with eBay and other common points of sale to catch tax cheats); to do otherwise would not only punish people who play the game for fun rather than for profit. It would also make for some rather odd tax deductions - if virtual currency is "income," every time one has to repair their equipment, they could write it off as a loss, and perhaps even use the game as a tax shelter.

Re:This is proof that income tax is a fraud

[JoeShmoe]

How the hell do you "sell" currency? The only entity that can do that is the Federal Reserve, selling notes that cost five or ten cents to make for face value. For everything else in the US, it's just an exchange.

Person A gives a $5 bill to Person B in exchange for five $1 bills. Who has profitted? Nobody...it's a "like kind exchange" and obvious to anyone older than five. And yet, the IRS wants to be the sole agent for determining what is a "like kind exchange". Trading a large swamp for a small forest of equal "value"? Exchange. Trading a male cow for a female cow? Taxable. I pay $250/mo for my own medical insurance and my employer pays me $250/mo to reimburse me. Is that taxable income or a tax-free exchange? In order to know, I would have to slog through something like this:

http://www.irs.gov/irb/2005-16_IRB/ar08.html

What about trading $5 for 2.5 British pounds? Income or like-kind exchange? And now finally...trading $5 for 500 virtual coins. You make the statement unlike Monopoly money, you can sell virtual currency for real money" ...wrong. If I'm playing a hotly contested game and the other player offers me $5 for 500 Monopoly bucks, then I'm doing just that. I've personally never played such a competitive Monopoly but then I probably wouldn't be paying real money to advance in WoW either.

That's my point...trading "real world" value for "virtual world" value is still just an exchange. If anything, it should be handled like any other currency exchange. And that raises the completely legitimate question of how I can trade $5 for $5 but not a hour for $5. According to the IRS, that's not an exchange and that's why it should be taxed...but there are a lot of people who disagree. After all, my time is a lot more finite than virtual gold, so if I trade my time (labor) for its equivalent value, that's an exchange.

The problem is that in all exchanges, the IRS will recognize any gain, but will never recognise a loss. Which means that if I trade property worth $10000 for property worth $20000, then I've "gained" $10000 and am taxed on that amount but the poor unlucky sap who agreed to that trade doesn't get to deduct his $10000 "loss". And that's why it's completely bogus. Someone has invented a new form of currency, and the IRS wants to recognize that any time someone trades it for US bank notes they have "gained" income and owe tax...BUT they refuse to equally recognize that any time someone provides the new form of currency (or the labor behind creating it) they have "lost" an equal or equivalent income.

So unfortunately, your idea for a tax shelter fails for that reason. They will recognize any gains and refuse any losses. Even the five-year-old would realize that's a rigged system. And so that, to me, is further evidence that calls into question the basis of the current income tax system.

-JoeShmoe
.

Re:This is proof that income tax is a fraud

[JoeShmoe]

"whether it's called a sale or an exchange doesn't matter at all for the purpose of this discussion"

Yes, it does because a sale is income and therefore taxable and an exchange is not. You conveniently avoided this point throughout your entire response.

"Yes, the law is complicated. Otherwise, there would be loopholes that would make the ones that exist look tiny by comparison. Deal with it: either figure it out yourself or hire more adept than yourself to do it for you."

Considering I've had two different tax professionals give me two opposite answers for the above question, it's more than complicated: it's contradictory. It should be plainly obvious that reimbursing someone for an expense is the same as my directly paying the expense yourself but...duh duh duh...it's not. Someone else pointed out the absurd example of giving $100 back and forth and paying taxes on "windfall" income until nothing remains of the original $100. Is there a single line anywhere in the tax code that says that isn't what actually the IRS thinks should actually happen?

"If the other player pays you $5 for your Monopoly money, that's income, and theoretically should be reported to the IRS. Of course, it's only $5, so no one cares. However, if you were paid $5,000 for that Monopoly money, you would unquestionably need to report it as income. Similarly, if you sell a WoW account on eBay for $5,000, that's income that you need to report."

As I mentioned earlier, you are completely skipping over the difference between sale and exchange. If someone gives me $5000 for a piece of land, and I take that $5000 and buy another piece of land, then it's not income, it's an exchange (called a 1031 exchange I believe), therefore there's no tax. If the person I paid the $5000 to also buy land, then neither one of us owes any taxes at all.

So if I buy 500 WoW gold for $500, and then sell those 500 WoW gold for $500...isn't that an identical situation? Beause the dialog seems to be that the person who I bought the gold from would be paying taxes on the $500, and then I'd be paying taxes again on the same 500 Wow gold when I resold it. People wouldn't accept that kind of "double-dipping" taxation of real estate, so why should we accept it on virtual real estate?

"Ah, the whining of a tax protester."

There's no such thing as a tax protester, unless this mythical being doesn't pay for gas, own property, or buy anything really at all. I have no problem with the $5-6 extra I pay on a meal that covers the infrastructure to get me there. I pay some pretty outrageous property taxes, but I do enjoy having a fire department. And I think it's perfectly legitimate to ask what good or service has been provided for the government in exchange for income tax. Or how someone who can't afford his living expenses and ends the year with a net value less than $0 still has "income". It's absurd. And before you point out that maybe he spent all his money foolishly on things like jet skis, let me remind you that he's already paying taxes on that. It's double-dipping and it's taking advantage of the fact that most people don't have the resources to carve out a loophole for themselves. Businesses can sell the same widgit to each other 1000 times and not pay a dime in tax because they are only "resellers" or "wholesalers". But the customer pays a tax when he buys the widgit, and then gets taxed again when he resells it at his garage sale. That person also gets taxed when they resell it at their garage sale.

I realize that the thinks this is A-OK, because any interpretation or confusion that puts money in their pocket is great idea in their book. But that doesn't make it right, morally or ethically, and it completely fails the logic test. If you want to call me a "tax protester" because I think the rules for taxation should be directly tied to the benefits they fund or that the rules should be consistant with an eye towards avoiding any chance of double-dipping...then fine, I'm a "tax protester" and you

What are they thinking?

[penguinbrat]

Seriously, it real life - the taxes go for things that effect us physically or that the entities we pay provide a service we use even if indirectly.

In real life taxes pay for...

1) roads
2) traffic control (stop signs, lights, etc...)
3) financial assistance (welfare, medicare, etc..)
4) law enforcement
5) military (protection of way of life)
6) etc...

I used to play WoW, so I'll use that as my example...
1) environment - developed and controlled by game maker
2) traffic control - disigned/mantained by your ISP
3) law enforcement - in game police, gamers paid by developer to help keep things under control - GM's
4) military protection - the particular guild your in, you pay them taxes via items found, helping noobs, etc...

Everything is covered and we pay either the ISP or the game maker (Blizzard in this case) and the government does not provide anything as far as I can tell. If they were to start collecting taxes what could they possibly offer that's not already covered?

Taxes: Funds provided by taxation have been used by states and their functional equivalents throughout history to carry out many functions. Some of these include expenditures on war, the enforcement of law and public order, protection of property, economic infrastructure (roads, legal tender, enforcement of contracts, etc.), public works, social engineering, and the operation of government itself. Most modern governments also use taxes to fund welfare and public services. These services can include education systems, health care systems, pensions for the elderly, unemployment benefits, and public transportation. Energy, water and waste management systems are also common public utilities. Colonial and moderning states have also used cash taxes to draw or force reluctant subsistence producers into cash economies.

The above is all covered by the developer, if it even exists - again what could they possibly offer? It's not like they can re-write the game engine to add an educational system if doesn't already exist...

Let's translate this BS-heavy synopsis

[Mr. Underbridge]

Let's translate this damned thing into reality:

congress is set to re-visit taxing virtual goods, a concept they shelved a while back in order to consider the matter more fully.

Congress, as a whole, doesn't fucking care.

'Given growth rates of 10 to 15 percent a month, the question is when, not if, Congress and IRS start paying attention to these issues,'

I extrapolate exponential trends, showing my poor grasp of statistics. I also make baseless speculations sound important by name-dropping governmental agencies.

Miller, who is a fan of virtual worlds and economies, told CNET News.com in December. 'So it is incumbent on us to set the terms and the debate so we have a shaped tax policy toward virtual worlds and virtual economies in a favorable way.'"

Somebody with way too much time on his hands takes this shit way too seriously.

Can I pay for virtual goods

[Jeremiah Cornelius]

in Monopoly money?

Or are they going to tax me for my hotel on Park Place too?

This is the kind of shit that Tories were shot for in 1776. Seems ripe enough time again.

Re:Flat/Fair tax

[bdjacobson]

Luckily, FairTax would abolish the idea of taxing virtual economies altogether, at least from what I've read and understand. Only services and first-hand goods are taxed, used items are not. Since you never purchased the virtual items to begin with, there is nothing to tax.

One small question arises from companies like Sony and SecondLife that sell virtual goods. Obviousy your monthly access fee would be taxed (recall that under FairTax, income is not taxed, only spending, so it's simply moving your tax due to your spending instead of income).

fairtax.org I don't like fair tax. A 40% tax when you're making $20k can be the difference between having enough money to rent and not being able to afford it. A 40% tax at $200k means you might not be able to afford that nice lakehouse and boat on which you will sip fine alcoholic beverages. Because the economy isn't fair, and encourages you to exploit anything and everything to the detriment of everyone else, and because you benefit more from a stables society when you're making $200k/year than when you're only making $20k/year, taxes should be a higher percentage if your pay is higher. Not enough to remove the incentive to move up in income, but enough so that the tax reflects the benefit you gain from a secure country.

We need a system that taxes wealth (when your money works for you), but not income (still have to work for your money).

income is already taxed

[dgp]

this makes no sense.
if i sell a virtual item for USD, that is income and it is already taxed.
stocks in a company are 'virtual' and existing in a 'computer simulation'.
non-physical items are nothing new.

the other interpretation is impossibly ludicrous which is to tax items created
and sold in-game with no real-world value. if thats the case then they must
collect the taxes in the form of in-world items.

The simple solution

[jonwil]

Tax anytime real world money is exchanged for virtual goods.

If I sell you an item in a game for $50, I would be required to declare that $50 as income for tax purposes.

If I give Linden Labs 100 L$ and get $50 back, I would be required to declare that $50 as income for tax purposes.

Re:The simple solution

[thedohman]

Tax anytime real world money is exchanged for virtual goods.

If I sell you an item in a game for $50, I would be required to declare that $50 as income for tax purposes.
This is already the case. It is income. It must be declared.

If I give Linden Labs 100 L$ and get $50 back, I would be required to declare that $50 as income for tax purposes.
Possibly. (do you mean US$? if L$ no income has actually been made... unless they are collecting in-world)
Hobby Expenses may be used to offset Hobby Income, so for the casual gamer (or, Second Lifer, rather) as long as you get back less than you put into it, there is no gain. But hobby still must be reported. You simply report the hobby expenses as well.

And I don't think they are really referring to WoW type items, are they? TFA did not say, but some of the "related" articles (which I did not read) may have. If so, then the need to collect it in WoW gold, or whatever the in game currency would be if the currency is declared by the publisher to have no value.

Taxing "Virtual Goods"? I'm all for this.

[krunk7]

As long as I can pay with virtual money.

Re:Flat/Fair tax

[CastrTroy]

In Canada income tax works kind of like this. Take whatever you make. The first 9000 doesn't get taxed. First 35000 gets taxed at 15.5%. Then there's 22% tax on the portion between 35K and 75K. 26% on the part between 75K and 120K, and 29% on the part over 120K. That's federal, provincial is the same system, but lower percentages. So, the poor end up paying less tax. Then there's provincial and federal sales tax, but those don't get charged on "essentials" like groceries. So again, people who only buy what they need to survive, and not many luxuries pay less tax. I think this works out pretty well. I'm not sure how different this is from the american tax system, but mostly I understand how this works, and I'm pretty happy with it.

No taxation without representations

[RealGrouchy]

I'll start paying taxes for virtual goods when my character can vote.

- RG>

Re:No taxation without representations

[RealGrouchy]

Felons have to pay taxes and mostly don't get to vote.

(I meant to reply with this:)

Maybe in your country they can't vote.

Up here in Canada, that was ruled unconstitutional a few years ago.

- RG>

Logistical Nightmare

[db32]

Ok so 1 Million gil in FFXI on server X = $30, but on server Y = $25. So how do they even begin to figure out the value to tax at? Multiply this out by every online game and every server and you end up with a logistical nightmare of trying to figure out how to tax it. So, not that it would stop them, but it kinda puts them in a situation of spending $1000 to tax you $10.

The other side to this, is that unless you deal with non IT managers and such you will probably never understand. It isn't that they are that greedy trying to come up with inventive ways of taxing you. Its that this kind of shit honestly makes sense to them. I spent 45 minutes the other day trying to explain why we couldn't make something happen, and I wasn't using technical stuff. I was drawing big multicolored circles to show that the two networks in question are not connected and the traffic cannot just go between them just because each network happened to have a computer in the same room as the other. They assume that all the computers are magically connected because they are networked. On top of this they frequently believe they are being lied to by IT because IT just doesn't want to do it, and not that IT is actually telling them it just can't work that way. There is absolutely no concept, nor any desire to learn even the fundamental workings of IT. Look at Sen "internet tubes" he wasn't being intentionally stupid...he really believes that insanity..and because anyone correcting him would be opposing his ideology on the subject he would just assume they are lying to him.

Re:Flat/Fair tax

[Khaed]

I didn't just mean to get by now -- to be able to save and invest. Because depending on social security for retirement is just a bad, bad, bad idea. I could live on a lot less than $40k, but I wouldn't have squat for savings. Which I guess I should have explained better.

Re:But the have to reconginized charities.

[ConceptJunkie]

Does the government REALLY understand what it's getting into?

Yes they do, it's the same business they've been in for many years.

"You've got money: Give it to me!"

Oregon Trail

[tillerman35]

It's Apr 15, 1837
You have 14 oxen
Your water barrels are 12% full
You have 2.3 days of rations
You have $43
You have traveled 1349 miles
(H)unt (T)rade (G)o (P)ay Taxes
>G

It's Apr 16, 1837
You have 15 oxen
Your water barrels are 8% full
You have 1.3 days of rations
You have $43
You have traveled 1378 miles
There is a warrant out for your arrest for tax evasion.
(H)unt (T)rade (G)o (P)ay Taxes
>