IRS Eyeballing Virtual World Tax Policies

Kotaku points out a Washington Post report about this year's recommendations from the national taxpayer advocate (an official who suggests improvements and updates to the tax code) which include developing clearer protocols for reporting taxable income from virtual worlds. We've previously discussed the implementation of such policies in China. Quoting the report summary (PDF): "By one estimate, about $1 billion in real dollars changed hands in computer-based environments called 'virtual worlds' in 2005. ... IRS employees have been unable to respond to taxpayer inquiries about how to report transactions associated with them. Economic activities in virtual worlds may present an emerging area of tax noncompliance, in part because the IRS has not provided guidance about whether and how taxpayers should report such activities. To improve voluntary tax compliance, the National Taxpayer Advocate recommends that the IRS issue guidance addressing how taxpayers should report economic activities in virtual worlds."

Comments

I guess it's true...

[zwekiel]

You truly can never escape the two inevitabilities of life: death, and taxes.

Re:I guess it's true...

[jcr]

You truly can never escape the two inevitabilities of life: death, and taxes.

I didn't expect the Berlin Wall to come down in my lifetime. It's a long shot, but it's possible that this depression will result in the end of the Federal Reserve and the IRS, both.

-jcr

No taxation without representation

[Anonymous Coward]

No taxation without representation. Please vote Spongebob.

Bigger Problems Then Taxes

[KronosReaver]

If your generating enough income from "virtual worlds" that it needs to be taxed...

Well, taxes are probably the LEAST of your problems.

Re:Bigger Problems Then Taxes

[philspear]

No, the economy has just gotten THAT bad.

Re:Bigger Problems Then Taxes

[drik00]

Not even that. The average tax-payer in the US is hit for 35-40% of earned income. How much more do they need before they realize that they're wasting money. Most of the US tax dollar is already going to non-military spending. We're a federalist republic, the federal government SHOULDN'T be paying for every program, it should be up the states on anything other than a certain couple of programs.

J

Re:Bigger Problems Then Taxes

[philspear]

We're a federalist republic, the federal government SHOULDN'T be paying for every program, it should be up the states on anything other than a certain couple of programs.

I might be more convinced by that argument, except California is currently doing its best to prove to the world that state legislatures are even more incompetent at coming up with a rational budget than the federal government. The lesson I'm getting here is that the same types of people get elected to the state and federal levels of government, but at the federal level there's some scrutiny and accountability as opposed to the state level.

I'm not making any statement as to what SHOULD be the case, and I too am guilty of not paying attention to local politics.

Re:Bigger Problems Then Taxes

[wisty]

So can I deduct my new gaming rig as a business expense?

If they tax gold farming as income, gamers should have the right to deduct their account costs, computer, and internet use as legitimate business expenses (provided they make some money from their endeavors).

When I say should, that is my moral judgment, and it doesn't mean the IRS won't try to screw people.

Re:Bigger Problems Then Taxes

[Anonymous Coward]

What that proves is that the people of California (and just about every state) are proving to be incompetent at selecting who represents them.

"You'll do what for me? Oooohh.... I'm voting for you!"

Re:Bigger Problems Then Taxes

[Lulfas]

California could return immediatly to surpluses if it stopped paying for poor states. For every dollar a Californian pays in taxes (to the federal government), they get 80 cents back. Random states like Alaska (2.40 back per dollar), Mississippi (1.45 per dollar) and such get to be welfare.

Re:Bigger Problems Then Taxes

[Sancho]

And suppose you're not farming, and just playing. Is all that gold still considered income because you *could* have sold it?

Well, you're not really selling it. See, it's all owned by the MMO owner. There's even something in the EULA about that. So if the IRS comes knocking on my door, I'll just pull out the EULA and explain that they should go talk to Blizzard.

(Not that I play WoW anymore, but you get the idea.)

Re:Bigger Problems Then Taxes

[Lulfas]

Well, newest chart I could find is http://www.taxfoundation.org/research/show/22685.html It shows that California (in 2005) paid $289b and received back $242b. $40billion clears up the deficit by more than double, I believe.

feh

[moniker127]

flat income tax. only way to go. anyone have a clue about how much freaking money is wasted on calculating this crap? its in the hundreds of millions of dollars annually.

Re:feh

[cgenman]

Why do tax stories always bring out the extremists?

Not everybody draws a clean salary. What is your income rate if you are buying and selling virtual goods? Heck, what is your income rate if you're buying and selling real goods? Or if you buy a good and the value goes up, but you haven't sold it yet? What if you're trading goods with value for other goods with value, and it never passes through a cash phase? What if a portion of your salary is drawn against goods that you have on loan to others?

A flat income tax isn't the answer. Forgetting about how it would shift the tax burden to those least able to pay, it would still be a nightmare of bureaucracy anyway. It would just be a different bureaucracy.

Considering the 2008 US federal recipts was in the range of 2.5 Trillion dollars, a cost of 500 million spent dealing with th emoney would be actually only .00002 of the total. That's less than one fiftieth of one percent. That's a monetary transaction cost that any business would love to have, and is a hundred times better than the 2% or so of every transaction that Visa skims off the top.

Re:feh

[EdIII]

It will never happen. What it comes down to is a choice:

1) Use a passive system that does not have to rely on the gathering and verification of data from individual citizens. No paperwork. No money spent on preparing taxes.

2) Use an active system that allows control over information, excuses to invade privacy, reasons to seize property and bank accounts.

Which one do you think the US government prefers? Which one favors their "war on Terrah"? Taxes are just as much about how to control people and information as they are about collecting income for the state.

Re:feh

[number11]

Feh indeed. Both "flat" sales and income taxes are scams.

Come back and let's talk when:

your "flat" income tax covers all the money a person has coming in, whether it's wages, tips, dividends, interest, capital gains, inheritances, rents, gifts of more than nominal value, bonuses, options, frequent flyer miles, use of company vehicles; or

your "flat" sales tax covers everything of value that is sold, whether goods, services (including those of advertising agencies, lawyers, architects, accountants, and hookers), real estate, stocks, automobiles, gasoline, puppies.

(Granted, getting the hookers to keep proper tax records will be a challenge.)

So far, every proposal I've seen had loopholes for high-income people and/or for business that you could drive a limousine through. Yeah, I know those people cheat already, but why make it legal.

Re:feh

[palegray.net]

Yeah, I know those people cheat already, but why make it legal.

So, you're advocating continuing to screw the general public on taxes because you like having a legal basis to punish the wealthy for being wealthy?

Re:feh

[QuoteMstr]

Where does the Constitution of any State guarantee the RIGHT to low cost public transportation, health care or schools?

The US constitution doesn't guarantee any of these things. It does, however, create a legislature empowered to raise funds and spend them for the general welfare. And as we live in a democracy, and the vast majority of us support the programs you mention, you're going to just have to suck it up. Or convince us to change our minds: good luck with that.

Re:feh

[jcr]

What's wrong with you? You're not part of the trust fund crowd. Why are you continuing to argue against your own interests?

That's the same line of bullshit that was used to sell us the income tax in the first place. The American people were promised that the federal income tax would only affect the top 1% of earners. Didn't work out that way, did it?

Every "soak the rich" scheme turns into a "soak everybody" scheme in a few years, because of the effects of the even more insidious mode of taxation, which is inflating the currency.

-jcr

Re:feh

[jcr]

And as we live in a democracy,

First of all, this isn't supposed to be a democracy, it's supposed to be a republic, and secondly, if you imagine that our government obeys the will of the people, you are sadly deluded.

the vast majority of us support the programs you mention

You're funny.

There was this little incident last year, in which our bought-and-paid-for legislators decided to hand some seven hundred billion dollars over to a bunch of incompetent speculators. This was done despite overwhelming disapproval by the public. In fact, that bitch who purports to represent me in the senate admitted that she had gotten a total of 91,000 calls on the matter, of which 85,000 were against, and she gave a snotty little lecture on the senate floor where she lied through her teeth and claimed that we didn't understand what they were doing.

-jcr

Re:feh

[jcr]

flat income tax. only way to go.

Limit the activities of the federal government to its constitutional powers, and there would be no need for an income tax at all.

-jcr

Re:feh

[Wildclaw]

There is only one "fair" flat tax and that is a flat wealth tax. Of course, you will never hear that coming out of the mouth of any of the flat taxers who only are interested in a tax system that benefits the upper and upper middle class.

Rich people are already benefitting from the current "so called progressive" tax system as evidenced by the growing gap between rich and poor. And everyone with a tiny bit of economic understanding knows why. The current tax system is highly in favor of those who own capital.

Re:feh

[jcr]

The current tax system is highly in favor of those who own capital.

Duh!

The current tax system is exactly what Hamilton dreamed of. The richer someone is, they more reason they have to support expansion of the federal government. One of the major driving forces behind consolidation of businesses into larger and larger corporations is the death tax, which forces the heirs of family businesses to sell out to pay the tax. Warren Buffet's done very well indeed from that.

-jcr

Re:feh

[jcr]

The Government uses taxes for behavior modification as much as for revenue.

That's what makes it so insidious. We are not property for the government to command.

-jcr

Re:feh

[TheLink]

Is she elected? If she is and is reelected in the next election, then the voters really don't know what they are doing ;).

Re:feh

[EdIII]

Well all of your considerable comment aside, MY passive system requires no math and has ZERO invasion of privacy.

I was not thinking of a flat tax rate on an existing system involving the IRS. I was thinking getting rid of the IRS entirely. I was actually thinking something along the lines of a consumption tax. I admit that I misread the comment of the poster I was replying too. I should have not implied that a flat tax has no paperwork, associated control over citizens and their information.

I don't want a flat tax. I don't want the federal government to have the right to tax citizens period. My idea is a little bit more "grand" and ambitious than that.

Through constitutional amendments I want to have the federal government draft a bill that gets sent to all the states *each* year. The states are then responsible for paying their portion of the bill, based on how many representatives they have in the House.

I see it as a problem of competition. The IRS has no competition. If California and Texas were both deciding on how to collect the money in the future, and both Californians and Texans could pick their asses up and leave, I think we would start to see some interesting ways get created to collect taxes. States that decide to use draconian systems based on complicated math, obscure paperwork, and government peering into citizens lives will more likely *have less citizens*. Taxes was one of the reasons my family moved away from California.

A consumption tax based state is one based on a passive system. The taxpayer never needs to calculate *anything*. They just pay for their consumption. No paperwork, no accountants, nothing. A taxpayer can't ever be wrong either or liable to the state. So no reason to seize property, put people in prison, or destroy lives. The entire transaction contains everything that needs to be paid to the state.

Of course this pushes all the responsibility onto business. They already collect taxes for the state so it is not like the infrastructure to do this in most states does not exist already.

What about deductions? I think the whole point of deductions is to give tax breaks to people that have lobbied their positions well. Well if we want to make it easier on the families that have kids, the poor, and the middle class in general how about most states deciding that food and other basic necessities don't have to be taxed? Kind of handles that right at the source real nice and easy doesn't it?

That's the problem with tax breaks. They most often involve the rebates that you mention. That is inefficient. If each state sets its tax rate appropriately, than rebates should not even be necessary. As for other tax breaks and incentives I think states and local cities can come up with their own tax breaks to businesses to improve their own local economies.

This seems to be a pretty fair way to do it. The rich complain endlessly that they earned their money and have the rights to keep it. I totally agree. I think they should be able to pull a Scrooge McDuck and build huge moneybins(tm) to hold all their gold and cash. They can sit in their golden mountains for as long as they want. Till they get hungry. That's when they pay taxes on the hamburger they consume. Till they get bored. That's when they pay taxes for their entertainment. When they want to buy a 10,000,000 USD yacht, they pay taxes there as well.

What could be more fair than that? Most of the arguments I get into over this are about how a working class guy will end up paying a higher percentage of his income to taxes than a rich guy. My answer to that is quite simple. Who gives a shit? The rich guy cannot take it with him when he dies and he deserves it for whatever he is doing that is making him rich. It is not the fault of the rich guy that the working class guy does not make more money. In any case, if the rich guy really wants to live like a rich guy his taxes, although being a less overall percentage, will be many many times that of the wor

Re:feh

[Cro Magnon]

Who is running against her? Does her opponent agree with her? If not, is he worse than her in other important ways? It's quite possible that the voters do know what they are doing; they just don't have anyone better to vote for.

Re:feh

[Attila Dimedici]

You do know that every member of the "trust fund" crowd I have ever heard speak on the subject has been in favor of increasing the tax rate on the highest income bracket. Do you know why that is? People who are members of the "trust fund" crowd don't have any "income": none of their money is taxed under income tax.

Re:feh

[harl]

It's a republic of representative democracies. Which is functionally different than either a direct democracy or a representative democracy. Each state is fairly autonomous. Things that are legal in one state are illegal in another. The other states and the fed can't stop each other from doing this.

Also it used to be one of the core differences in the major political parties. Dems want to take away state right and Rep want to strengthen state rights. Well it used to be that way. Now the only difference is the color of their tie and whether or not they hate people who are a different color or religion than them.

We've had this discussion before

[CrazyJim1]

I think we concluded that if we can write off losses in the virtual world, and pay our real tax in WOW dollars that it would be welcomed by all gamers.

Re:Excuse me

[Anonymous Coward]

I meant WOW gold.

Gold hell, do they take wolf pelts?

The solution is...

[jonwil]

To apply tax to things when they earn real income. For example, if you sell 3000 in WOW gold on ebay for US$500 (to make up an example since I don't know real values), you have to pay tax on the US$500 just like any other income. In that case you would not pay any tax at all on the ingame stuff.

The only issue comes up with currencies like the Linden Dollar that can be converted back and forth with US$ and other currencies, for those you could treat it like any other currency (presumably if I give you 500 euros as payment for something, thats still income and has to be reported as such, the same could apply to L$)

Re:The solution is...

[cgenman]

It's actually closer to 30,000 gold for 500 dollars.

However, what if you bought bits of that gold for 200 dollars? Can you write that off as a business expense? Can you write off your salaried time? If you bought Epic Armor to sell, but an expansion suddenly made it less valuable, can you write it off as capital depreciation? What if you spent salaried time to get Epic Armor, only to have to write down that value on a re-balance?

It gets messy. IRS issuing guidelines could clear up a lot of the messy details.

IRS can't withstand virtual reality

[MSTCrow5429]

The IRS only exists in the real world. It should stay there. Otherwise, it could cause a reality breach, and soon find itself the target of thousands of nuclear warheads, tens of thousands of orcs, millions of heavily armed commandos, and a giant green pulsating penis.

I can't wait for taxation

[the_raptor]

Taxation of virtual worlds will mean players will have ownership over their accounts (currently trying to monetize your WoW assets is a bannable offence), and fraud and theft in virtual worlds will fall under standard criminal statutes.

Trying to enforce that mess will drain resources from trying to create copyright cops or other nonsense.

Re:I can't wait for taxation

[im_thatoneguy]

Or an even better solution.

The IRS can charge me taxes in WOW items. But I can defend it using WOW laws.

So the IRS agent must catch me in a raid and take my items by force. Because if I'm in a WOW world I'm going to fight by WOW rules and kick his sorry tax collecting ass.

Just think how much more interesting collecting a 400 gold piece tax will become when you can draw a sword and protect your property. Of course the IRS raiding parties will be top level well orchestrated teams working in concert across Azeroth it will add a whole new level of excitement every february for most players. The IRS would also probably add bounties for top
level characters leading to an interesting new dynamic of payed free agents for whom money is on the line.

Orrrr... if you sell your gold you report your "Other Income" like you're legally obligated right now. But that would be far less exciting.

*thatoneguy does not play WOW nor has ever played WOW. However adding IRS agents as a force might... just might convince him to open an account.

Re:I can't wait for taxation

[stephanruby]

Second Life makes this very clear. You own your account. You own your own stuff. You can monetize it. You can even take your intellectual property outside of Second Life and put it on your own server (not that you'd want to, since you'd be alone on your own server). But this is a growing trend for virtual worlds that want to attract and keep content creators.

WoW I suppose is a different kind of virtual world, where it's not so much dependent on user-generated content or user-generated scripts?

Re:I can't wait for taxation

[mattwarden]

Your ideas are intriguing to me and I am interested in receiving your newsletter.

If this happens ...

[Aiml]

Can I write my WoW characters off as dependencies?

Taxing Monopoly money next?

[laron]

Gaming companies by and large insist that they own everything within the game. Basically a player "owns" stuff the same way a monopoly player "owns" his cards, houses and money, i. e. only in the context of the game. If there is a transition to real world money (gold on ebay), that is already taxable.

Re:Taxing Monopoly money next?

[trolltalk.com]

"Gaming companies by and large insist that they own everything within the game. Basically a player "owns" stuff the same way a monopoly player "owns" his cards, houses and money, i. e. only in the context of the game. If there is a transition to real world money (gold on ebay), that is already taxable."

Why are you giving them even more stupid ideas? This is Washington we're talking about. Politicians who've never met a stupid idea they didn't like ... like the bailouts.

Mind you, if they're going to start treating all game transactions as real-life, I'm going to play Risk, conquer the world, and tell the IRS their new job is to collect tribute for me.

Re:bullshit doublespeak: voluntary tax compliance

[QuoteMstr]

End the bullshit - one simple tax law: 10% of any income. No fucking loopholes.

The vast majority of the complexity in the tax code comes from figuring out what exactly qualifies as income. Flat tax proposals like yours address none of the complexity issues.

I can't wait when money disappears...and people learn to put TRUE stock in something that only increases in value -- themselves

I think prostitution ought to be legal, but it'd be foolhardy to base all exchange on sexual favors. Actually, on the second thought...

Taxman mob

[Aceticon]

Will we get a Taxman mob?

Large boss, slightly human looking but with fiery red eyes and decaying flesh. Fights with a magical Tax Form and spawns an army of goblin-lawyers as adds.

Players will only have time to go OMGWTFBBQPWNED before they die.

Re:Taxman mob

[Culture20]

Even Scarier: It's nigh invulnerable, and does damage to Gold instead of Hit Points. Maybe it could be paired with Death.

(Virtual) reality check

[itsdapead]

Nobody would argue that income suddenly became immune from income tax simply because it was earned using a computer and the internet. OK, which have convoluted rules about cross-border transactions, but not income tax. I think you'll also find that the taxmen also have existing arrangements (took 30 seconds on Google to find that) to deal with any attempt to use alternative currencies or barter exchanges as an end-run around tax.

The only difference between income from selling software or art on your dollar-priced internet shop and income from running a virtual hat shop in Second Life is a sprinkling of fairy dust. If second-lifers try too hard to make it sound like something new, different and scary, the danger is that the tax authorities will be only too keen to invent new, different and scary rules...

What I find depressing is that these "virtual worlds" are all taking the form of capitalist economies. Communism/Socialism may or may not work in the real world, but if I'm going to move to a virtual world which is supposedly limited only by the imagination of its inhabitants, I'm holding out for a post-scarcity utopia like The Culture or even the freakin' United Federation of Planets! If you don't have property then its much harder to have tax...

Unite WOW!

[UID30]

Isn't this how the Boston Tea Party started? How can they possibly think to tax online gamers hard earned gold without some form of representation? This is blatantly taxation without representation.

I, for one, think that this opens up a need for seats in congress for Night Elves, Gnomes, Orcs, and even Tauren (as long as they promise to first take a bath). Sorry Humans, you've already got enough reps on the hill. We'll need HUGE multi-panel monitors setup all around the House chambers ... at least ... 130" tall so that each representative can be rendered at his/her real size ... and full sound systems for each so that their voice can be HEARD!

And why stop there? We need seats on appropriations committees, too! Lets put those tax dollars ...err ... tax golds to work! How about a fast train system linking Ironforge to Undercity? Faster gryphon rides? or better yet ... FASTER LOGIN QUEUES for overloaded servers??

Until we get all of this, I say we should each buy Tea from a local vendor and then drop it while standing at the harbor in Booty Bay. Below is a helpful list of some of the teas which might be appropriate:

Honeymint Tea, Green Garden Tea, Thistle Tea, Goldthorn Tea, or even Green Tea Leaf