Uncle Sam to Take Virtual Bite?

Experts are saying that it's a question of when, not if, the goverment will decide to start requiring game manufacturers to report in-game earnings of it's players to the IRS. Let me say that again to be extra clear: They're claiming that it is only a matter of time before the government starts taking steps to tax your WoW gold, your Anarchy Online credits, and your EverQuest platinum. That set of uber armor? Yeah, that'll carry some kind of virtual property tax too.

Why? Because it has value, of course. Because gamers can convert their in-game riches into real world dollars.

But what does this all mean to you and me? What's the picture really look like?

Obviously I can't say for certain, for one thing the anticipated laws don't yet exist, and for another thing I'm not an economics expert. I'm more of the armchair quarterback when it comes to virtual economies, and when you start tossing in tax law well... anyone but a Vogon would get confused there.

I can tell you this: It would change gaming as we know it. Maybe not the asteroid-that-wiped-out-the-dinosaurs kind of changing gaming as we know it, but there would be a very real and tangible alteration to the nature of gaming. Think about it: every thing you earn in-game represents a potential increase in your yearly taxes. Yeah. Not so much "fun and games" when you have to keep track of how much you've leveled in the last fiscal year, eh?

However, it will rock the game companies' worlds too. How can you justify penalizing a player for converting their virtual holdings into real cash if the US Government is taxing them based on those virtual holdings? Can you say class-action lawsuit? Yeah, that's what I'm thinking. If virtual property is taxable, and a game company will not allow you to convert that asset into any other form of asset, how is that not essentially stealing? It'd be like having a car that you have to pay a monthly fee to drive, pay taxes on, but you're not allowed to sell it for anything other than another car from the same manufacturer.

See, if it's a taxable commodity the game companies pretty much have to permit players to trade it across the virtual/real border. If I'm being taxed real money, I'd better be able to sell that Sword of Server Slaying for some real cash if I decide the taxes are too much. Even if the law doesn't prevent the game companies from holding the virtual goods hostage and forbidden real world sales, there will be games that change this rule (or are created without it) and those games will inevitably win out over their Neanderthal brothers.

Taxation of virtual goods could wind up forcing a lot more equality into the industry, but personally I'm not anxious to see it happen. I'd rather have my recreation be recreational. If I want to spend my weekends down at the lake drowning worms and trying to catch fish, I'd like the government to keep their nose the heck out of it. Sales tax on my rod and reel? Fine. Charge me for a fishing license? Whatever. Start making me file taxes on the perceived value of the fish I catch? That would take all the fun out of it.

Personally I think the only time that taxes should come into gaming is when you're reporting your real world income from selling virtual merchandise. (Which everyone ought to do, since it's jail time if you don't and get caught.) I don't get taxed for the things I write that aren't sold, why should I be taxed for the virtual goods I earn that aren't sold? If I have a closet full of clothes I don't have to pay taxes on them, but if I sell them I have to pay taxes on the earnings.

At least it probably won't destroy the concept of MMORPG's if the government starts taking a cut of the goods. Probably.

Besides, there's always the option of off-shore companies hosting servers outside the reach of Uncle Sam's tax arm. If there's one thing we know for certain about taxes, it's that enough money will buy your way out of most of them and the game companies are nothing if not wealthy.

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  1. I think I'm going to sit firmly in the "I'll believe it when I see it" category.

    Seriously, games companies would pitch an unholy fit. I don't see it getting past the debate phase.

    I do see the point, but I disagree with the need. Tax on the exchange into the real world, not the earning or ownership of virtual goods in a virtual world.

    If it started being taxed then exchange rates would pop up and people would day trade WoW gold versus Eve Online ISK. How weird would that be?

    It is a can of worms that shouldn't be opened and probably won't be opened. I don't claim to be an expert, but I always questions those who do.
  2. Someone correct me if I am wrong, but converting your virtual assets into real life cash through sales is against the EULA for games. You don't own the virtual property.

    Example, you have 5000 WoW gold. It is not yours to manipulate into real cash, Blizzard owns that virtual property. That gold exists as data on Blizzards "real" hardware that they own.

    The possibility that the tax would happen in next to none. Game manufacturers would most likely find a way to not allow the transfers to take place to avoid something like this.

    This type of tax would cause them to lose customers. Do the math, 6,000,000 WoW players @ 16.00/month = 9,600,000 monthy income or 115,200,000 per year. That is a lot of money. Blizzard and the ranks would protect that sort of income from a major loss said taxing would bring.

    Think about it, MMO's with monthly fees are cash cows, the game development has been paid for through the retail box sale, 6,000,000 @ 39 (at the time i purchased) = 234,000,000. Figure in the expansion pack at similar numbers. Blizzard already pays uncle sam his cut.

    The loss would be too great if it happened. Think of EA and what it has made of FPS BF series. Most games start between 39-49 at first release. Game producers will portect the gamers.
  3. A tax on virtual credits is as likely as the tax on e-mail. They were talking about it ten years ago, and it never panned out. Same thing will happen here.
  4. Leandra Lederman of Indiana University School of Law-Bloomington recently wrote a paper entitled 'Stranger Than Fiction': Taxing Virtual Worlds. This paper is expected to weigh heavily with the congressional study being conducted by the Joint Economic Committe to look into the potential changes to relevant tax laws.

    The Abstract:

    Virtual worlds, including massive multi-player on-line role-playing games (game worlds), such as City of Heroes, Everquest, and World of Warcraft, have become popular sources of entertainment. Game worlds provide scripted contexts for events such as quests. Other virtual worlds, such as Second Life, are unstructured virtual environments that lack specific goals but allow participants to socialize and engage virtually in such activities as shopping or attending a concert. Many of these worlds have become commodified, with millions of dollars of real-world trade in virtual items taking place every year. Most game worlds prohibit these real market transactions, but some worlds actually encourage it. Second Life, for example, grants participants intellectual property rights in their creations.

    Although it seems intuitively the case that someone who accepts real money for the transfer of a virtual item should be taxed, what about the player who only accumulates items or virtual currency within a virtual world? Is valuable "loot" acquired in a game taxable, as a prize or award is? And is the profit in a purely in-game trade or sale for virtual currency taxable? This is an important set of questions, given the tax revenues at stake. Although the Internal Revenue Service has not yet attempted to tax transactions within virtual worlds, it is aware of the issue, and there is pressure on the government to determine how to resolve it, given that the economies of some virtual worlds are comparable to those of small countries. The Joint Economic Committee has announced that it is studying the issue.

    Most people's intuition probably would be that accumulation of assets within a "game" should not be taxed even though the federal income tax applies even to non-cash accessions to wealth. This Article argues that federal income tax law and policy support that result. Loot "drops" in game worlds should not be treated as taxable prizes and awards, but rather should be treated like other property that requires effort to obtain, such as fish pulled from the ocean, which is taxed only upon sale. Moreover, in-game trades of virtual items should not be treated as taxable barter. If courts uphold game agreements that purport to provide players with a mere license to use the game, in-game trades do not constitute realization events and thus are not taxable. Otherwise, tax policy considerations suggest that Congress should provide nonrecognition for these exchanges.

    By contrast, in virtual worlds that are intentionally commodified, such as Second Life, tax doctrine and policy counsel taxation of even in-world sales for virtual currency, regardless of whether the participant cashes out. However, as in game worlds, participants should not be taxed on purely in-world trades of non-currency items. This approach would allow entertainment value to go untaxed without creating a new tax shelter for virtual commerce.

    The full draft can be read here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=969984

    The way I see it things can go only one of two ways (possibly on a game-by-game basis). Either the in-game wealth is retained by the game company as their property, as most game companies demand in their EULA’s, or the in-game wealth is property of the gamer.

    If it’s gamer-property, the game companies can’t demand we not buy and sell it for real-world money, but it would logically fall under taxable assets. If the goods remain property of the game company they can do whatever they want to try to prevent EULA violations regarding that property, but the government should not be able to tax us for someone else’s property.

    Personally, I think we’ll see some of both – some games like Second Life are likely to be ruled as taxable virtual properties while other games will not be taxable because the game companies demand the players have no ownership rights to the virtual goods *cough*Blizzard*cough*.

    But what really makes me curious is this: if virtual goods are ruled taxable, and game companies that demand players don’t actually own those goods prevent players from being taxed for those goods, do the game companies get taxed instead? If so, what does that mean?

    I’m not sure I like the idea of a game company that is concerned about the total wealth allowed on their servers due to tax liability…

    One thing I forgot to mention: Some people are insisting that virtual property be treated the same as certain other earned properties. Take fishing for example: under current law the government doesn't tax someone for catching fish. They tax the fisherman for selling the fish. If you fish and then eat the fish yourself (or bury them in hole, or whatever) you don't pay taxes.

    It's only when you start earning money from fishing that the government wants its slice of the pie.

    Personally, I think this is the sanest solution.
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