The IRS - Taxing of Virtual Assets

[Guest]

Virtual gold could draw real taxes

Imagine getting a tax form and a warning to report taxable income from the IRS every time you collected rent on your hotel-stuffed Boardwalk and Park Place. Only in a bad dream, you might think; but don't underestimate the U.S. tax code's potential for surrealism. While the IRS won't be taxing Monopoly cash anytime soon, another variety of play money--earned and spent by millions of online gamers each day--may not be so safe. Sometime in the next few months, the Joint Economic Committee of Congress will publish the results of an ongoing investigation into the economies of World of Warcraft, Second Life, and other massively multiplayer online game spaces (MMOs). The report's number-one bullet point will address a question that the inhabitants of these spaces may soon wish had been left unasked: Do the tax laws of the real world apply to virtual-world transactions?

First discussion point: If the IRS decided to tax virtual assets (thus legitimizing and declaring them valid forms of exchange for goods and services), what's to stop the citizenry from paying these taxes with virtual assets? If someone wanted to tax Person A's amount of Warcraft gold, why (either in the spirit or the letter of the new "tax") wouldn't Person A pay those taxes with virtual money? Answer: because they'd have federal agents with machine guns pointed at their temple, that's why. The IRS shows it's extortion-esque colors by even contemplating this absurd concept. Don't bother trying to follow the IRS's logic; you will only end up as tortured as their thought process in this. Now, this is not to say that some "virtual" transactions in the gaming world are not, by definition, taxable - I can certainly see the point in taxing someone who sells a WoW character on eBay for several hundred dollars; but only in the manner and for the same reason as we tax someone who sells Beanie Babies on eBay. The idea, however, that virtual costume sales (as in the Second Life game) or monster-drops in WoW constitute "gross income" or a "taxable asset" is a twisted, tortured ideal. And don't think that's not what they want. But if you want the straight-poop....

Don't ask the IRS. Pressed for an official opinion on the taxability of virtual trades, IRS spokesperson Nancy Mathis would say, via e-mail, only that "whether exchanges constitute bartering depends on the facts and circumstances of each case." As to whether that magic helmet won from a slain dragon is a taxable prize, the answer was similarly noncommittal. "{The} bottom line," Mathis wrote, "is this: You can receive income in the form of money, property, or services. Generally, your income is taxable unless it is specifically exempted by law."

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[Guest]

Second topic of discussion:

Can the 'virtual' world of MMORPG's (in this example, WoW), be considered a legitimate environment for taxable income? If you trade someone "real" money for a pair of Boots of Asskicking, has a taxable event occured? I would posit that it has not - because, while their is an implicit, quasi-market to determine 'value' for this, the whole of the property is still owned by the manufacture of the game in question (in this instance, Blizzard software). Nothing has been "created" - the item was materialized ex nihilo by software - and therefore, the "owner" (again, Blizzard) has lost nothing as well as gained nothing. There is no gross output or gross input. It would be like taxing someone every time they put a quarter into an arcade game.

And this is to say nothing of the invalidity of the very environment for a legitimate, taxable market. If Blizzard suddenly decides that Boots of Asskicking should no longer be +20 Asskicking, and instead are now +10, hasn't the quasi-owner (not the "real" owner, since that's still Blizzard, as demonstrated by their ability to change the items value at will) lost taxable value, if the item was taxable in the first place? This is also nicely demonstrated by the recent release of the Burning Crusade expansion for Warcraft - overnight, values of certain items vanished - some items became worthless, others priceless. Inflation doubled. And yet, the IRS wants to tax it all. Even though government alread receives monetary benefit every time someone buys the game (from both Blizzard, from their profits, and from the customer, from the game sale), as well as every expansion, and every piece of computer equipment the invidual (not to mention the company) needs to buy/maintain. And yet, they want to tax this chaotic, online world. This of course will probably cost millions of dollars to investigate and set up anyways, eliminating any expected monetary gain.

But, did you expect efficiency and logic from the IRS?

[Firegirl]

Considering that the U.S. tax code in total is 60,000 pages long, it would not suprise me if they attempted such a venture. The likelihood of success is not particularly good as they have not figured out how to tax the internet without affecting interstate commerce. Also if the entire gamer population rises up in outrage against such absurd taxation, then the IRS would be even less likely to tax virtual, fake money and fake assets.

[hive_king]

I posit that they should be able to collect income from games such as WoW, under the condition that they collect it in game. I can just imagine "taxcollector666" getting ganked by the entire server.

[jotabe]

That would be a serious problem in games like FFXI, where RMT operations are against the rules of the game, so for legit players, our virtual possesions have no real life value at all... while for people who play the game and break the rules, they do have value.

Edit: of course, it would be amusing if the american IRS would collect taxes from me

[Guest]

And what about those who would be exempt from in-game taxation? I mean, if you're a High Elf Cleric or Priest, isn't your church a non-profit, tax-free organization? But what about Shamans and Paladins?

[hive_king]

My WoW guild actively helps out low level players with their gear and what not. I say we claim tax free status.

[Epi]

I wonder if this is more referring to people who sell online stuff for real money. i.e. if you trade in your WoW gold pieces or items for real cash.

I know in Canada, there was recently a report in the paper about the government using spider software to find online auction sites and ecommerce sites in Canada in order to tax them. Apperently lots of people and companies sell all their stuff online and then just never report it. While canada doesn't have the same tax rules as the US, perhaps this effort is similar.

[mr_thebrain]

i'd like to see in-game tax evasion court battles.