January 17, 2006 4:00 AM PST
Are virtual assets taxable?
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"On April 15, 2004, I will truthfully report to the IRS that my primary source of income is the sale of imaginary goods," Dibbell wrote on his blog at the time, "and that I earn more from it, on a monthly basis, than I have ever earned as a professional writer."
Essentially, he was telling the world he thought he could make a profit selling to other players in the real world the weapons, currency and other goods he had accumulated in the fantasy game "Ultima Online," and that he was willing to tell the IRS so. He ultimately came up short in his personal challenge, making more from his writing, in fact, than from his online trafficking.
News.context
What's new:
Some wonder whether valuable goods frequently bartered in the online game world can be deemed a taxable possession before they are sold for real-world money.
Bottom line:
Some say there's no theoretical reason the government shouldn't come calling for its fair share of valuable game assets that haven't been sold for real-world money. But observers of online games worry that the IRS doing so could be a disaster.
Now, with a
"If you haven't misspent hours battling an Arctic Ogre Lord near an Ice Dungeon or been equally profligate spending time reading the published works of the Internal Revenue Service," Dibbell's essay begins, "you probably haven't wondered whether the United States government will someday tax your virtual winnings from games played over the Internet. The real question is: Why hasn't it happened already?"
It's a question insiders at academic conferences like
After all, since the trafficking of virtual goods from games like "World of Warcraft," "City of Heroes" and "Star Wars Galaxies" on exchanges like eBay sets their fair market value, the millions of online game players are collectively holding tens or even hundreds of millions of dollars' worth of these digital assets at any one time. And some would say that's a target the IRS can't ignore forever, raising the tricky question of whether virtual goods that are frequently bartered and exchanged in the gaming world can be deemed a taxable possession before they are sold for real-world money.
I just don't think it would be the catastrophe that everybody imagines.
journalist
While most online game publishers try to sidestep the issue by saying in their terms of service that players don't control the property rights to their game assets, some say there's no theoretical reason the government shouldn't come calling for its fair share.
"From the standpoint of economic theory...there's no fundamental distinction between selling euros and buying magic wands," said Ted Castronova, an expert on virtual economies and an associate professor of telecommunications at the University of Indiana at Bloomington. "They carry value with them. If you're going to tax exchanges in the real world, you've got to tax exchanges in the virtual world, in economic theory."
The problem, said Castronova, is that it's not about economics.
"It's about common sense," he said. "Common sense says that when people are playing a game of Monopoly, you don't tax (the properties they buy and sell)."
Dibbell isn't so sure. He said that while the IRS has ruled that some forms of goods with inherent value--such as then St. Louis Cardinals star Mark McGwire's record-breaking home run ball from 1998--are not taxable assets until they are sold, that may not always be true.
"As the RMT (real money trading) markets get bigger and more normalized, how long are the tax agencies of the world going to forebear?" Dibbell asked during an interview with CNET News.com. "At a certain point, it will be less crazy-looking to everybody and therefore more palatable, and there will be more money involved."
No one knows the exact worth of the virtual assets of the millions of online game players. But with estimates for the sales of such goods going as high as $880 million a year, the unconverted assets are surely worth similar amounts. Thus, the government's share, if the government were ever to lay its claim, would be substantial.
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virtual worlds
For starters, many users that play MMORPGs never sell their items from the game in the first place. And very much like the part in the article where they talked about an autograph from a celebrity but never selling it, the government has no right to tax on items where a profit was never made. What next, paying tax on your kids' construction paper art that they made because you could sell it to someone?
Secondly, as a player in WoW, I know that selling items is against the ToS so, how could that even be taxed? There is no way I could sell my items without my account being in danger.
The last part that really gets to me is how Cnet really doesn?t seem to fight or take the side of the consumer and seems to instead push the idea multiple times in the article of why these items should be taxed. Maybe it's just me but, I feel like it?s the beginning of the end...
Ha, I'll bet the IRS won't see it this way, but it will be funny to see them try to justify one thing, but not the other.
Should the IRS tax me because I have one kidney, one lung, and one cornea I might potentially garner income from should I choose to sell them in, say, Asia or South America?
Certainly they represents asset growth - I didn't pay a damned thing for them.
transactions? It seems to me that Monty Python
thought of this long ago when they observed that
taxing "thingy" would make accounting much more
interesting.
The taxable event comes in if/when you sell or trade it (even within the game). Trade the fantastic sword you found for gold or platinum and you now have a "taxable event". Trading is taxable in the real world. The concept the IRS may use is the person you traded the sword to may sell it in the real world. That person may try to deduct the "cost" of purchase from the income on the sword thus coming up with a "net profit". (You can be sure if I sell that chair I made in my garage I'm going to deduct the cost of the materials I used to make it.)
If the person you sold/traded the item to tries to deduct what s/he "paid" you for it, then the IRS is going to want to come after you for your "income".
For those that claim such real world transactions violate terms of service, I believe SONY recently set up a set of servers in either EQ or EQII (don't remember which) in which they actively support real world transactions. SONY is inherently recognizing the real world value of the items. This is not true of all games. However, the IRS could easly claim that a magical item in the virtual world in which SONY actively supports real world value is inherently the same as a similar item in a different virtual world.
My personal opinion is that the IRS should do a simple ruling which encompasses: 1. All transactions within the game(s) are non taxable. 2. All real world transactions for virtual items (receiving real world money for virtual gold/platinum/swords/spells/characters/etc. or receiving a real item [http://car, trip, boat, etc.|http://car, trip, boat, etc.] for a virtual item) are taxable. 3. Deducting the "cost" of the virtual item is not allowed.
Sadly, if any REAL money changes hands, the tax man gets involved.
Just be glad that 'Quattlus' are considered game pieces and trading in them or using them is not considered taxable.
Hey, if you're going to tax me on income, you better allow me to deduct expenses that allowed me to generate that income! And that means my game purchase and subscription fees are tax-deductable!
If they're going to go beyond that, and start real-world taxing people that never take their gameplaying out of the game, and who never make real-world income from their fun, well, that'll become a bit more complicated. Will they tax us on what we potentially could have sold something for even if we never do, something akin to what many people fear about exercising stock options due to the AMT?
For Final Fantasy XI, which I played for a short time, World of Warcraft, and any other game title that would be a target of such real-world taxation, it's going to become a burden to keep track of who is taxable by the IRS and who is not. Are all those FFXI players from Japan going to be subject to the IRS? They shouldn't be. If other countries jump on this bandwagon, will I as an American citizen end up paying foreign taxes to any extent? How will the gaming servers keep track of it all? What if I do in-game transactions with a game character belonging to someone in a different country, do international treaties or tarriffs come into play, and do I now have to fill out tax forms related to income from a foreign country? Or will it depend on the location of the game server, and how do I know where my server is located? Will the game company suffer the burden of sending out the new W2-V or 1099-V (for virtual income) forms?
Will it end with MMORPGs, or will it be required to have an internet connection to report any virtual winnings for otherwise "offline" games, even if they are single player and items are not transferrable at all, and must we all buy the printer accessory so it can pring out our IRS tax forms every time we end a gaming session?
If you actually look at the eBay auctions, which is where the real money comes into play. They are not selling their virtual items. They are selling their services. These services are taxable just as any ebay auction is if the money you make is over a certain amount. So, why hasn?t it happened yet? It has, you are just too ignorant about the subject matter to write a decent article.
however, make some real world coin and you'll have to pay taxes on the income. period. no new laws required. it's the law as written. period.
however, the author of the article totally misses the boat on the possibility of taxing these assets. that is, in some states/counties/cities, personal property is taxed. you don't have to sell it. the fact that it has worth is what generates the tax liability. and, if there is a business connection, then even more jurisdictions jump onto the "tax it" bandwagon. suggest that the author visit with a tax accountant and rewrite the article: there's a real tax liability, but he totally missed it.
mark d.
place....
Government justifies taxes by providing services and regulatory
agencies that enforces law and makes commerce possible. (At
least this is what it is SUPPOSE to do).
Government plays no part in fostering an enviroment that
promotes game play in these virtual worlds. Why should it be
allowed to tax?
Only those who have brain washed by the lame ass politicians
will agree that everything and anything should be taxable. These
are the same people that readily lube themselves everytime
they're asked the bend over.
- Virtual Goods are just that
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by
January 18, 2006 4:17 AM PST
- The goods, according to all of the game companies Terms of Service I've read recently, belong to the game company not the player. What players are buying or selling in reality is time. The real question then would be, can the government tax a service one player provides for another over the internet when that service is paid for in real USD?
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