January 9th, 2006
Should MMORPG Goods Be Taxable?
By Michael Santo
Contributing Writer, RealTechNews
Since I’m a MMORPG player myself, I should probably keep my mouth shut, but … on the other hand, as long as we’re talking about those games (see my prior story here), LegalAffairs.org has an interesting article this month about the taxability of items “won” in virtual worlds, like EverQuest or World of Warcraft (WoW). After all, if you take a look at eBay, you can easily find say, WoW gold for auction.
In 2004 the author of the article, Julian Dibbell, decided he would pay income tax on the income made from the items sold in his “virtual career”, most of which was made on Ultima Online. But actually, it wasn’t the whole idea of paying taxes on this income that was most troublesome … it was the possibility of items won in a game, maybe (or not) traded, but never sold being treated as barter.
What about the assets I bartered for or won in the game but never sold in the real world, the suits of armor stashed here and there with their easily established fair market value? What if I traded those assets for their value in Ultima Online’s official currency, the Britannian gold piece, rather than for dollars? Wouldn’t it be easy to establish their value in dollars nonetheless and, if I owed American taxes on the exchange, put a number on the deal that the IRS could grasp and love?
You might think that I was letting my imagination run away with me—I certainly hoped I was. I thought that a glance at past IRS practices would assure me that the feds would never dream of taxing assets that had not been turned into money. I thought wrong.
The IRS has taxed barter transactions that are remarkably similar to the ones that online players engage in every day. In the late 1970s, for example, dozens of so-called barter clubs sprang up around the U.S., said Deborah Schenk, a tax professor at New York University School of Law. The clubs put out directories in which members listed themselves as providing accounting, window washing, or other types of services. Any member could buy those services with “trade dollars,” a virtual currency like Britannian gold pieces, and a member could earn trade dollars by offering his own services. By 1980 these clubs were handling an estimated $200 million worth of transactions every year, and the IRS took notice. In a 1980 ruling, the agency said that barter club transactions produced taxable income, even though no actual money changed hands. A 1982 law made enforcement of the ruling easier by requiring the clubs to provide the IRS with information about every transaction.Swapping a financial audit for a dental checkup seems different from trading a Runic Hammer for an Ethereal Mount, if only because audits and checkups are real. But what does “real” mean for tax purposes? Source: LegalAffairs.org
Dibbell pursued this somewhat further, speaking with some IRS officials, and going through a great deal of trouble. He received an opinion, but not a ruling. Apparently, as they said “… it sounds to us like [the online trades you’ve described] would be—yes—Internet barter. However, there are no regs, there is no code, there are no rulings, to rely upon. This is our opinion.”
We Say: Time for me to logoff City of Heroes (COH). I could never afford to pay for that … waitasec, COH doesn’t really have a Runic Hammer or things like that to trade. In fact, I give away stuff or sell it at a store and keep the Influence (it’s like COH cash) for myself. On the other hand, I see plenty of places where you can buy Influence online.
So, I think, if you’re selling stuff, and making real money, like on eBay, that should be OK to tax. I mean, hey, that’s really income. This barter idea, well, to me that would be crazy … how would it be tracked for one? And I think a lot of people would quit (I would!) rather than deal with the complexity. Without a real ruling from the IRS, who’s to say though? I’ve seen this government do sillier things. And hey, don’t they have a deficit right now?
MissingFrame says:
Oh heck they came with a new expansion and obsoleted my 1337 gear, time for a tax writeoff!
January 9th, 2006 at 9:37 am
Sean Brody says:
These goods shouldn’t be sellable in the first place as these sales are creating companies of people who farm for these resources and therby skew the game for players without huge amounts of cash to commit.
January 9th, 2006 at 6:03 pm
George Philp says:
Why have I not received any Newsletters from you?
I tried resubscribing, but your Newsletter computer says I am already on the mailing list.
Thanks, George
January 10th, 2006 at 10:53 am
Michael Santo says:
I forwarded your comment on to someone who can look into it, George.
January 10th, 2006 at 11:32 am
cattrain says:
uh… isn’t the internet tax free?
January 10th, 2006 at 6:51 pm
Ryan says:
Too many problems with this.
1) The clubs were all US based and members were all US citizens.
2) In addition the members were providing services/goods that had a USD value.
3) These transactions generated positive flow only.
4) They were done in RL as opposed to via the web.
5) The services/goods were not intended for recreational purposes.
6) They were adults
7) What about tax exempt users?
These 3 things are NOT true for online gaming.
1) You can preform trades, or even buy in-game items with real money from players all around the world. Thus creating an international problem with transport n goods.
2) Online gold does not have a “fair market value”. Let me explain before you go and whine about ebay sales. In order for something to have a fair market value you need to have certain criteria met. There needs to be a cost with making/acquiring the item, and then a comparable value to ratio on how rare/common this item is. For example… When the US tomato farmers suffered crop loss the value of there product rose but not because of the cost to make the item increased, but rather the decrease of availability to the market. Same goes with oil, and lots of other items for trade. Well, when you try to turn a games economy into a taxable source of income then you have a serious problem because you need to be able to account for the games “current trade value”. Thus a need for an online stock market will be needed, and don’t forget this will be needed for every country and then there will need to be a cross value evaluating the countries real money worth to ingame worth and create a formula for international and domestic sales.
3) Since this creates the potential for a “new market” there will be profits and loss. With the risk of a loss and since the “player” could potentially take a huge “loss” before end of tax season or a quarter thus allowing him to screw the IRS on his real taxes, and yet the next day reclaim the very thing is took the “loss” on it could be very bad. In order to prevent this the IRS would need to be able to take audits of in game value and of players stock at anytime to prevent this. Obviously you can see the problems before I even waste my time explaining all the trouble that would cause. (and lag)
4 & 5) We do not tax many recreational things. We don’t tax on the “projected” value on many tradeable game items…. LIKE… baseball/magic/pokemon and other cards. Not until they are sold for a profit. You could have 10million USD worth of cards, but until you sell it for actual USD then it’s not taxable. The same would apply here.
6) The companies could claim that a law like this would cause sever damage to there company since parents would prevent children from playing in order to prevent them from having a larger taxable income. There are laws that prevent such things from occuring.
7) Tax excempt users could use there status to change the fair market value and cause severe problems to all areas of the equation because this makes every person have the potential to qualify as a buisness and an individual.
Well thats my take… not a sentence, but definitly more then previously commented on.
September 7th, 2006 at 2:02 am
ClapekDodki says:
strozzare
July 16th, 2007 at 6:17 am
ClapekDodki says:
grassi
July 17th, 2007 at 3:03 am
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May 18th, 2008 at 7:24 pm
Kunoichi says:
There’s also the issue that many “e-bay” sales of power leveling, currency, and items are either illegal outright, or are at least bannable offenses within the game worlds. I remember that there *are* now laws about this, mostly because I remember Second Life requested to be exempted from this law (which makes sense).
So, assuming current laws etc, it’s like taxing the sale of cocaine…which would be utterly ridiculous, you don’t tax illegal transactions, you stop them! Assuming gold selling were even legitimate outside of China, you’d be taxing something *imaginary*, not even just intangible and mutable like the futures market, because something real eventually can be bought there. Taxing the imaginary is simply folly.
July 8th, 2008 at 12:04 pm