How Long Till Virtual Currency Taxation?

GameDaily has a piece on the thorny issue of taxing virtual currency. From the article: "The current tax law has a clause, #525 to be exact, entitled 'Taxable and Nontaxable Income.' This verbose, meandering clause describes all manner of abstract (legal, illegal and otherwise) means by which you can earn income. Some of these obscurities can only be taxed by the speculative and vague term, 'fair market value.' ... This clause also includes a statement about goods acquired through barter or won (prizes or cash) in a game. Technically speaking this means those 'earnings' are taxable the very moment someone comes into possession of them, regardless as to whether or not they are sold for money. While no one knows the exact worth of all the virtual assets floating around the MMO gaming-verse, estimates for the sale of these goods range as high as $880 million a year. Step back and think about that for a minute... EIGHT HUNDRED AND EIGHTY MILLION! That's a crapload of real world money! Money made during what can be considered the infancy of the genre. Can you imagine how exponentially greater this amount will be in a few short years? "

Someday But Not Yet

[BenEnglishAtHome]

Taxing in-game earnings has come up before and it'll come up again. In the U.S., the Internal Revenue Service will eventually take notice of the phenomena when someone who makes lots of real-world money by selling virtual goods gets audited by an ambitous Revenue Agent. Until then, unless you're actually converting virtual goods into real greenbacks, there's not much to say on the subject. Any scaremongering about taxable events occurring inside a game is just FUD. It may be fun to talk about, but I notice that no one has yet made the news after obtaining a private letter ruling. Until someone sparks a written determination from the IRS [irs.gov], this is really a non-issue. Someday it'll be an issue, but not for a while.

Re:IANAE...

[Babbster]

The most fundamental problem is that the people selling these items and gold are not the owners of the property, nor are they representatives of the owners of the property (such as on a stock exchange). The EULAs for MMOGs usually specify that users have only those rights granted to them, limited to use of the game on the developer/publisher's terms and that the folks running the MMOG retain all rights to the game (and, thus, everything in the game - including the individual characters). For the virtual items/money to be taxable, even theoretically, there would have to be a transfer of ownership from either the owner of the game to the person with the character, or from one character to another. Since that transfer never occurs in most MMOGs (I don't know about games like Second Life which seems to have a fairly robust crossover between virtual and real lives), there's nothing to tax.

Now, the people who sell these virtual items could theoretically still be taxed (even criminal income is subject to taxation, though it's also subject to seizure) but folks who are just playing the game and following the EULA never really "own" anything.

Yes, bartering counts as income

[Steve Hamlin]

If I trade you two chickens for a goat, are they entitled to take for themselves the drumsticks off one chicken and one udder from the goat?

Actually, yes. Well, not payable in drumsticks, udders or MMO silver, but....yes.

You'd owe taxes on the excess of the market value of goat over the market value of the two chickens. If equivalent tranactions value the goat at more than two chickens, then you just made a profit, and probably owe personal income tax.

Income doesn't have to be in cash, and bartering counts. An equal trade would probably be counted as a either [Revenue-Cost of Goods Sold=zero Net Income], or a like-kind echange of assets.

Reportable on Schedule C (profit or loss from a business-sole proprietorship), or Schedule F (farm income and expenses)