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Virtual Economies Attract Real-World Tax Attention 247

Posted by kdawson
from the tax-haven-in-Second-Life dept.
doug141 writes to point out a Reuters story on the attention tax authorities are beginning to focus on virtual economies. From the article: "Users of online worlds such as Second Life and World of Warcraft transact millions of dollars worth of virtual goods and services every day... People who cash out of virtual economies by converting their assets into real-world currencies are required to report their incomes to the U.S. Internal Revenue Service or the tax authority where they live in the real world... 'Right now we're at the preliminary stages of looking at the issue and what kind of public policy questions virtual economies raise — taxes, barter exchanges, property and wealth,' said Dan Miller, senior economist for the Joint Economic Committee of the U.S. Congress."
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Virtual Economies Attract Real-World Tax Attention

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  • Finally. (Score:2, Insightful)

    by Hubbell (850646) <brianhubbellii@nOsPAm.live.com> on Monday October 16, 2006 @01:53PM (#16455403)
    I'm surprised this wasn't done years ago when people were making real money off of Ultima Online and Asheron's Call. Good AC accounts, like Animal the first level 126 Battlemage which went for $5,000, were going for thousands during it's prime and even a year or two afterwards.
  • Re:Well (Score:5, Insightful)

    by drsquare (530038) on Monday October 16, 2006 @01:58PM (#16455521)
    Whether the game manufacturers say it has legal value or not, if you cash in, that's income, and you have to pay tax on it.
  • by Deliveranc3 (629997) <deliverance AT level4 DOT org> on Monday October 16, 2006 @01:58PM (#16455525) Journal
    Timmy: WOW a +2 Vorpal SWORD SWEET!

    IRS: Hey Timmy...

    This is increadible they are taking one of the LEASE PLEASANT ASPECTS OF REAL LIFE and imprinting it on the virtual world... for no reason, they can just tax the sale of the goods!
  • by tont0r (868535) on Monday October 16, 2006 @02:00PM (#16455569)
    I always felt there would come a time that if someone stole your 'virtual item', they could be arrested for stealing. This will be one more step towards reaching that goal. Because now this is something you would pay taxes on. But how does one decide how much to tax? Is it considered 'investing' if you decide to buy all the WoW gold you can and then raise the price of it when you resell it? Because in all reality, Blizzard can just change the amount of gold you have in their database and poof its gone. And how do you handle hacks and what not? Will that become illegal if you sold 'gold' that you achived through hacking?
  • by Hubbell (850646) <brianhubbellii@nOsPAm.live.com> on Monday October 16, 2006 @02:00PM (#16455577)
    They can only tax actual income made from the sale of said items ingame. They cannot put a value on virtual goods until the actual event of purchase/sale occurs using real money.
  • Re:yay! (Score:2, Insightful)

    by ackthpt (218170) * on Monday October 16, 2006 @02:04PM (#16455683) Homepage Journal

    I can't wait to pay my tax in WoW gold.

    Don't mention Gold. Tangible or not, it just gets Congress excited.

    You know the paper dollars in your pocket are not backed by any gold or silver, right?

  • by amigabill (146897) on Monday October 16, 2006 @02:05PM (#16455697)
    Just remember to deduct your expenses toward creating your virtual wealth. Buying the retail box or download, the monthly service fees, upgrade fees when new content is released, etc. should all be legit deductions to such a tax.So should some percentage of your electric bill to power the computer. Maybe part of that nice new desk, chair, and all that too. If they want a tax, they better recognize the business expenses we're ging to to create that income, virtual or not, and if they leave the deductions part out of this weird tax law they better be ready for a virtual revolution.

    I wonder when Monopoly will stat coming with a per-game tax too...
  • by Shihar (153932) on Monday October 16, 2006 @02:09PM (#16455761)
    The only case where I can see taxation having any success is when a company facilitates it in a direct way. So, if I can cash money out of the game directly, you might very well be forced to pay a tax in the same way you are forced to pay a tax when you get a paycheck from work.

    That said, that sort of transaction where a legitimate business is facilitating a cash transfer is pretty rare. The real money trading hands in MMORPG economies is almost exclusively person to person transaction, non-legal companies, or legal companies outside of the US. In all of those cases you are about as likely to get a drug dealer to voluntary tax report his taxes as you are to get some guy working over e-bay to report his income.

    The only reason I can think of to voluntarily report MMORPG income is if you are making so much that it makes up a substantial part of your income. In that case, you might report some fraction of it just to avoid looking like a drug dealer.

    I expect the vast majority of people to simply ignore any efforts to improve taxation about as easily as they ignore laws against a few guys playing poker on Friday night and smoking small quantities of marijuana. Yeah, those activities are illegal if you are caught, but unless you are running an underground casino or smuggling pounds of drugs, no one really cares and the penalties for being caught are a slap on the wrist.
  • by SatanicPuppy (611928) * <Satanicpuppy AT gmail DOT com> on Monday October 16, 2006 @02:10PM (#16455787) Journal
    They don't give a damn about how much WoW gold you collect, but they DO care about how much that gold brings you in real money when you sell it on eBay.

    Subscription fees are an obvious tax deduction, but the fact remains if you're making more than a minimum amount on it, and you live in the US (don't know about other countries), you owe taxes on it.

    What I'd expect to see out of this is companies like IGE being forced to be more open about their cash flow, to make it easier to find people who are not paying their taxes.
  • Re:Losses (Score:4, Insightful)

    by Morphine007 (207082) on Monday October 16, 2006 @02:13PM (#16455837)

    yeah, seriously. If you "invested", say, $10,000 worth of online currency into, oh... I dunno... this [slashdot.org] does that mean you can claim that online currency's worth as a loss?

    To answer my own question: no

    Now for a better question: suppose you first bought that $10,000 worth of online currency and "invested" it into that EVE Online ISK scam and lost it. Can you then claim your $10,000 investment as a loss? Since you invested the money into a business (some might argue this, but I'd argue right back that the EVE Bank had more chance of succeeding than some dot coms), with the expectation that it would make a profit (online) which you could then sell for real money (and hence pay tax on), but instead lost it?

    I mean, just how different are these two scenarios:

    • you invest real money into a business which makes a product, this business fails and you claim a loss
    • you invest real money into a virtual business which makes a product, this business fails and you claim a loss

    These are the reverse of the two scenarios the IRS wants to capitalize on:

    • you invest real money into a business which makes a product, it succeeds, you make money and pay tax on it
    • you invest real money into a virtual business which makes a product, it succeeds, you make virtual money which you exchange for real money and pay tax on it

    Where does the line get drawn?

  • by Anonymous Coward on Monday October 16, 2006 @02:16PM (#16455895)
    So i want to anonymously transfer some funds to Al Quaida or Al Capone or Al Bundy, i just have to:

    1. Register in told MMORPG
    2. Buy weapons, land whatever on ebay(or other means, i am not too experienced yet)
    3. Meet AQ/AC/AB in the game who takes away my stuff
    4. He sells the stuff where it can be sold.

    - No record who i handed the items (is there full log of these games stored anywhere?)
    - I have lost in a game, i did not support terrorism/mafia/AB
    - The receiving end made a fortune on gaming, not easy to prove he received donations

    Great!

    vajk
  • Re:Not True (Score:4, Insightful)

    by Maxo-Texas (864189) on Monday October 16, 2006 @02:18PM (#16455919)
    The "level of risk" you speak of is "the risk of punishment including fines and prison time for not paying taxes that the government requires you to pay on income". You implictly acknowledge that you can be punished for failure to pay in your own post. ironic, no?

    So , actually it simply is true.

    If you sell drugs, you are required to pay taxes on the income.

    Remember, it was good enough for the original mob Al Capone, it's certainly good enough for you with the loot you got off your MOB.
  • by CerebusUS (21051) on Monday October 16, 2006 @02:30PM (#16456145)
    Well, that's exactly what a lot of people are missing.

    This is no different than other forms of income, and income is taxable.

    By great coincedence, the money you spend to allow you to create that income is allowed to be deducted from the earnings to offset the total tax paid.

    If you make $20K /month in Second Life, hell yes you should be required to pay taxes on that. But you'll be able to deduct the cost of your internet access, computer depreciation, office space rental, etc. from the gross income.

    The IRS isn't going to worry about people making $20-100 / month online doing this stuff... they are going to go after the bigger fish.

    As an aside, most people know that the money you win gambling is taxable, typically at a fairly high rate. Most people I've talked to, however, didn't realize that if you keep your reciepts from when you lose, you can mark that as an expense against your winnings to reduce that tax.

    All this being said, IANATL, so check with a specialist :-)
  • Does this mean... (Score:3, Insightful)

    by Samurai Cat! (15315) on Monday October 16, 2006 @02:34PM (#16456227) Homepage
    ...those folks can write off their WoW account fees, and depreciation on their computers, etc. as "expenses"?
  • Re:Finally. (Score:3, Insightful)

    by truthsearch (249536) on Monday October 16, 2006 @02:47PM (#16456487) Homepage Journal
    But enforcement is the issue they're trying to tackle. Enforcement is basically handled by either withholding or reporting (e.g. form 1099). It sounds like these virtual world companies aren't reporting (we definitely know they're not withholding). So the government will either tax the virtual world and trading companies or force them to report payouts. Don't be surprised if in the next few years they ask for your SSN. I recommend getting an alternate tax ID if they do enforce reporting and you still want to make transactions.
  • by w1cked5mile (963365) on Monday October 16, 2006 @02:56PM (#16456639)
    In the event that you have set up a business model that sells virtual equipment/accounts from an online game you would treat your business as you would any other service oriented business. Income would be generated at the time of sale rather than at the time of acquisition of an item since market pricing would provide fluctuations in the value of the commodity. Accounting for your machine, home office expenses, percentages taken for online payment options, advertising, game costs, etc. you would file under a 1099 just like any other independent contractor who provides a service.

    The problem is, the average gamer isn't looking to give unto Ceasar what is Ceasar's since they think it's just a game. It is just a game until you turn a real money profit, at which time you declare income less deductions and pay the percentage for whatever tax bracket you fall into.

    This would not fall under a capital gains (15%) tax since it wouldn't be a regulated investment income or real estate sale. I would dare to guess that virtual estates aren't recognized under tax regs.
  • Re:Ummm.... (Score:1, Insightful)

    by Anonymous Coward on Monday October 16, 2006 @03:25PM (#16457067)
    This may have been an issue at one time when I actually knew people making a living on EQ. However, I really doubt it's a huge deal today.

    It's a big deal today because Reuters opened a bureau in Second Life, and there's a lot of Second Life hype hitting the techie mainstream (like with Sun). It was in the papers this morning and on the news: it must be a real story - it was from Reuters.

    It's a big non-story really, though. You make a living at something, you get to pay income tax on it. If it's pocket money, nobody really cares. It's no different to being a regular E-bay seller: if you trade enough, it counts as a job. Folks really are living in an alternate reality when they think making money online is different than making it offline.
  • Re:Finally. (Score:2, Insightful)

    by mysidia (191772) on Monday October 16, 2006 @04:15PM (#16457921)

    Hm.. I think the trade of the gold for a sword may separately be taxable as barter exchange [irs.gov], oh boy -- you may note, that income from barter or exchange is not deferrable for tax purposes, beyond the end of the year, and estimated payments may be required.

    Otherwise, you could start a consulting business and delay taxation of your business profit, by having your customers pay you in Barrels of Whisky, Japanese Yen, instead of dollars, E-gold or World of Warcraft money. But according to the IRS, the income is taxable immediately, all the same.

    You really don't have to worry about that... you don't get taxed on things as they increase in value, just when you cash out on them (imagine buying a rare baseball card; as it increases in value you don't have to pay taxes on that)

    Problem: when you slay the boar and get the gold, it's not a matter of something increasing in value.. it's a matter of you working and earning, acquiring control over a new possession that already has a market value at the time you earned it, that's what might get taxed, as an ordinary income asset, instead of a gain from selling a capital asset.

    (The virtual currency did not start at a value of $0 when you acquired it, if there was already a market for the item.)

    I know that once you already have the asset, the gold, it will be considered a capital asset (unless you are a dealer, and the thing is part of your inventory), I know future changes in value after you acquired it won't be taxable, until you sell.

    I think there is a possibility the gold you acquire could be determined to be ordinary income property, at the moment you acquire it: much like a non-qualified stock option grant, may be taxed: if you're a treasure hunter, and you find a stash of USD, that's taxable, if you find gold, that is taxable also.

  • Re:Finally. (Score:3, Insightful)

    by default luser (529332) on Monday October 16, 2006 @06:10PM (#16459965) Journal
    You folks are taking the wrong tact on this.

    This isn't an issue of taxable SALES, it's an issue of taxable INCOME.

    It is true that, due to the intangibility of code, you cannot tax the SALE of that code. However, if you are making monetary gains, it is considered self-employment, and is subject to federal and (in some states) local income taxes.

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