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Virtual Economies Attract Real-World Tax Attention 247

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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  • by generic-man ( 33649 ) on Monday October 16, 2006 @01:59PM (#16455557) Homepage Journal
    News flash: When you make money, you owe income tax on it. Doesn't matter if the money comes from real-world work, virtual-world work, services, corporate gifts, [] or even illegal activity. [] The second you get U.S. dollars for your work, the IRS gets to claim a chunk of them.
  • Re:Well (Score:1, Informative)

    by Anonymous Coward on Monday October 16, 2006 @02:24PM (#16456021)
    It's not a developer's best interest to host an economy-based online game since the richest people, in-game and in real life, can defeat the poorer players with gear alone.

    Sure it is, they make money off the rich people by selling them things. Lots of Korean companies seem to do rather well with that model. Second Life also seems to do well with such a model. Face it, if someone spend more money than you on a game they are worth more to a developer than you all other factors equal.
  • by Anonymous Coward on Monday October 16, 2006 @02:29PM (#16456109)
    On the plus side, your WoW account fees would become tax deductable as a business expense.
  • Re:Finally. (Score:4, Informative)

    by Anonymous Cow herd ( 2036 ) on Monday October 16, 2006 @02:40PM (#16456345) Homepage
    What would the tax be, exactly? For the most part, most states don't require sales tax on internet purchases.

    Most states also have what are known as "Use Taxes". Wiki here: []

  • Re:Ebay is the key (Score:5, Informative)

    by Free_Meson ( 706323 ) on Monday October 16, 2006 @02:45PM (#16456457)
    When dealing with illiquid assets (such as real estate or, in this case, baseball cards) you are only required to recognize and pay taxes on income when you convert the illiquid asset into cash or a cash equivalent. When you trade illiquid assets, though, you keep your original basis for tax purposes. If you paid a nickel for your baseball card and I paid $500 for mine, we can swap without being taxed but when you sell your card you will be taxed on the sale price less your original basis (.05) as will I, even though the card you're selling was bought for $500 and the card I'm selling was bought for $.05.

    There's one cool tax consequence of this, btw. As a taxpayer, you can allocate basis when you receive both cash and an illiquid asset in exchange for your own asset. So, if I buy my card for $500 and you bought yours for $.05, I can sell you my card for $500 plus your card and not owe any taxes until I sell your card. For baseball cards that's small potatos, but for things like real estate it can make a huge difference in whether a transaction is profitable or not.
  • Re:Tax write off (Score:2, Informative)

    by w1cked5mile ( 963365 ) on Monday October 16, 2006 @03:10PM (#16456837)
    As long as you have a viable business plan and show a profit 3 out of 5 years you can. The key is, if you do not show a profit in 3 out of 5 years and count your expenses as loss against your income you are subject to the IRS auditing you. Your business can also be deemed a hobby business in which all the expenses can be deemed unacceptable and you have to pay the taxes plus penalty. Self employment isn't hard. Proving that your hobby is actually a business is over time.
  • Re:Losses (Score:4, Informative)

    by Gorm the DBA ( 581373 ) on Monday October 16, 2006 @03:24PM (#16457027) Journal
    -1 Incorrect.

    You are allowed to deduct any losses from your winnings for tax purposes. You cannot claim an overall loss (ie if I won $500 and lost $600, I can't claim a $100 loss for taxes). Any chip purchases, tournament buyins, or other money you gave to the casino can be offset against your winnings thereby reducing the final tax bill.

    And yes, I would know, since I had to fill out paperwork for winning a poker tournament in Atlantic City. The $1360 I won is offset by my $65 buy-in, as well as the $300 in other buy-ins I had over the weekend, as well as the other miscellaneous losses I can document.

    (Documentation is key, if you are going to gamble with any possibility of winning more than the $599.99 that doesn't trigger the paperwork, write down precisely when and how much you bought in for, and how much and when you cashed out for)

  • Foreign Accounts (Score:3, Informative)

    by TheoMurpse ( 729043 ) on Monday October 16, 2006 @03:49PM (#16457477) Homepage
    It seems to me that, if we are going to consider that money in virtual worlds is taxable, that it should be treated like money in foreign accounts. I'm not a tax lawyer, but if you have more than US$10,000 in aggregate in foreign accounts, they may be taxable and you may have to file a U.S. Treasury Form TD F90.22-1 annually. A foreign country is defined as geographic areas located outside the US, Guam, Puerto Rico, and the Virgin Islands. Granted, this may invalidate prior case law where the internet was defined as being within the US, but I think it is very important to set a precedent that the internet is one unit that encompasses the whole world, and to rule that the entire thing is located within the US is folly.

    The simpler solution is to say that while the virtual possessions are still virtual, they are worthless. However, once you make real money off of them by selling, the sales are taxable in the same way that plants you have grown on your property are not taxable, but as soon as you sell them the revenue is taxable. Otherwise, this situation is parallel and displays the idiocy of taxing virtual possessions as capital gains:
    MMORPG : FPS Tournament ::
    virtual gold : frags ::
    cashed out value : tournament winnings.
    Isn't it absurd to say you should be taxed on frags gained in pursuit of a tournament victory? Or, to put it in terms more old people (read: legislators and judges) would understand:
    MMORPG : tennis tournament ::
    virtual gold : points ::
    cashed out value : tournament winnings.
    Now, does Maria Sharapova get taxed on points she won in a match? NO! She is taxed on tournament winnings only. Thus, by analogy, a gamer should be taxed on real earnings made by "cashing out", and not by what he possesses in the virtual world.

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