"IRS taxation of online game virtual assets inevitable"

[Hivetyrant]

........

NEW YORK--If you are a hard-core player of virtual worlds like World of Warcraft, Second Life, EverQuest or There, IRS form 1099 may someday soon take on a new meaning for you. That's because game publishers may well in the not-too-distant future have to send the forms--which individuals receive when earning nonemployee income from companies or institutions--to virtual world players engaging in transactions for valuable items like Ultima Online castles, EverQuest weapons or Second Life currency, even when those players don't convert the assets into cash. Most governments are only beginning to become aware of the substantial economic activity in online games, but the games' rapid growth and the substantial value of the many virtual assets changing hands in them is almost certain to bring them into the popular consciousness. "Given growth rates of 10 to 15 percent a month, the question is when, not if, Congress and IRS start paying attention to these issues," said Dan Miller, a senior economist with the Congress' Joint Economic Committee, who is also a fan of virtual worlds. "So it is incumbent on us to set the terms and the debate so we have a shaped tax policy toward virtual worlds and virtual economies in a favorable way." Miller's comments came during a Saturday panel called "Tax and Finance" at the State of Play/Terra Nova symposium, the fourth annual gathering at New York Law School of academics, lawyers and other scholars to talk about the legal, social and economic issues surrounding virtual worlds. The panel was formed in the context of recent questions--first raised by author Julian Dibbel in his book Play Money and in an article he wrote earlier in Legal Affairs magazine--about whether the transfer of virtual assets, or players' acquisition of virtual loot by, for example, killing monsters, creates taxable events. "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 article began, "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?" And while Miller's committee began examining these issues in October, his comments Saturday suggested there could be wider future congressional oversight and a revised IRS tax policy. That's in spite of the fact that Miller said his committee, and Congress in general, is not out to gouge virtual world players. "The Joint Economic Committee is not seeking to impose a new tax on virtual economies," Miller said. "We have a very clear record of supporting lower taxes in free market." Meanwhile, Miller's fellow panelists also weighed in Saturday on Dibbel's question, and came at it from several different perspectives. First up was William LaPiana, a wills, trusts and estates professor at New York Law School. He approached the question by examining whether estate taxes would accrue on the transfer to an heir of a sizable collection of valuable virtual assets. LaPiana said that there is little question that the transfer of such assets could be taxable, since it is property. However, he did say that the taxes would accrue only if the total value of the estate's assets, at the time of death, exceeded the limit set by the state in which the deceased had lived. In most cases, he said, that amount is $2 million, though some states, like New York and New Jersey, have lower limits. There are not that many instances in which someone has that level of virtual assets, although the recent reports that Second Life land mogul Anshe Chung had amassed $1 million in virtual land and other holdings certainly suggest her heirs might have some interesting inheritance tax issues if she dies. More problematic, LaPiana said, would be laws that require estate administrators to take on responsibility for the proper transfer of assets to beneficiaries. Because most virtual assets are locked behind password-protected accounts, it would be incumbent on the administrator to try to figure out how to get access to those accounts. "Whoever is going to run your estate...has an absolute obligation to collect all your property and make sure that it goes to the (proper) people," LaPiana said. "How do I make sure my trustee has access to this stuff after I die? These are all problems we're going to have to face." Next up, Texas Tech University School of Law tax professor Bryan Camp addressed Dibbel's question with a warning. "Be careful what you ask for," Camp said, "because tax is always behind the corner. Tax is the shadow life" to many issues. Camp said that that section 61 of the U.S. tax code, a 1913 provision, stated clearly that all income, "from whatever source derived," is taxable. Thus, the question of whether the transfer of virtual assets is taxable boils down to determining if there is a profit afterward. As an example, he explained that if two people were to exchange copies of books, one of which is worth $30 and the other worth $24, the person ending up with the more expensive volume would have acquired $6 of taxable income. Another example, he said, was Kyle MacDonald's much-publicized quest to trade up from a red paper clip to a house, which was ultimately successful. "He has massive tax issues," said Camp of MacDonald. "He started with (the value of) a paper clip and ended up with (the value of) a house." MacDonald is Canadian, though, which puts him under Canadian tax law, which Camp did not address. His point is well taken, though: in determining tax liability--regardless of whether the IRS would likely try to collect--it is necessary to figure out how much profit has derived from a transaction. However, Camp also said he is working on a legal journal article in which he will argue that at least some profits from transfers of virtual goods are not taxable. For his part, Miller--who spoke last on the panel--said the Joint Economic Committee is expected to produce a report early next year that will address three goals. First, he said, the report will address the areas, such as tax, cybercrime and education, where virtual worlds connect with public policy and will therefore educate the committee's staff members about such issues. Next, the report will seek to identify future uses of virtual worlds, including those by commercial, nonprofit and governmental bodies. And lastly, the report will specifically investigate the tax issues raised by virtual worlds. "We will look at factual technical questions," Miller said, "like what is a taxable event in a virtual world." And that's where the answer to Dibbel's question is likely to come into clear focus, he suggested. "The key takeaway for the people" at State of Play, Miller said, "is that congressional and IRS interest in this issue is simply a matter of time."

I don't know what to say.....

[Bungleau]

Hmmm... so what's different now than before?

If I sell something to someone, taxes are supposed to be paid. If it's a small amount (like a garage sale, tag sale, yard sale, or what have you), then it's generally not worth the paperwork or hassle for either side.

If I sell something worth $100,000, then it's now worth the amount. It doesn't matter if it's a chair I crafted, a story I wrote, or an item I acquired in an on-line game. Someone gave me $100,000 for something that I gave them in return. The taxing authorities are interested in that... [img]graemlins/wow.gif[/img]

It's a leap from there to taxing the gold I earn in a computer game. It's only if I give that to someone else in exchange for money that the taxers care...

That said, the tax authorities are going to want to know when these transactions take place, so they're likely to go to the sources... those who run the game.

Figuring out how much profit was made... that's where the fun will be. Sure, I traded a million gold for a thousand euros... but it did cost me something to earn those gold, so you can't tax me on all of it...

I smell a business opportunity coming up.

[Olorin]

I hope that they don't go too far here. Taxing people who sell their virtual items/currency for real money on eBay is fine. Taxing players because they made 500K in gold by camping the ogre spawn last month gets more scary.

For all those players who never connect their virtual "assets" with the real world, would it be fair to tax them real money? And what happens when a MMORPG ends its run? Do all the players get to claim massive losses due to all their gold/items/houses disappearing? Can they sue the game company because their assets (that they were taxed for acquiring) were taken away? If a game is losing popularity, and the values of its stuff is declining on eBay, is that a tax deductable loss in assets?

What I hope to see in terms of the IRS and virtual worlds, is for the IRS to only get involved when the virtual world interfaces with the real one. If someone gives me a castle in UO for free, I shouldn't have to pay taxes on it. But if I go and sell said Castle on ebay for $50, then I should have to pay taxes on the $50 I just earned. Perhaps you should even be able to deduct your subscription costs from your profits before being taxed.

I also don't know how this meshes with the claims by all the game companies that players do not own any of the virtual items in the game. If a player can't demand compensation for their castle if the shard gets shut down, should they have had to pay the IRS when they got the castle?

Another question...does the IRS have jurisdiction in Brittania or Azeroth? If it depends on the physical location of the servers, what happens if Blizzard relocates it's game servers to another country?

I think the best way to handle MMORPG economies is to treat them as completely virtual, with items having no intrinsic value to the player (after all, they are technically all property of the game company), until such time as the player converts the virtual items into real assets (either money or items). If the IRS goes into the virtual worlds and assigns values to items within it, and then taxes the players on the increase in their assets, then they open up the game companies to all kinds of liability. If the IRS says that my items have real life value, does someone stealing them constitute a crime?

Sorry for the long post, but I think this issue can get very complicated, and I hope that they are very careful with it.

edit: If the IRS does decide to tax me when I make 1M gold in profit from my vendors, can I pay them in gold?

[ 12-04-2006, 04:57 PM: Message edited by: Olorin ]

[Legolas]

It'll probably lead to PKers spending life in prison.

[Sir Krustin]

The key issue, as Olorin states, is that the "property" involved belongs to the gaming companies. The IRS can't claim taxation on something you don't really own.

If players sell virtual property, then they have taxable income - I'm pretty sure this is covered by existing tax law, though I don't think anybody claims that income.

[Bozos of Bones]

It's all well and good to tax transactions like me selling m account for 1000$ or an uberiffic rare sword for 25 000$, but this is what really troubles me:
"...even when those players don't convert the assets into cash."

[Iron Greasel]

I wonder if we're going to get in-game tax collectors? And other things? "To open this door and reach the lair of the District Attorney you must bring me 100 Bureaucrat Briefcases"?

[Luvian]

Originally posted by Bungleau: Hmmm... so what's different now than before? If I sell something to someone, taxes are supposed to be paid. If it's a small amount (like a garage sale, tag sale, yard sale, or what have you), then it's generally not worth the paperwork or hassle for either side. If I sell something worth $100,000, then it's now worth the amount. It doesn't matter if it's a chair I crafted, a story I wrote, or an item I acquired in an on-line game. Someone gave me $100,000 for something that I gave them in return. The taxing authorities are interested in that... [img]graemlins/wow.gif[/img] It's a leap from there to taxing the gold I earn in a computer game. It's only if I give that to someone else in exchange for money that the taxers care... That said, the tax authorities are going to want to know when these transactions take place, so they're likely to go to the sources... those who run the game. Figuring out how much profit was made... that's where the fun will be. Sure, I traded a million gold for a thousand euros... but it did cost me something to earn those gold, so you can't tax me on all of it... I smell a business opportunity coming up.

I think you're missing the point. Do you play any MMORPG? In every mmorpg I played, it's illegal to sell ingame items for real world money. Real players don't make ANY money out of playing those game. It make as much sense as taxing you for the gold and items you got in Baldur's Gate II and Neverwinter Nights. Did you ever make any money out of those games? Do you want to be taxed for every gold you found in those games?

If this really get passed, this mean that since players are going to be charged for those items, they will HAVE to convert their gaming session into work sessions. Forget about dropping of even selling old items to the shopkeeper, you paid taxes on them, you might as well sell them for real life money to get cash back. What's next, are games going to stop using gold coins and start using real life US currency? Say bye bye to gaming as you knew it.

Oh! And by the way, you owe 2k US in taxes for all that time you played on Ziroc's Undermountain server.

[SpiritWarrior]

I'm appalled. I imagine if it did happen though, there'd be numerous protests etc. and it'd go through pre-initiative hell and I hope, would be blocked from ever becoming a real thing. What about people playing on Euro servers I wonder?

[Yorick]

Originally posted by Olorin: I hope that they don't go too far here. Taxing people who sell their virtual items/currency for real money on eBay is fine. Taxing players because they made 500K in gold by camping the ogre spawn last month gets more scary. For all those players who never connect their virtual "assets" with the real world, would it be fair to tax them real money? And what happens when a MMORPG ends its run? Do all the players get to claim massive losses due to all their gold/items/houses disappearing? Can they sue the game company because their assets (that they were taxed for acquiring) were taken away? If a game is losing popularity, and the values of its stuff is declining on eBay, is that a tax deductable loss in assets? What I hope to see in terms of the IRS and virtual worlds, is for the IRS to only get involved when the virtual world interfaces with the real one. If someone gives me a castle in UO for free, I shouldn't have to pay taxes on it. But if I go and sell said Castle on ebay for $50, then I should have to pay taxes on the $50 I just earned. Perhaps you should even be able to deduct your subscription costs from your profits before being taxed. I also don't know how this meshes with the claims by all the game companies that players do not own any of the virtual items in the game. If a player can't demand compensation for their castle if the shard gets shut down, should they have had to pay the IRS when they got the castle? Another question...does the IRS have jurisdiction in Brittania or Azeroth? If it depends on the physical location of the servers, what happens if Blizzard relocates it's game servers to another country? I think the best way to handle MMORPG economies is to treat them as completely virtual, with items having no intrinsic value to the player (after all, they are technically all property of the game company), until such time as the player converts the virtual items into real assets (either money or items). If the IRS goes into the virtual worlds and assigns values to items within it, and then taxes the players on the increase in their assets, then they open up the game companies to all kinds of liability. If the IRS says that my items have real life value, does someone stealing them constitute a crime? Sorry for the long post, but I think this issue can get very complicated, and I hope that they are very careful with it. edit: If the IRS does decide to tax me when I make 1M gold in profit from my vendors, can I pay them in gold?

Great post Olorin!