Virtual Gold Could Draw Real Taxes
Gumbo
Congress is investigating whether the IRS should tax online game loot.
Julian Dibbel
Monday, January 29, 2007 05:00 PM PST
Source:
http://www.pcworld.com/article/id,128270-page,2-c,onlineentertainment/article.html
For all you online gamers out there this was in PC worlds March 2007 Issue
Imagine getting a tax form and a warning to report taxable income from the
IRS every time you collected rent on your hotel-stuffed Boardwalk and Park
Place. Only in a bad dream, you might think; but don't underestimate the
U.S. tax code's potential for surrealism. While the IRS won't be taxing
Monopoly cash anytime soon, another variety of play money--earned and spent
by millions of online gamers each day--may not be so safe.
Sometime in the next few months, the Joint Economic Committee of Congress
will publish the results of an ongoing investigation into the economies of
World of Warcraft, Second Life, and other massively multiplayer online game
spaces (MMOs). The report's number-one bullet point will address a question
that the inhabitants of these spaces may soon wish had been left unasked: Do
the tax laws of the real world apply to virtual-world transactions?
For most people unacquainted with MMOs, of course, it's a mystery how the
question could be asked at all. If you're among the mystified, you are
probably unaware of the key feature that distinguishes most virtual game
currencies from Monopoly money: an exchange rate.
Real-Money Trades
At this writing, the Azerothian gold coin--the in-game currency used by
World of Warcraft's 7.5 million players to buy and sell the game's magic
armor, weaponry, and other items--trades on eBay at an unofficial rate of
seven to the U.S. dollar. Though most game companies try to ban or
discourage these free-wheeling out-of-game markets, Second Life actively
encourages a real-world type of economy with an official market-driven rate
of roughly 50 cents per 100 Linden dollars (Second Life's currency). But
whether the game companies like it or not, where there's an MMO, there's a
way for players to buy what they want in the game with real money.
And naturally, where there is a way to pay real money, there is a way to
collect it. From the player who sells his WoW character on eBay for a quick
$300 profit to the laid-off factory worker making $7000 per month selling
Second-Life animations he creates that let game couples dance and assume
other poses, virtual worlds have blurred the line between work and play
almost past recognition. Successful entrepreneurs like Second Life
real-estate magnate and real-life millionaire Anshe Chung are the
pixel-perfect face of a fast-growing "real-money trade" that is estimated by
Steve Salyer, former CEO of online game item and currency retailer IGE, at
nearly $1 billion worldwide--every penny of it as taxable as any other
industry's real-money revenues.
Taxing Trades
But as any accountant can tell you, real-money revenues are not the only
kind of income that draws the tax man's eye. The labyrinthine U.S. tax code
includes many provisions that can leave you owing income taxes without ever
earning a dollar.
Consider "bartering" and "prizes" as outlined in IRS publication 525
("Taxable and Nontaxable Income"): Anyone who acquires goods or services
either in trade or at play must report as income the "fair market value" of
those goods or services. Give your plumber a rare baseball card in exchange
for fixing your pipes, and you both owe taxes on the dollar value of your
respective ends of the deal. Win an SUV on Wheel of Fortune, and the
government will want its share of the sticker price, whether you sell the
car or not.
So if virtual loot can be sold for real money and therefore has real value,
what's to stop the government from concluding that every time a fallen
virtual monster gives up its prize, or a fistful of Linden dollars is traded
for a virtual hair weave, a taxable event has occurred?
Don't ask the IRS. Pressed for an official opinion on the taxability of
virtual trades, IRS spokesperson Nancy Mathis would say, via e-mail, only
that "whether exchanges constitute bartering depends on the facts and
circumstances of each case." As to whether that magic helmet won from a
slain dragon is a taxable prize, the answer was similarly noncommittal.
"[The] bottom line," Mathis wrote, "is this: You can receive income in the
form of money, property, or services. Generally, your income is taxable
unless it is specifically exempted by law."
Translation: The IRS is keeping its options open. And according to former
IRS lawyer Bryan Camp, now a professor of tax law at Texas Tech, those
options definitely include taxing virtual gold. "Section 61 of the Internal
Revenue Code says that gross income is any income received from any source,"
says Camp. "And if someone in the IRS thinks that a [virtual-world]
transaction represents the receipt of either cash or services or property,
and that has a fair market value, then yes, that's going to be income." When
and if that that decision is made, Camp explains, there are only two ways to
override it: Take it to the courts, which may or may not disagree with the
IRS's interpretation of the law, or take it to Congress, which can pass new
laws that leave no room for interpretation.
Congress Steps In
Enter the Joint Economic Committee, an advisory Congressional committee
influential in framing the debates that shape many laws. When the committee
launched its research project on virtual economies in October, then-JEC
chair, Representative Jim Saxton (R-New Jersey), made it clear that he wants
to restrict the IRS's reach into virtual worlds: "There is a concern that
the IRS might step forward with regulations that start taxing transactions
that occur within virtual economies," he said. "This, I believe, would be a
mistake."
The antitax position isn't surprising coming from a solid Republican like
Saxton, but there's more to it than that. His chief economist, Dan Miller,
is a veteran gamer, with hours of World of Warcraft under his belt and the
level 41 night-elf priest character to prove it. "We're not approaching this
as a partisan issue," says Miller. "But if there's a new issue, you want to
set the terms of the debate...to make sure that we're talking about this in
a sensible manner, not waiting until it's too late. I don't think it's a
good idea to wait until the IRS has already started writing rules."
That's not to say the JEC could forever banish the IRS from the economies of
virtual worlds. Estimates vary, but some put the total wealth created
annually within those economies (not just that part of it bought and sold
for real money) at somewhere around $10 billion. And that figure will only
grow as established businesses get in on the game: American Apparel now runs
a Second Life store selling virtual versions of the clothing chain's
fashions for Linden dollars. With serious money at stake, it may become
harder and harder to resist the political imperative to tap into the wealth
of virtual worlds.
Even Miller concedes the point. "Maybe down the road, it becomes something
that's unavoidable," he admits. But in the meantime, he argues, any tax grab
would be penny-wise and pound-foolish: "I just see so much potential in
these virtual worlds, beyond simple gaming and social interaction, that it'd
be a real shame to shut the door on these opportunities before they ever get
started."