The Taxman Cometh?

It's official: The IRS has its eyes on your virtual gold.

Well, sort of official, anyway. And maybe more like just the corner of one eye. But as Yours Truly reports in the latest issue of Legal Affairs magazine, IRS advisers specializing in the arcane field of barter income recently offered the opinion that any trade of one virtual item for another--gold pieces for thick leather, uber drops for plat--could very well constitute a taxable, income-generating exchange according to the IRS's rules on barter.

I repeat: Not dollars for dragon scales. Not sterling for staves. Every blessed, innocent, RP-consistent trade of one virtual good for another, so long as each good has a determinable fair-market value (and name one that doesn't these days).

For assurance that such a ruling would indeed be consistent with the
IRS's present and past practices, you can RTFA or just take my word
for it. In any case, there are sure to be plenty of voices raised in
blood-curdling objection to the very notion, and if you want to join
the chorus, feel free. But what I'm hoping for from this uniquely
well-informed crowd is a discussion that takes seriously the idea that
tax authorities the world over may one day track trades in virtual
gold as routinely as they track income in foreign currencies--and
seriously contemplates the consequences.

Would this be the death of the industry? The last nail in the coffin
of immersive game play? How hard, or how easy, would it be for
developers to monitor in-game trades and issue year-end 1099s to every
player? Dare we think the unthinkable? Dare we pretend it will never
happen?


Comments on The Taxman Cometh?:

Nabil Maynard says:

I sincerely hope this does not come to pass. Logistically speaking, I think this would be incredibly difficult to organize, maintain, and manage. It would need the establishment of a mandatory registry of online games and an official virtual currency exchange that formally tracks the real world valuation of each game's virtual currency. Personally, I think if they feel they can justify the taxation of in-game items for other in-game items or in-game currency, then it is a logical extension that a virtual world should enjoy extra-territoriality and diplomatic concessions afforded other nations. (This includes the interesting idea of declaring citizenship to a virtual world.)

My opinion is that the task is too unwieldy to be worth it, even for an entity as large as the IRS. While I foresee real-to-virtual/virtual-to-real transactions getting taxed in the not too distant future, purely virtual transactions are a form of "play", an abstraction of economics, and thus not subject to taxation (either that, or they're going to start taxing pre-schoolers who are being taught how money works in school).

The short of it: if there is no real-world value explicitly gained, there should be no real-world value implicitly gained (and taxed) either.

Posted Jan 5, 2006 1:39:18 PM | link

Morat says:

What are they going to do? Tax my gold pieces? And do what? Buy a Staff of Smiting?

My read of this is simple: It's IRS people doing the same "Hey, you know what's funny?" thing that regular people do.

I wouldn't worry about it unless you're in a game in which you routinely buy and sell items for "Real money" (US dollars). In which case, you should be reporting your income in any case.

Posted Jan 5, 2006 1:49:50 PM | link

Peter Edelmann says:

Interesting analysis from the IRS - sounds a lot like Hiroshi Yamaguchi's argument that virtual currencies are essentially a form of LETS (Local Exchange Trading System). I imagine the "unofficial opinion" Julian received reflects the way the IRS would treat exchanges in a LETS.

Nabil Maynard >purely virtual transactions are a form of "play" [...] no real-world value explicitly gained
I'm not surprised that the IRS wouldn't let you have your magic circle and eat it too... If gamers want to claim "property rights" in their virtual possessions, then the accumulation of that property is going to be (and ought to be) treated much like any other property at the time it is acquired/exchanged. If the virtual items belong to the gaming company (ie - no RMT, keep "magic circle" closed), then there is no acquisition/exchange of property for tax purposes. But you can't have it both ways. In a virtual world with (sanctioned?) RMT/"property", there is "real-world value" gained at the moment a virtual good is acquired, much like in the actual world. If her holdings are in effect "property", why should Anshe Chung be treated differently from a RL land/stock speculator?

Nabil Maynard >Logistically speaking [...]
Logistically speaking, you simply have reporting requirements similar to the existing ones. The burden of tracking virtual property accumulation/exchange falls on the player who chooses to play in a property/RMT-enabled world. Auditors need only develop tools to check the veracity of the reporting - much like in the current RL system, the tools need not be perfect if the penalties are an effective deterrent for false reporting. Will people cheat on their taxes? Sure - why would such a time-worn tradition end just because we are in a virtual environment?

Posted Jan 5, 2006 2:39:34 PM | link

Norman Maynard says:

Peter Edelmann > I'm not surprised that the IRS wouldn't let you have your magic circle and eat it too...

I don't think that's what he was getting at. If I go to France and buy several articles of clothing, as long as I am not over a certain spending limit, the US does not require me to declare the exchange. If I exceed that limit, but leave them in France when I come back, the US government does not tax me for their purchase. In-game item collection would clearly fall into this category, and taxation would not make sense.

Now, income from drops and exchanges in the form of "meaningful" currency (to use Hiroshi Yamaguchi's term) may be a different story. This opens up the question of whether the foreign income exclusion would have to be modified to take into account this new, clearly foreign (due to the necessity of currency exchange) income base. This would certainly futher the idea of citizenship in virtual worlds, assuming of course that an official currency exchange is established; otherwise there is no governmental difference between platinum pieces and monopoly money.

I wonder how the IRS would deal with "informal" trades without some sort of trade tracking designed into the game. Also, since so much wealth is held in the form of items rather than currency, would the US pass a net worth tax on avatars?

Posted Jan 5, 2006 3:51:45 PM | link

Phil says:

I wonder if it do come to pass. What stresses would this put of developers? If a duping issue came up, would players have the right to file class action that the duping effected thier worth (this could be applied to "nerfing" certain skills)? Legal action against in game scams?

If the day comes, I think that it will open a legal can of worms that no one will want to face.

Posted Jan 5, 2006 3:55:50 PM | link

Matt Mihaly says:

Norman Maynard wrote:

I don't think that's what he was getting at. If I go to France and buy several articles of clothing, as long as I am not over a certain spending limit, the US does not require me to declare the exchange. If I exceed that limit, but leave them in France when I come back, the US government does not tax me for their purchase. In-game item collection would clearly fall into this category, and taxation would not make sense.

But if you're a US citizen playing Second Life, you haven't left the country when you do something on Second Life. You're executing a trade from your house, no differently from executing a transaction via Etrade.

--matt

Posted Jan 5, 2006 4:37:02 PM | link

Edward Castronova says:

As the encroachments of the real world come to seem more and more natural, the need for an explicit public policy regulating and protecting synthetic worlds becomes more and more important. Otherwise they will become just another address on the googlenet.

The tax man's ruling is sensible from the standpoint of current law. And that's why the law needs to be amended.

Posted Jan 5, 2006 4:37:23 PM | link

Anon says:

Today, if you trade your neighbor a lawnmower for a car, you're supposed to report and pay taxes on this transaction. By law. Everywhere.

This rule is almost never enforced between private individuals, and almost never enforced when both sides of the transaction are goods rather than currency.

No doubt the virtual goods situation will evolve similarly. The first major case will go something like this: some creative tax accountant will discover a way to take a million dollars in cash from the Mafia or the Cali cartel, launder it through platinum pieces or Godly Armor of the Whale or whatever, and end up giving it to someone else in a way that is not, according to the accountant, taxable. (Buy platinum on Ebay, hand platinum to other character, sell platinum on Ebay. Not subject to the gift tax because virtual platinum has no value, right?) The IRS will disagree, saying that just because you waved your hands or cycled the money through Everquest, it's still taxable. They'll go to court, the judge will see through the accountant's sham, the IRS will win the case, and the decision will be TRUMPETED EVERYWHERE like so:

"GREEDY TAXMAN GOES AFTER VIRTUAL GOODS"

But of course, the law here is correct. And good. And the IRS is not going to be coming after you for tax when you sell leather armor in game for 6 copper pieces until they've taken care of taxing the lawnmower-car exchange I noted above, which is to say, never.

So please, I urge everyone here, don't be flaming idiots about tax issues. The IRS is deeply starved for operating funds, and has been for many years. You can currently file an utterly bogus return with very little chance of being audited for it. Just because you can imagine some sort of onerous outcome does not mean that that outcome has any chance of actually happening. The IRS may, and should, go after virtual transactions that are mere covers for real-world transactions, but they haven't the resources or the inclination to do any more, even if philosophical musings by IRS officials imply that various transactions are theoretically taxable.

Posted Jan 5, 2006 5:12:20 PM | link

Charlie Stross says:

Speaking as a non-US resident and non-US citizen, I want to note that one significant aspect of the idea hasn't been mentioned so far -- MMORPGs are distributed across national borders! I can in principle connect to a WoW realm hosted in the USA from my computer in Scotland, or vice versa.

Now here's a nightmare for your tax inspector to tangle with: let's say I'm a UK resident and I've been grinding away on a server in South Korea and acquired a shitload of loot. I then put the stuff up for sale via an auction house in a realm hosted in the USA, take payment in US dollars, and repatriate the currency via my PayPal account in Sterling.

The US government cannot demand income tax, because I'm a nonresident alien. They can try to impose withholding, but then they run smack-bang into the thorny, arcane field of international reverse double taxation treaties. Double taxation is what happens if you pay withholding in country A, but live in country B which then taxes you again (doubly) on your income. To avoid this, most countries have negotiated bilateral(!) agreements that say "if a native of A earns money in B, then B will surrender their claim to income tax, as long as A does the same in return". To handle this, there are various certificates that need to be obtained. As the UK's Inland Revenue website drily explains, "the UK is a world leader in this field, with more than 100 bilateral treaties". There are over 1200 different double taxation agreements in effect, and it's normally a subject that can only gladden the heart of a very highly-paid international tax lawyer (or a novelist whose books are sold in foreign editions, like me).

Bluntly, once they open this can of worms the creepy-crawlies are going to get everywhere. The massive multiplication of workload could well destroy exchangability within and between MMORPGs -- but it would overload the tax authorities in the process. I suspect it's going to end up with a vague resolution to police folks who earn their real-world living through farming, and to exhort the masses (us) to declare any profits we make.

Posted Jan 5, 2006 5:34:38 PM | link

Peter Edelmann says:

Norman Maynard >If I exceed that limit, but leave them in France when I come back, the US government does not tax me for their purchase.
Does the US not tax on global income? In Canada, it's my understanding that you have to declare your global income (now whether people are actually declaring the income in their Cayman Islands accounts is another story) - you may not have to pay on the parts that have been taxed in a country with which Canada has a treaty (eg. the US - see the preceding post), but methinks you declare it all. Somehow, I doubt Canada (or the US) will be signing tax treaties with Second Life or Project Entropia anytime soon...

Julian >Would this be the death of the industry? The last nail in the coffin of immersive game play?
Ted > And that's why the law needs to be amended.

I wonder what would happen if we didn't amend the law. If/when the IRS et al. start taking VWs seriously, I have a suspicion that the players who didn't want to worry about taxes and such would either gravitate to worlds that didn't have RMT by design (eg. Toontown), or create strong social pressures to have RMTers eliminated from the games they chose to play. Immersionist/casual/non-RMT players may tolerate RMT if they can simply ignore it, but once they have to declare taxes because of it (and it thus costs them money to tolerate cheaters), methinks the devs who want to keep the non-RMTers' business will find pretty effective ways to eliminate the practice without needing intervention from legislators. It would seem the risk is less to "immersive game play" and more to the livelihood of traders like Julian - who are to a certain extent parasitic on the broader social appeal of VWs created in part by non-RMTers (the non-RMTer's participation contributes to the overall value of an epic sword, although only the RMTer capitalizes on the value - I wonder if the business would be as lucrative in a world with only RMTers...).
[on a side note, I don't see how Ted's interration proposal would serve to eliminate RMT anyways - and if RMT persists in interrated worlds, why should the practice be tax-exempt? are you proposing the legislature institute RL sanctions for engaging in illicit RMT?]
As for those who wish to embrace RMT - more power to them - the IRS will be happy to do business with them. Some amendments to the tax code might be helpful on a purely logistical level, but as a matter of legal infrastructure, it would seem the necessary tools are already in place.

Anon >You can currently file an utterly bogus return with very little chance of being audited for it [...] even if philosophical musings by IRS officials imply that various transactions are theoretically taxable.
Perhaps the entire tax code and accompanying caselaw is merely a collection of "philosophical musings" - but that hasn't stopped many an erstwhile philosopher from spending time in Club Fed musing about the games they played on their bogus returns.

Posted Jan 5, 2006 5:49:59 PM | link

Varley Taylor says:

It will not require a new theory of taxation to subject a United States citizen's transactions in "virtual property" to United States taxation. The principles subjecting these transactions to federal income and federal transfer (gift and estate) taxes are well established. Any time I receive something of value, I have received taxable income unless there is an express exclusion in the internal revenue code. Any time I exchange something of value for something else of value, there will be a taxable transaction. For example, if I agree to paint your house for $100, I will have taxable compensation of $100. If I agree to paint your house and you agree to give me your gold watch worth $100, I will still have $100 of compensation income and you will be treated as having sold your watch for $100, which would result in $25 of taxable income if you bought it for $75. If I agree to give you my ring worth $100 and you agree to give me your watch worth $100, I will b treated as having sold my ring to you for $100 and you will be treated as having sold your watch to me for $100. Finally, if I find and keep a watch worth $100, I have received $100 of taxable income. As long as I am a United States citizen, I will be subject to US tax regardless of where I am or where the transaction occurs.

Until now, the greatest impediment to taxation of "virtual property" transactions has been the issue of valuation -- i.e., something may be taxable in the abstract, but unless it has some value, the tax is zero. Probably the second greatest impediment has been the lack of information about the workings of these games outside the game community. These impediments no longer exist.

The creation of both official and unofficial markets for the virtual goods created within a game has made taxation of both in-game and out-game transactions inevitable. Until these markets were established, there was no way to value these transactions. Likewise, once the markets were established, the secret became public as the traditional media began to discuss the game economies. We now have public markets (and the new cash models adopted by game developers such as Entropia and Roma Victor) which can be used to objectively establish a value.

While it's true that many items will have so little value that the tax would be nominal, that's certainly not true in every case, nor is it necessarily true when an individual's transactions over the course of a year are aggregated. Consider, for example, the reported purchase of the space station in Entropia for $100,000 and the purchase of Treasure Island (also in Entropia) for $25,000. Now, if I kill a deamon and am rewarded with something (gold, a sword, a spell) that can be sold on eBay for $100, I have $100 of taxable income regardless of whether I sell the object or not.

Consider what might now happen if the Entropia space station owner dies or divorces. He has something that is worth $100,000 (assuming its value has not appreciated or depreciated). Without worrying right now about whether the "space station" is to be treated as a kind of "property", he seems to possess something of value that would be subject to estate tax at his death, that would be subject to gift tax if he gives it to someone else, or that would be part of the assets subject to division in a divorce (you may recall the short news article from China last year concerning the impending divorce of two gamers who were arguing over which one would get the game account).

I think the income tax issues may be more complex. It seems to me that the central question will be, not whether transactions involving game "property" are taxable, but how they are taxable. Will game "property" be treated for tax purposes as if it is the same as its real world equivalent -- i.e., will a virtual sword be treated as a tangible real world sword, will virtual currency be treated as real world currency, etc. If I sell the sword (either in the game or outside the game) do I have to determine my tax basis (usually cost), compute my gain or loss, and then decide whether that gain or loss is treated as capital gain or loss or ordinary gain or loss. If it's capital gain, the tax may be as low as 15%; if it's ordinary gain, the federal income tax may be as high as 34%.

Likewise, if, through my avatar, I perform some service in the game for which I receive compensation, am I to be treated as an employee or independent contractor who has received employment-related income which may be subject to both the income tax and the employment taxes (FICA, FUTA, Medicare). If my avatar is the "employer", do I have to pay the employer's portion of the employment taxes and file the required payroll tax return? Do I have to provide a W-2 or a 1099 to owner of the avatar that performed the services?

Just to make things even more complicated, assume I am part of a group that undertakes a venture (hunting or mining) with some agreed method of dividing the profits of the venture? Are we a partnership for tax purposes that must file a partnership tax return?

Finally, just exactly "where" does the game-related transaction take place? If I am a US citizen, as a general rule I will be subject to US tax on my worldwide income. In addition, certain kinds of transactions also may be subject to taxation by a foreign jurisdiction. The double tax is ameliorated by either a foreign tax credit (you get to subtract the foreign tax from your US tax, so you only pay the highest of the US or foreign tax), or by the provisions of a tax treaty between the US and the foreign jurisdiction. Likewise, an alien will be subject to US tax on certain kinds of income and depending on his status as a resident or non-resident alien (as well as the provisions of a tax treaty between the alien's country of citizenship and the US). So, if a US citizen and a French citizen cause their avatars to enter into a transaction in a game whose server is located in Finland, which countries will be able to tax which participants?

Posted Jan 5, 2006 6:54:05 PM | link

Bart Stewart says:

As the anonymous poster pointed out, there's no reason to get overly excited about this.

One, it would be hard to implement; two, it would meet with massive resistance (both active and passive); and three, I think it's a non-starter because I believe in-game money is already owned by developers as ones and zeroes in their database. The idea of taxing virtual income is mostly just a funny and clever way to raise the profile of virtual worlds.

But for the sake of discussion, let's suppose this actually happened. Say the U.S. decided that money inside virtual worlds was real, and therefore that purely internal transfers of money could be taxed. (As noted, goods transfers -- barter -- might be too tough to go after, even as in RL.)

In that case, several questions (some of which are probably silly) come to mind:

1. What's the role of the virtual world's operators? Suppose for a giggle they decide to dump one billion zorkmids into everyone's in-game bank account. Suppose further that the exchange rate (however determined) is held to be one ten-thousandth of a dollar per zorkmid. That's "income" of $100,000 for which you're now liable. At an income tax rate of 35%, you now owe at least $35,000 in taxes... and so does everyone else in that world. What happens next?

2. Suppose instead that the operator takes money out of your account -- can you declare a loss?

3. If running a virtual world implies a license to print Real Money, would developers have to be regulated? Or would the government have to take over the operation of all virtual worlds that offer monetized economies so as to control the money supply for the overall economy?

4. Suppose you're a developer: what's the minimum economic feature set that would trigger your virtual world's money being treated as real and therefore taxable? Is there some smaller feature set that would allow a functional in-world economy without triggering taxability?

5. Suppose that the rate at which internal income is taxed is set at a lower rate than regular income. Wouldn't that produce massive RMT as people convert "real" money to virtual money, basically using virtual worlds as tax shelters? Would that be good for virtual worlds or bad?

Again, I don't imagine any of this happening, but it's fun to play "what if" games.

--Bart

Posted Jan 5, 2006 7:10:19 PM | link

F. Randall Farmer says:

My gawd. We've lost our ever-luvin minds.

So: I'm playing Parker Brother's Monopoly and I offer to "buy" Boardwalk from you for $1000 in Monopoly money, which I "earned" by collecting "rent" and passing Go.

I'm taxable by the US Government? Come again?

Parker Brother's, who mints the "money" and all the "property" [and also sells it in replacement-packs] is a legal party HOW?

Let's stop being so silly.

Posted Jan 5, 2006 7:23:31 PM | link

Matt Mihaly says:

Randy: Monopoly money isn't taxable because it has no value. If you went and sold Boardwalk to someone for $1000 dollars of real currency, then you would indeed have a taxable event on your hands.

Clearly, developers own the 1s and 0s, unless they grant owners the rights, so this is really irrelevant and nothing to get excited about. If you're selling items or gold on Ebay or to IGE or whatnot for real cash, of course you have to pay tax on that. You received income. In-game transfers of items you don't own (which is the case in most MUDs/MMOs) aren't a transfer of ownership, so there's really nothing to get excited about here.

--matt

Posted Jan 5, 2006 8:17:20 PM | link

Elle Pollack says:

So: I'm playing Parker Brother's Monopoly and I offer to "buy" Boardwalk from you for $1000 in Monopoly money, which I "earned" by collecting "rent" and passing Go.

If you read the article, You'll notice that this comparison would only apply if other people had a history of paying for Boardwalk or buying Monopoly money with US dollars.

Posted Jan 5, 2006 9:10:07 PM | link

Peter Edelmann says:

Matt >so there's really nothing to get excited about here.
Unless, of course, we take the types of property claims made by Dan, Greg, Joshua and others seriously. Turns out that such blanket claims [even if they were convincing] might not be in (all/many) players' best interests after all... property can be a nasty beast when the tax man rings.

Posted Jan 5, 2006 9:56:26 PM | link

Matt Mihaly says:

Well, that's true, but I don't take those types of property claims seriously. ;)

--matt

Posted Jan 5, 2006 10:24:18 PM | link

Chas York says:

Elle> If you read the article, You'll notice that this comparison would only apply if other people had a history of paying for Boardwalk or buying Monopoly money with US dollars.

Interesting. If we ignore the "unsanctioned" RMT behavior of IGE/EBAYing, we still have certain MMO business models (the purchase of "in game currency" with real money instead of a monthly fee) that would be significantly at-risk here.

What more intrigued me is the case of David Zarin, mentioned in the article. The article only says that "several courts reached different conclusions." However, the IRS was only concerned about the amount of money that existed at the end of the gambler's session, not the tokens that were exchanged during play.You don't pay the "barter tax" for every hand you play in game when the tokens exchange hands, but you would pay tax when you "cash out."

If we treat game currency as simply a "token," we can treat the time playing as a "session" with only the act of "cashing out" (RMT transaction) being of interest to the IRS.

Posted Jan 6, 2006 9:43:42 AM | link

Seamus says:

Great news! I'll set up a dozen WoW accounts, pay some guy in the third world twelve cents to level them up and get them a bunch of cool stuff, anda couple of days before the end of the tax year walk them all off a cliff and declare the loss of their market value as a taxable loss against my real-world income, bringing my tax bill down to zero.

Posted Jan 6, 2006 11:35:16 AM | link

hikaru says:

Hilarious suggestion from the IRS. If so, make sure they tax every transaction in every game of Monopoly first. Morons.

Posted Jan 6, 2006 1:51:13 PM | link

Julian Dibbell says:

> Well, that's true, but I don't take those types of
> property claims seriously. ;)

Yeah, unfortunately the IRS doesn't take hardly *any* types of property claims seriously. For them, possession is pretty much TEN-tenths of the law, whence their priceless rule about stolen goods:

"If you steal property, you must report its fair market value in your income in the year you steal it unless in the same year, you return it to its rightful owner."

Note that "returning it" here means surrendering control, not just acknowledging the original owner's superior property claims. If I steal an iPod from my landlord's house and keep it on the nightstand next to my bed, I'm sure the IRS won't give a rat's ass if I point out that the iPod is legally his, remains on premises he owns, and could be retrieved by him at any time he chooses. They'll just add tax evasion to my theft charges.

Posted Jan 6, 2006 2:12:36 PM | link

Johnicholas says:

Seamus, if you purchased them for twelve cents, the market value is twelve cents.
I don't think this scam is an effective way to evade taxes.

Posted Jan 6, 2006 2:46:38 PM | link

xaldin says:

Paying taxes on something is not all negative. Now you have an actionable legal recourse when the company reduces an item that used to be worth $1000 into something that isn't selling for $5. Same with virutal property like houses. Could be actually pretty amusing least from my perspective. I could handle paying the taxes if it means a measure of protection.

Posted Jan 6, 2006 3:06:40 PM | link

monkeysan says:

A question for the many folks here smarter than me:

If, as developers claim and many legal scholars opine, I don't 'own' anything in a virtual world, how is it that I can be tax for the value of property for which I have no property rights? How can I be taxed for something that isn't mine?

Posted Jan 6, 2006 3:56:46 PM | link

Brask Mumei says:

From the sounds of it, I must be the only one who isn't adding the value of my Christmas presents to my tax returns this year.

Posted Jan 6, 2006 4:29:36 PM | link

F. Randall Farmer says:

Matt says: "Randy: Monopoly money isn't taxable because it has no value. If you went and sold Boardwalk to someone for $1000 dollars of real currency, then you would indeed have a taxable event on your hands."

Hogwash! Monopoly money DOES have cash value -
It's about US$5.00 for M$15,140 or more than $300 per Million M$.

See any of 100s of game stores: http://www.thegamestore.com/product_p/00035.htm

The last time I bought "Influence" on City of Heroes, it was US$6.00 per Million Inf.

Monopoly money costs a LOT more.

Posted Jan 6, 2006 5:10:28 PM | link

Bhagpuss says:

This could get very complicated. Accepting the principle that barter-like transactions are taxable (something that I am not sure has yet been established beyond doubt for LETTS-style schemes in the U.K.), virtual world transactions present a whole new set of problems.

Look at EQ2, for example. Transactions outside the game (e.g. plat for sterling via I.G.E., let's say) could be seen as the virtual equivalent of illegal profits - they would not be taxable but might be confiscateable. Exchanging an item for an item, or for gold/plat, on a non-Station Exchange server, on the other hand, would not be taxable as the only way it could reflect a real-world financial calue would be through a further illegal transaction.

Exchanging an item on a Station Exchange server for dollars might both be legal and taxable, but exchanging an item for another item, or for gold/platinum on a Station Exchange server could be taxable as it could result in a material gain in virtual value, which could be realised in dollars in a further transaction (kind of like capital gains tax).

This is potentially a ferociously complex new area of taxation and I dread to think how it might develop.

I'd recommend making MMORPGss with no means of transferring items or currency whatsoever. That way there can be no doubt over their status as entertainment. Leave the potential real world interface issues to the virtual worlds , like SL.

Posted Jan 6, 2006 5:20:53 PM | link

genericdefect says:

For the sake of argument, let's posit that it is technically and legally possible, necessary and accepted that these transactions are recorded as fungible.

What then would "game-type" artificial domains look like? I'm not sure I accept the hypothesis that it would have a chilling effect on their development. However, I suspect they may become even more representative of the world they might not have otherwise intended to emulate. Alternately, they might go in the opposite direction. In the first category, exchanges would become less common, except on features that are by design more critical, more of an ends rather than a means. Those environments in the middle ground would wane.

In the creation of property, players might end up documenting improvements made to otherwise uncultivated spaces or objects. But since such reclamation is done on endlessly reproducible media, it would quickly grow worthless, perhaps to the point of not constituting property philosophically speaking. Labor exchanges, and creative control, however, are products in limited supply.

Would the exchange among participants of innovative services never intended, but encouraged, by world owners be subject to income auditing? (Crowd Control Productions allows this.) How do we evaluate that? Participants are voluntary agents ultimately, so it'd be like taxing the collaboration between autonomous corporations. This I suspect might have a chilling effect on the political development of textual spaces. By this I mean that implementing systems of owing and interdependence might wane from a conservative developmental standpoint focused primarily on entertainment in virtual worlds. By a leap of fate, this could also serve as a catalyst for real community-like environments with the possibility of having to deal with debts and profits extending from the world transcending abstraction of capitalism. This of course would make these textual spaces a lot less virtual.

All spaces have their own demands, as created by the participants who use them. It is a paradox, but the less developers code for them, the less abstract the need for services becomes. Contract systems will develop in these spaces in the pursuit of shared narrative as concieved and demanded by the participants. Of course, I highly doubt the abstract excesses of our meatspace games can ever really keep up with the pace of redefinition of value in closed worlds.

Posted Jan 7, 2006 3:33:19 AM | link

Charlie Stross says:

It occurs to me that the very long-term solution to the problems of exchange and taxation raised by virtual realms probably lies in de-emphasizing income tax and replacing it with a global sales tax on physical goods. Those +5 swords of smiting aren't much use to you when you've got an empty belly, and while tracking the exchange rate between fictional plot devices and food-purchasing tokens is difficult, the physical loaves of bread you intend to ultimately convert them into are eminently trackable and taxable.

This isn't going to be a surprise to those of us EU citizens who've experienced a gradual shift away from income tax and towards VAT over the past decades, although it might prove a bit more of a shake-up to the US: but it would certainly suffice to cut the Gordian knot of taxing virtual goods, if/when that sector of the economy becomes big enough to start distorting the government's tax base.

Posted Jan 7, 2006 9:07:23 AM | link

Lurker says:

I wouldn't worry too much. The IRS will need to prove that virtual property rights interest holds before they can tax such transactions (those that do not involve any tangible assets or currencies). The game publishers will fight this because, not only will it impose a frictional cost upon their customers, but it will erode their EULA claims (which I maintain is inevitable anyway).

Look to what the IRS did in relation to the barter-enabler companies of the late 90s (like inBar, etc.) They were very careful to not go after barter micro-transactions involving individuals, but instead systematic corporate barter arrangements (although they reserve the right to tax any barter of value). Any virtual barter transactional taxation would fall upon the game publishers, not the players. Of course, then hold your breath as the publishers all move their operations offshore.

I'd recommend making MMORPGss with no means of transferring items or currency whatsoever. That way there can be no doubt over their status as entertainment. Leave the potential real world interface issues to the virtual worlds , like SL.

This is not possible. A game developer can make it harder, to varying degrees, to monitize value within a virtual world, but it categorically cannot be prevented. This is basic economic theory. Something will become the store of value, unless the game is trivial. So long as any trade can occur between players within the game, it is externalizable and monitizable. I won't risk invoking Rand, but suffices to say that such human behavior is a truism.

Posted Jan 7, 2006 5:05:59 PM | link

says:

Lurker > This is not possible. A game developer can make it harder, to varying degrees, to monitize value within a virtual world, but it categorically cannot be prevented.

Not to mention the fact that trading and economic activity are some of the major attractions to gamers. For game developers to try to eliminate trading would almost be profit minimizing for them; you're not going to see any game designed that way last very long.

Posted Jan 7, 2006 6:09:56 PM | link

Matt Mihaly says:

Randy Farmer wrote:

Hogwash! Monopoly money DOES have cash value -
It's about US$5.00 for M$15,140 or more than $300 per Million M$.

See any of 100s of game stores: http://www.thegamestore.com/product_p/00035.htm

The last time I bought "Influence" on City of Heroes, it was US$6.00 per Million Inf.

Monopoly money costs a LOT more.

Ignoring the irrelevance of comparing currency values (influence vs. monopoly money) by using arbitrary units, the difference, again, is that nobody is buying and selling monopoly money in the confines of a game. If you come to my house and play a monopoly game, you don't own the money. It's just a token that is owned by the owner of the game. If you took the money from my house and sold it to someone for cash, you'd have a taxable event. (sounds a lot like MMOs doesn't it?)

--matt

Posted Jan 7, 2006 6:11:48 PM | link

blaze says:

I think Ted hit the nail on this one.

However, the question is - will the congress be sympathetic in anyways to the plight of virtual worlds and their avatars?

Honor thy father, yes, but honor thy child?

No, we have to rip our rights tooth and nail from our father, I think. It may come down to virtual civil war.

Posted Jan 8, 2006 3:18:22 AM | link

blaze says:

Another way of looking at it.. maybe there should be a quantum theory of economy.

A transactions become smaller and smaller, the laws governing the market of micropayments need to change.

Posted Jan 8, 2006 3:23:35 AM | link

bruce boston says:

Julian: "It's official: The IRS has its eyes on your virtual gold."

Looks like we have finally surpassed even the most incredilous local tabloid in the search to maximize headline coverage and skew any sense of actual truth.

-bruce

Posted Jan 8, 2006 12:17:43 PM | link

bruce boston says:

“Looks like we have finally surpassed even the most incredulous local tabloid in the search to maximize headline coverage and skew any sense of actual truth."

I guess I should further explain this statement.....

I think the question I keep having to ask myself is ‘why is there so much *risk hype* in the industry today?’ At one point, the game industry was about, well, making fun games, but clearly that skill won’t get a company very far today.

(notice: the following is less a critique of this particular topic as it is a critique of the academic, legal and journalistic cultural that seems to encourage this type of article here on TerraNova.)

I could start at a number of places, but let me start here:

1) Taxes are important to society

Not to turn this into a civics lesson, but Taxes, and the agencies employed with the responsibilities to collect them, have been, are today and will continue to be the lifeblood of any democratic society. Even before democracy, taxes allowed societies to stop having to send every 3rd child to work for the King, or be dependent on slavery, or be forced to conscript its citizens 1/3 of their lives. The institution of taxes has had huge highly beneficial economic impacts on modern societies and opened the doors for both specialization and the division of labor which is at the heart of most of the wealth we enjoy today.

It is because of taxes that our societies can afford to do all of the myriad of many, many services that governments provide to people. In fact, the many, many services that we as societies have decided that the government should provide. It's also due to our current tax systems that citizens are able to make decisions of enormous social impact and be assured that the resources to fund those decisions will be available. etc, etc, etc....

That said, who would know the importance of taxes from the way we treat agencies like the IRS in our media?

2) This leads to the question, why is the truth being so highly skewed? Why in a blog about MMOs? Well, it seems to me that the MMO market is increasingly being targeted as place for lawyers, academics and journalists to exploit, and the scam is pretty easy.

a) Find a sector that people are extremely passionate about and willing to spend time and money in.

Clearly MMOs fit this bill, there is plenty of passion and plenty of money being spent here.


b) Use your specialized knowledge of the historic weaknesses in societies to target and instigate an early breakdown in the system.

I have a hard time, not that they are not there, finding examples where all of these highly educated masters of society (MMO lawyers, academics and journalists) are doing what they can to teach the new immigrants of virtual worlds how to build their new societies.

We have thousands and thousands of years of information on how to build new societies, and literally hundreds of highly trained experts, and yet very few if anyone is teaching simple civic lessons like ‘Taxes are good’. Too often what these experts are now doing is anything but teaching about these core principles. Which leads to the question; So why are these experts here? One explanation might be to exploit the opportunity of big changes happening in this part of humanity.

Yes, every social system has weak spots. And, yes, the world is growing at an extremely high rate. As such, it’s pretty easy for a society expert (like a journalist) to anticipate how, when, how and why one of the systems of society will breakdown.

In this case, I see a journalist using his specialized knowledge of our society’s tax systems, not to inform the public, but in fact to put society at risk.

c) Do what you can to scare as many people as possible.

With the finger tightly gripping the trigger, we now have these same experts running around telling everyone that we are all in grave danger. ‘For less than a thousand bucks, and 20 mins of legal time, I can bring this whole industry to its knees’

I liken this to a journalist doing a study on how easy it is to assemble a nuclear weapon, by actually doing so, and then walking around showing it to everyone. ‘no, really, I just push this button here and we are all dead…’

Heck, if you’re lucky enough, you can springboard this type of story straight to mainstream media venues.

d) Tell society that you also have the specialized knowledge to 'protect' them for a fee.

I'm wondering how many of the journalists and academics, and lawyers on TerraNova are consulting more and more on the side. This becomes a great way to break into the 'protection business'. Now, to become the expert in a highly lucrative industry on a very serious risk, it’s pretty easy. I mean, who knows more about the monster than the person that created it.


3) At what cost?


Besides the fact that some might say that this all constitutes an absolute abuse of societies key foundation pillars of The Press, Higher Education and the Legal System, it also comes at great cost to the gamer, player and member of these new Worlds.

**Games require investment. As perceived risks/costs go up, investments go down.

In the specific example of Julian and the Tax gun, I can't see any way this does anything other than decrease investment, scare away would-be-entrepreneurs and cause all sorts of distractions within the management groups of current VWs.

Does it lead to newer, cooler, better designed games? Does it lead to any sort of informed decrease in the risk to build new games? Does it do anything to help increase the rate at which this industry is growing? No, no, no.

So what does it do? What it does, is help encourage the employment of people that have little or nothing to do with improving the actual livability or fun of these same worlds.

Hard to see any other benefit here to this article at all. It’s hardly informative and does little but further decrease our trust in one of the most important agencies in modern society.

That said, I think I would be the first to say I may be over reacting here.

One way to check, I guess, is to make another call to 'Mrs. Clardy, badge number 7500416', explain in the same level of detail how BitTorrent works, and then (assuming a similar opinion) write an article like "IRS starts plans to tax BitTorrent users (based on value of downloads)", then, I don't know maybe post that on Slashdot and see what the consumer reaction is the creditability of the article.

At some point I would hope that the experts here would realize that VWs are about growing new societies, and not hacking current social systems in an attempt to increase personal gain and stifle them.

-bruce

Posted Jan 8, 2006 9:57:51 PM | link

blaze says:

Small point: one of the differences between virtual items and RL barter is that there is a certain security of goods with RL barter.

For example, if you gave me a dental checkup, then I had a dental checkup. No server crash can take that away from me.

Posted Jan 9, 2006 5:45:41 AM | link

bruce boston says:

After giving it a good night's sleep, I've decided that the only way to deal with this issue is head on, as such, I have made the following post to NetizenNation.com, and will be writing much more this evening after I get home from work.

In the meantime, if you have any interest in resolving this issue, please contact me, no idea what form this will all take, but I think it's imperative that we get in-front of the obvious booming rumor-mill on this topic as quickly as possible.

Sincerely,
Bruce Boston

=============================================
Starting the Bomb Squad

In direct response to Julian Dibbell's latest set of articles dealing with the Taxability of in-game trades, I’ve decided that the best way to deal with the situation is to hit the topic head-on

The thinking here is that if you have a bomb-threat, you send in the bomb squad. But here’s the problem, there is no bomb squad to call.

As such, I am starting an effort to do exactly what Julian threatened he could do and that is draft a request for a “private letter ruling” from the IRS.

I’m not a lawyer here, so I’m not exactly sure the best way to do this, but my guess is that there are three basic steps.

1) Raise the money to file the request. Approximately, $650.

2) Have legal counsel draft the letter.

3) Assemble a petition by the Players to go with the drafted letter.

From what I can tell much will have to do with the semantics of the letter. And, the plan would be to draft it in such a way that the IRS understands the context of the game, that these MMORPGs are just that ‘Games’, and that they make a ruling hat frees up gamers, game companies and game investors to keep doing what they are doing.

I need to go to work, but I will post more here tonight.

Also, if you have any interest in participating, in any of the above tasks, please contact me at [email protected]

Sincerely,
Bruce Boston

Posted Jan 9, 2006 9:50:26 AM | link

Norman Maynard says:

Bruce > As such, I am starting an effort to do exactly what Julian threatened he could do and that is draft a request for a “private letter ruling” from the IRS.

I don't see that as necessary. It was not the design of the original post to scare a bunch of gamers, but rather to inspire informed discussion about the implications such a policy would have. The original post clearly states
>> But what I'm hoping for from this uniquely
well-informed crowd is a discussion that takes seriously the idea that
tax authorities the world over may one day track trades in virtual
gold as routinely as they track income in foreign currencies--and
seriously contemplates the consequences.

All we are doing is discussion what would be necessary for such a program from the IRS to come about, and what effect that may have on virtual worlds. An legal opinion from the IRS on the issue is likely premature at best.

Posted Jan 9, 2006 4:53:38 PM | link

F. Randall Farmer says:

Bruce Boston> ...I am starting an effort to do exactly what Julian threatened he could do and that is draft a request for a “private letter ruling” from the IRS ... if you have any interest in participating, in any of the above tasks, please contact me at [email protected]

I'm in, including for a sizeable chunk of the cash. Will anyone else join us in this effort?

Norman Maynard>...All we are doing is discussion what would be necessary for such a program from the IRS to come about, and what effect that may have on virtual worlds. An legal opinion from the IRS on the issue is likely premature at best.

I completely disagree. Given threads like this one, I think this is EXACTLY the time.

I think the thesis is destructive to the industry and should be settled ASAP. I've already designed an example of a system [search for KidTrade] that should have killed this meme last year by demostrating the eBaying is a design effect [bug?] and does not constitute the instantiation of real property rights.

I have no interest in seeing anyone else waste time designing an IRS-compliant accounting system for such an absurd and alarmist idea.

And, I'm willing to put my time and money where my mouth/keyboard is.

Posted Jan 9, 2006 5:48:44 PM | link

bruce boston says:

Norman Maynard>It was not the design of the original post to scare a bunch of gamers...

Hi Norman,

I wish this were true. I have greatly enjoyed Julian's work over the years, but I think he has just gone to far this time.

Listen to the language he uses:

"Would this be the death of the industry? The last nail in the coffin of immersive game play? ... Dare we pretend it will never happen?"
Who would ever think of investing in an industry on the verge of extinction?

Even the title isn't designed to further conversation, but clearly aimed at making us feel like the evil government is here to shut things down.
"The Taxman Cometh?
It's official: The IRS has its eyes on your virtual gold."

While I fully understand the following statement;
"what I'm hoping for from this uniquely well-informed crowd is a discussion that takes seriously the idea that tax authorities the world over may one day track trades in virtual gold as routinely as they track income in foreign currencies--and seriously contemplates the consequences"
This sort of thinking is the last thing we need.

What we need are strategies that protect a person’s ‘right to play’.

To create the next generation MMORPGs, investors are looking at risking upwards of $20-50,000,000 a pop. To fully enjoy the current generation MMORPGs players are investing thousands of hours each, not to mention the thousands and thousands of US$ that each player is investing to play these games. The thought that this might all disappear someday if the wrong person asks the IRS the wrong question is exactly what we don’t need, not today, not tomorrow, not any day in the future.

What we need are articles saying that all these investments will someday be worth it. And that the games that we enjoy today, our children will be able to enjoy tomorrow.

If I had a wish for this crowd it would go along the lines of:
'what I'm hoping for from this uniquely well-informed crowd is a discussion that takes seriously the idea that tax authorities the world *will never* track trades in virtual gold as routinely as they track income in foreign currencies--and seriously contemplates the consequences'

The only way we do this is by being proactive, both in our planning, and in our communications. Unfortunately, for all we know the damage is already done. For all we know, giggly Mrs. Clardy, badge number 7500416, has already told her boss's, boss's, boss, and she was just in the mood to start a new year project on this very subject.


Norman Maynard> An legal opinion from the IRS on the issue is likely premature at best.

I agree that an IRS ruling at this time should be premature, which I question why Julian went ahead at pressed so hard for it. Now we have the most prominent academic authority in the industry proclaiming:
Castronova> “The tax man's ruling is sensible from the standpoint of current law. And that's why the law needs to be amended.”
If it not to early to be calling for new legislation, it is hardly too early to actually confirm the current assertions that current tax law requires that virtual gold be taxed.

I’ve been in enough rooms with enough lawyers to know that ‘rulings’ are very subjective to the questions asked. Take the same assumptions, take the same judge and ask, ‘could virtual gold qualify as taxable trades?’ and 'could virtual gold qualify as non-taxable trades?' And you could very well have the same answer for both questions, hardly making either one ‘official’.

Again, I think the only way to at least stop the articles of “the taxman has eyes on your virtual gold” from continuing is to appeal to a higher court, and as suggested by the IRS that would be via a letter to the Chief Counsel of the IRS requesting a ‘private letter ruling’.

Again, if anyone is interested in helping in this effort, your participation would be greatly appreciated. This means everyone who has $10 they can spare for a good cause, and everyone that wants to help Randy and I draft the communication to the IRS and everyone that would be willing to be part of something that the industry really needs right now.

Also, I want to give special thanks to Randy for being the first to come forward and offer both financial help and professional wisdom. It's times like these that make it so easy to understand why some have been at the forefront of this industry for so long.

Sincerely,
-bruce

Posted Jan 10, 2006 12:25:41 AM | link

ironperth says:

I'm in as long as the intention is to go forward with a winning battle plan.

If the lawyers advise us that this probably will not work, I suggest not filing.

Posted Jan 10, 2006 5:54:02 AM | link

bruce boston says:

"I'm in as long as the intention is to go forward with a winning battle plan."

Hi Ironperth,

Absolutely! I have no interest in doing anything other than further strengthen a player's right to play, and lower the risks for companies that want to make cool games for people to enjoy.

-bruce

Posted Jan 10, 2006 11:51:12 AM | link

Zach Adams says:

This was a really fascinating, thought-provoking article. The kind that makes me glad I no longer play any MMOs but the gloriously economy-free City of Heroes/Villains.

Posted Jan 11, 2006 6:26:27 AM | link

Randolfe says:

The kind that makes me glad I no longer play any MMOs but the gloriously economy-free City of Heroes/Villains.

CoH/CoV enjoy vibrant economies. Our database shows that most CoH servers have an implied Buy exchange rate of 0.005998USD/1K-INF, and the Sell prices imply a 250%-350% spread. This is a bigger spread than EQ, by comparison (there is much more demand than supply)

Posted Jan 12, 2006 3:44:17 PM | link

bruce boston says:

I guess at some point I should actually start debunking some of the arguments made here by Julian, and start describing some of my initial thoughts as to the basic framework that I might propose in the eventual appeal to the IRS's Chief Counsel.

1) Let's first debunk.

Juilan, "For them, possession is pretty much TEN-tenths of the law, whence their priceless rule about stolen goods:"

a) Possession?? 'Officer, I never touched the stuff.....'

Just to start with a minor technicality, but I think I might disagree that players are actually in 'possession' of in-game gear and if the following description helps out at all, I would further argue that even if these items are 'possess-able' they are hardly outside the control of the game developer and hardly outside their premises.

b) Rarely is anything, everything;

I used to think that the 9/10 rule of thumb was an exaggeration, but certainly a proposed 10/10s rule would be.

Julian: "If you steal property, you must report its fair market value in your income in the year you steal it unless in the same year, you return it to its rightful owner. Note that "returning it" here means surrendering control, not just acknowledging the original owner's superior property claims. If I steal an iPod from my landlord's house and keep it on the nightstand next to my bed, I'm sure the IRS won't give a rat's ass if I point out that the iPod is legally his, remains on premises he owns, and could be retrieved by him at any time he chooses. They'll just add tax evasion to my theft charges."

I think this is making a number of claims that may or may not apply to MMOGs. For one, I don't see the Theft, at what time is any property of any kind being removed from the game developer's control?

Second, there is a world of difference between having a property rental contract with your landlord that includes the use of his iPod, and a rental contract with your landlord that doesn't. Gamers have the former, a contact with their landlord that includes full use of any and all perks within the game. Additionally, in the same way that I am in full possession of several real world objects that belong to my landlord, like her water heater, her air conditioning, her refrigerator, her carpet, her real estate etc, etc, and even though I might even have a number of civic rights associated with these items, like a reasonable expectation of privacy for one, these items, nor the privilage to limited and restricted use of these items, are deemed taxable income by the IRS or any other tax agency. In a similar manner, a person may have limited, licensed and temporary use of certain features in a game while having this 'use' included as part of their 'usage contract' with the game company, clearly a non-income-taxable event on the consumer's side of the transaction.

2) Ok, let's look at some arguments.

First, a few quick notes, a) it is really sad that I am having to spend my Saturday not actually playing these games, but making arguments to defer others from encroaching on my rights to fully enjoy them. b) in no way do I pretend to have any sort of legal expertise, and the following arguments are simply proposed lines of thought. c) again, the hope is that there are numerous uses of current law that would allow gamers to be fully protected without any need to propose new legislation. d) it is also my hope that the following arguments will carry more weight that the claim that in-game transactions qualify as possible 'barter trades', as has been previously argued by Julian here in this topic.

a) Classification of Gaming & Virtual Social Activities as 'Not-for-profit' activities.

Like many things in the law, its not just what is happening and what it may look like when described in legal terms, there is also often a question of 'intent' This is also true for the IRS's classification of certain activities deemed 'Not-for-Profit'. As such, even though an activity may look like a business activity or a trade activity, for example providing accounting services for your local boys and girls club, if it done without the intent to profit financially, it makes all the difference in the world. Likewise, while 'barter' law may cover transactions of business services and goods, I hardly think they would apply to groups collaborating in a not-for-profit activity, like say, a game.

b) Classification of Gaming & Virtual Social Activities as a 'Hobbies'.

There are a number of pleasurable activities that include the accumulation and exchange of property. In their publications the IRS often quotes Stamp Collecting as an example, and classifies this activity as a 'Hobby'. The IRS also has certain rules associated with these activities. If there in an exception for the accumulation and exchange of 'real property' as in the case of 'stamp collecting', then I think there is plenty of room, and reason, to extend this same logic to the transactions found within virtual worlds as well.

c) Classification of in-game credits, privileges and items as 'Restricted Property'.

I think the easiest way to define 'restricted property' is as property you have a risk of losing. The IRS calls this risk, 'risk of forfeiture', and when there in a 'substantial risk of forfeiture' property is deemed 'restricted property'. This is one of the reasons that I do not have to include a new water heater from my landlord in my income statement, simply because at some undefined date in the future, there is a 'substantial risk of forfeiture' of this property when either I or my kind landlord decides that it is time to end our relationship.

One key point here is that the classification of 'restricted property' carries through even if the property is 'transferable, sell-able, assignable or pledgeable' as long as it continues to have a 'substantial risk of forfeiture'. As such, because all access to any in-game credits, privileges and items are subject to the continual renewal of the contact between gamer and game company, I think there is a fairly strong argument that says that even if these in-game credits, privileges and items are being transferred, sold, assigned and pledged to 3rd parties because, at the end of the day, they are always subject to a 'substantial risk of forfeiture' they should be treated as restricted property and follow the rules thereof, which I believe includes income tax exemption.

d) Classification of in-game transactions and transfers as 'Like-Kind-Exchanges', not trades.

Going back to stamp collecting, there is a substantial difference in how the IRS treats transactions based on whether the transaction is a sale, or a trade of dissimilar services or goods, or a 'like-kind-exchange'.

This is why the 'exchange' of Japanese currency for US currency is a non-taxable event. It is also why stamp collectors exchanging stamps for stamps are exempt from income taxes. It makes all the difference in the world if you are 'bartering' haircuts for hammers, or if you are exchanging star wars collectibles for star wars collectibles. Additionally, it makes all the difference in the world, if you are selling stamps, or exchanging them.

That said, I think there is a strong argument to support the claim that while RMTs may very well be the sale of certain services, this does not disqualify these credits, privileges or items from being considered for 'like-kind-exchange' status.
At the end of the day, players are exchanging one game privilege for another and also clearly within the context of a much bigger activity, the game, and as such these activities should be classified as tax exempt 'like-kind-exchanges'.

3) Wrap-up.

While I would expect that agreement to any of the above arguments by the IRS would seriously weaken any claims that in-games transactions might qualify as taxable barter trades, its my hope that at some point in the future that a player's right to play isn't simply secured by a single argument, but a number of them.

That said, in preparation for this eventual discourse with the IRS, it would be interesting, if not helpful, to hear opposing views as to why in-game trades should not be classified as 'like-kind-exchanges', or views as to why in-game credits, privileges and items should not be treated as restricted property, or why Gaming & Virtual Social Activities should not be classified as 'Not-for-profit' activities or 'Hobbies'.

I also believe that these four arguments serve as serious criticism to any claims that in-games trades should be taxed, that companies that produce these games will someday be required to track them (based on current tax law) like bartering houses, or that the game industry will suffer any sort of serious impact from possible IRS requirements to track in-game transactional activity.

As such, I would like to see a serious discussion that included rebuttals to the above arguments before any further discussion of the applicability of real world taxes to in-game activities was furthered in the media by those that have furthered the discussion this far.

Julian, as you have stated yourself, this line of thinking (that in-game transactions could qualify as taxable events) could have a serious impact on the industry. As such, you have a responsibility to ensure that you are not causing undue concern among interested parties in the topics that you are covering.

For ethical reference please see http://www.asne.org/index.cfm?id=387

Additionally, if you insist on furthering your coverage of the applicability of current tax law to in-game activity, then I insist that we first have a fully public, fully open discourse on this topic to insure that your coverage is neither biased, nor-skewed. Any place, any time, preferably right here, right now in this blog.

Sincerely,

bruce boston
netizennation.com

Posted Jan 14, 2006 3:14:17 PM | link

Chuck Norris says:

Please stop this type of irresponsible journalism.

Posted Jan 14, 2006 10:38:40 PM | link

Concerned Gamer says:

Please stop this type of irresponsible journalism

Posted Jan 14, 2006 11:07:07 PM | link

Tyler says:

One of your posits can be summarized as "does it have REAL economic value?"

On the surface, the answer seems to be yes.

The problem is, not legally. Any sale of in-game material for out-of-game cash is strictly illegal and thus already beyond the realm of the (non-black) market. As it is illegal for in-game good to be exchanged for real cash, it thus follows that there is no (legal) cash value for in-game goods.

Posted Jan 15, 2006 2:38:31 AM | link

Tyler says:

It was further pointed out that a potential flaw in the reasoning is that even illegally obtained goods are taxable.

However, with that point, it's well worth noting that the potential for income and the income itself are entirely different. Precedence seems to hold that taxable goods/services fall under either: actualized illegal gain or potential legal gain.

Were this standard to be broken to rule that potential illegal gain were taxable, pragmatism should win over; would such a ruling not encourage the illegal trade of digital goods for real cash?

Posted Jan 15, 2006 2:53:21 AM | link

Tyler says:

Ugh, a third comment. I didn't intend to go past one originally... Not something else pointed out to me as a flaw in an argument, but rather a well-summarized version, specifically in response to your stated "If you steal property, you must report its fair market value in your income in the year you steal it unless in the same year, you return it to its rightful owner."

"Why not tax me for my neighbor's car radio? I could steal it and sell it, so it's potential income even though illegal."

Posted Jan 15, 2006 3:25:40 AM | link

says:

If this insane shit EVER comes to pass, it's time for the IRS to die in a fire.

Posted Jan 15, 2006 11:27:40 AM | link

Mithra says:

I just wanted to say that Julian's shock-jocking is doing the MMOG industry more harm than good. A little responsible journalism please? If, directly or indirectly, money - fame - ego, or some combination thereof, are the true motives for this literary spectacle, then I think Julian is no different from the gold farmers - in that any destructive behavior can apparently be rationalized for the sake of paying the bills.

Posted Jan 17, 2006 5:46:51 PM | link

Hiroshi Yamaguchi says:

Virtual currency in a MMORPG is a kind of LETS, and might be "meaningful" currency, IN THE GAME WORLD. In the real world, we should not think of the game world as a foreign country. Instead, it is a web service offerred by a game company.

Virtual currency or items in MMORPG, from the viewpoint of IRS in the real world, should be viewed as a kind of mileage points or discount coupons issued by game companies. I don't know about tax rules in the US, at least in Japan, the tax authority would not impose tax on mileage points or discount coupons that I got from airline company or grocery store. These points might potentially be their liability but certainly not our assets. Of course, if a firm like IGE buy my items, the money I got is my taxable income. I think it is rather simple.

Posted Jan 27, 2006 1:14:50 PM | link

Aysa says:

Ya total bullshit. What is our country gonna tax trades from Japan to China?! Honestly, F*ck the US Government and F*CK the IRS. Hey IRS..... Open your eyes to reality and maybe you'll see that you have no control. The constitution was set up to prevent this from happening.

And you can't take out the basic economy of an MMORPG. It destroys the balance of the game and removes the entertainment value. Take Final Fantasy XI for example. take it out and i can't auction my stuff off on the AH (in game for non FFXI Players). So I end up selling my 3mil body armor to an NPC for 3k

someone explain the brilliance of that because I'm failing to understand this crap. I am not paying more on my taxes becuase of the IRS. This is just another plan to destroy gaming becuase "Parents are perfect and games are the devils."

I promise you this, the IRS is not getting factual information on my Tax Return this year.

Posted Oct 20, 2006 8:26:38 AM | link

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Posted Oct 23, 2006 7:06:06 PM | link