Death is avoidable -- or, at least, rezzable -- in virtual worlds. Are taxes?
State of Play / Terra Nova really started talking about what is looking like the big incoming thing: whether trades in virtual worlds are taxable.
Here's why: being a game doesn't make exchanges immune to taxation (see poker); and the fact that the trade concerns electronically-maintained records in a virtual environment doesn't make the exchanges not real (see the stock exchange).
So the legal experts on the panel agreed: the current law seems to indicate that not only are taxes due if you cash out, or if you pass the assets at death and are above the estate tax limit on non-taxable transfers, but the law may even reach to tax the value of in-world barter. Responses to the panel seemed to be along some lines we've talked about before: Virtual property isn't really property, they say, so it can't be taxed. Another pretty common response was that these are just games, so they can't be taxed.
In a pretty cool moment, Bryan Camp argued that my work on virtual property was at the root of this problem. /eep. But the thing is, whether something is property doesn't determine what rule the IRS will choose to tax it. We tax capital gains when the person cashes out. We should tax gold farmers by taxing their gains when they cash out of the world. Saying that something is property doesn't even begin to tell us whether we're in a pretty good world -- gold farmers get taxed -- or in a pretty terrible world in which gamers get form 1099s in the mail requiring them to report their recently-acquired Misplaced Servo Arm.
One way to look at this is as a purely pragmatic matter. Remember, the IRS is at least as concerned about tax evasion as it is about deep theoretic discussions of what could be taxed and what can't. They classify some pretty far-out stuff as property, just to stop people from pouring assets into it as tax evasion. They don't base their theories of what is taxable on deep theoretic distinctions about property or non-property. If virtual worlds aren't taxable, some enterprising individual is going to open TaxEvasionWorld, and permit parties to convert their assets to tax-exempt virtual assets. It could be the wave of the future.
Don't Panic. /Douglas Adams. Deep breath. Reach for your towel.
What we need to do is talk to the people involved, and convince them that a cash-out rule that taxes gold-farmers is the way to go. I'm pretty convinced this is how this will go, it's just a matter of speaking with a clear voice.
Finally, I gotta say, there is no way the IRS will NOT develop some policy on virtual world assets -- not at the rate of growth virtual worlds are seeing. We need to influence policy and protect gamers, not stick our heads back in the sand and murmur "but it's just a game!"
