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How Long Till Virtual Currency Taxation?

Posted by Zonk on Mon May 01, 2006 01:46 PM
from the please-stop-talking-about-it dept.
The Almighty Buck Entertainment Games
GameDaily has a piece on the thorny issue of taxing virtual currency. From the article: "The current tax law has a clause, #525 to be exact, entitled 'Taxable and Nontaxable Income.' This verbose, meandering clause describes all manner of abstract (legal, illegal and otherwise) means by which you can earn income. Some of these obscurities can only be taxed by the speculative and vague term, 'fair market value.' ... This clause also includes a statement about goods acquired through barter or won (prizes or cash) in a game. Technically speaking this means those 'earnings' are taxable the very moment someone comes into possession of them, regardless as to whether or not they are sold for money. While no one knows the exact worth of all the virtual assets floating around the MMO gaming-verse, estimates for the sale of these goods range as high as $880 million a year. Step back and think about that for a minute... EIGHT HUNDRED AND EIGHTY MILLION! That's a crapload of real world money! Money made during what can be considered the infancy of the genre. Can you imagine how exponentially greater this amount will be in a few short years? "
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[+] Politics: Congress to Revisit Virtual Goods Taxation 205 comments
News.com has the word that congress is set to re-visit taxing virtual goods, a concept they shelved a while back in order to consider the matter more fully. That's given the Congress' Joint Economic Committee time to come to a decision about what exactly the value of virtual goods means for players and game-makers. An economist with the group told CNet to expect their report sometime next month. "What that report will say is unknown, as the committee has kept entirely quiet about its thoughts. However, it's clear that something will happen. '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,' [senior economist Dan] Miller, who is a fan of virtual worlds and economies, told CNET News.com in December. '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.'"
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  • Someday But Not Yet (Score:5, Informative)

    by BenEnglishAtHome (449670) * on Monday May 01 2006, @01:48PM (#15239233)

    Taxing in-game earnings has come up before and it'll come up again. In the U.S., the Internal Revenue Service will eventually take notice of the phenomena when someone who makes lots of real-world money by selling virtual goods gets audited by an ambitous Revenue Agent. Until then, unless you're actually converting virtual goods into real greenbacks, there's not much to say on the subject. Any scaremongering about taxable events occurring inside a game is just FUD. It may be fun to talk about, but I notice that no one has yet made the news after obtaining a private letter ruling. Until someone sparks a written determination from the IRS [irs.gov], this is really a non-issue. Someday it'll be an issue, but not for a while.

      • Wouldn't they just tax you when you 'cash out'?

        That would be the easiest way, but depending on how developed these virtual economies become, it may someday be possible to use these "currencies" without first cashing out. If/when you can exchange WoW money for real-world goods or services - i.e., by spending some of your gold (or whatever - I don't play WoW) at Amazon to buy a book - then the IRS will surely perk up and take an active interest, as income from what's effectively a barter system is definite

      • Wouldn't they just tax you when you 'cash out'?

        No, that's where the scaremongering comes in. Some transactions (and the myriad rules on such subjects are what keeps tax lawyers employed) are taxable when they occur, not when you finally cash out. So if you earn some magic sword that you could sell for USD$5K real-world dollars, it may be the case that you should be taxed on that USD$5K of income right now, before you sell it. Maybe.

        Until such transactions become commonplace, however, nobody's going

        • Now, if we find ourselves in a situation where large numbers of people are making serious money and trying to avoid taxes, then all bets are off and the IRS could come down on the whole thing pretty hard. I just don't see that happening.

          Or if we end up in a situation where the government owes lots of money and its leaders come down on the revenue generating parts to find more money, fast...
        • So if you earn some magic sword that you could sell for USD$5K real-world dollars, it may be the case that you should be taxed on that USD$5K of income right now, before you sell it. Maybe.

          If the market for those items were considered robust enough (not sure how you'd measure that), I'd say you're very likely going to be taxed at the time of acquisition, not the time of sale. Just like winning items on a game show, it doesn't take the sale of those items to generate a taxable event, merely the acquisition
        • Can it really be considered income, though, if I'm paying to be allowed to make it? Say I pay someone $50 to be allowed to fish in his lake and pull out $25 worth of fish. Is that income? I feel like it's just part of the value I am paying to receive. In the same way, even if the IRS were to determine these virtual goods to be taxable, they still couldn't tax you if you were "earning" less than you were paying in your monthly subscription fee, right? (Maybe if you are making much more than you are payi
          • Well, if it's treated as a business, you would only be paying tax on the 'profit' you make. In your example, you would be 25 in deficit.

            I think the larger scale concept is that it should be treated like the real world - you work day to day job in game, you pay income tax - you buy products, you pay Sales Tax/VAT.

            The thing is, none of this could really function as every game is like a 'country'... it has it's own money laws and systems just like the US has it's own. I feel it should just log how much goes in

        • Re:is it simpler than it seems? (Score:5, Insightful)

          by KDR_11k (778916) on Monday May 01 2006, @02:34PM (#15239658)
          In most MMOs there is no transaction. The service contract clearly states that all items remain property of the service provider. Because the items cannot be traded for real money they have no value.
      • I sure hope you're being sarcastic. Otherwise, if you're really not paying taxes, and living in the USA, expect a knock on your door from a not-so-friendly IRS agent soon.
      • Nothing produced physically.

        And on my internet bill. And airline reservations. And electricity (nothing produced, just electrons moving back and forth.) When I buy software for download.
      • I consider what I did a service and last time I checked, doing a service where nothing is produced physically isn't taxable.

        If that were true, waitstaff wouldn't have to pay takes. The tax is on income, not the actual service. Things like sales tax might not apply, but the money itself is taxable.
      • You can be taxed for services that do not produce a product. If I am a taxi driver, I am producing a service by driving people from one location to another. But I do not produce anything. I still have to pay income taxes however.

        It all depends on how much you make from it and whether or not the IRS will even bother taxing you. In truth, you must file every time you win $100 in a friendly poker game at your friend's house. But if you dont file it, the IRS is not going to notice that you are living outsi
  • I know that X million people are playing such games as WoW, but a lot of players sort of keep in their "circles." People who don't play the games don't really know much about them or the "cash value" of the assets. It will be a while, if ever, before there are any issues about this brought up. It will take everyone playing WoW, including the legislators, before anything like this even can happen. But where there's free money, and they know about it, it *WILL* be taxed.

  • I can see it all now... (Score:5, Funny)

    by Rob T Firefly (844560) on Monday May 01 2006, @01:53PM (#15239279) Homepage Journal
    You slay some MMO monster, and it drops a small pile of gold, jewels, and several IRS forms for you to fill in.

  • Why it won't happen... (Score:3, Interesting)

    by thebdj (768618) on Monday May 01 2006, @01:55PM (#15239293) Journal
    I will point the government to the EULA which typically state you are not allowed to sell these assets for money. Granted a large number of people do, but most of the EULAs for MMOs prevent people from selling goods or accounts. So, since you are not allowed to sell your accounts, it seems pretty hard to tax them. Also, this would just add another layer of trouble to tax agencies. They would have to retrieve account information from the companies running MMOs and then calculate how much money the accounts are worth at FMV. This would present issues since this varies by character levels, item levels, amount of virtual currency, class of characters, etc.

    I think there are a great many things limiting the taxation of this "income." So, don't worry. This will not happen anytime soon.

    • Re:Why it won't happen... (Score:5, Insightful)

      by kclittle (625128) on Monday May 01 2006, @02:03PM (#15239374)
      Al Capone was not allowed, by law, to sell bootleg liquor. He was, however, legally required to pay taxes on the income. He failed to do so, and went to prison for tax evasion...
      • Yes, but he did sell liquor and did avoid taxes. The idea presented here is taxation without having sold the account. The items have a FMV, so therefore are taxable is what we are debating. If you sell anything legal or not in the US, you are liable for the income made from it. So as you see, your analogy isn't quite right.
      • The reason why Capone was busted on tax evasion and not murder, extortion or some other crime is because tax evasion was a federal offense, while the others where state. This allowed the prosecutors to select a jury from a larger area, (outside of Capone's turf,) so they could get a jury that would actually convict.
    • To add to the other replier... in many states not only can you get poked for possession of illicit drugs, but you can also get additionally poked if you have not paid the tax on them [milwaukeephilatelic.org].

      Point to the EULA all you want but the fact remains that State and Federal Law trump virtually any EULA.
      • I will tell you the same thing I told the last guy. You HAVE to sell something in order to make money. We are talking about the idea of being charge taxes on the FMV of your items and characters. These are two different concepts. If I break a EULA and sell my characters on eBay then the government has every right to tax that as income since I did make income on selling goods.

        My point is that they cannot assign an FMV to your items if they technically have no FMV. What you are mentioning is from respe
    • So, since you are not allowed to sell your accounts, it seems pretty hard to tax them.

      Actually, the IRS is very clear that you're required to pay taxes on income, regardless of if the income was legal. You're also allowed to, for instance, claim deductions for any bribes you've paid, if such things are a normal cost of doing business in your area.

      They would have to retrieve account information from the companies running MMOs and then calculate how much money the accounts are worth at FMV.

      They'd pro
  • Ssshhhhh!! Maybe if we don't post stories about it nobody in the IRS will notice and I keep up my full-time job at the auction house!

  • So many questions... (Score:3, Funny)

    by Volante3192 (953645) on Monday May 01 2006, @01:56PM (#15239304)
    Will the IRS allow a one time, tax free gift to your in-game spouse for up to 100k plat?

    If you destroy a no-drop item can you get a refund?

    How bout deductions for funding your own crafting business?

    Are repairs business expenses?

    So many questions... and why do I think all the CPAs are going to be Druids?

    (Sorry, no WoW experience, all EQ1 based references...cept the repairs)

  • It'd be easier (Score:4, Interesting)

    by the_skywise (189793) on Monday May 01 2006, @01:56PM (#15239309)
    to just tax the transaction point at which point you have to convert the virtual currency into the real thing. For instance, an EBay or paypal sale. It's easier (and more profitable) to tax all of EBay sales or paypal transactions.

    If virtual currency ever gains real value (that is... you'd accept your paycheck in WoW gold instead of cash) then you might see taxation systems required to be in the game. But I doubt that will ever happen (Okay that's 50 gold pieces for the broadsword and I see you live in California so that'll be an 8% sales tax rounded up or 54 gold pieces.)
    • And the key point is - all Ebay sales are already taxable (and at the nasty "collectables" tax rate, too). Therefore, selling WoW gold or whatever on Ebay is already taxable.

      INATL, but AFAIK any "collectable" you sell is taxable, at a pretty high rate (28% IIRC), on the entire amount you get for the sale of the item less what you can prove you paid to acquire the item. However, there's a difference between what you're tecnically required to pay taxes on and what the IRS actually cares enough about to inve
  • (I am not an economist)...

    There are certainly parallels between virtual economies and certain forms of commododities trading:

    • The traders acquire commodities "on paper", totally intangibly. (Has a CBOT purchaser ever actually taken delivery of 2,000 tons of orange juice concentrate?)
    • The system within which all this buying and selling occurs is pretty much self-contained.
    • The fundamental method of buying and selling is a bid system.
    • Trades in some systems occur in non-US currencies.

    So, is an MMO virtual ec

    • Re:IANAE... (Score:3, Insightful)

      by Znork (31774)
      "There are certainly parallels..."

      There are also, however, some very large differences; the first and foremost being that there is no fundamental scarcity (nor is it desireable to have such) of the virtual items in question, leaving them ultimately worthless.

      I suspect the economic effects of allowing interaction between game and real economies may actually be damaging to the real economy; it opens up various speculation effects, and can create massive fraud distortions (for example, say some nasty people en
    • The most fundamental problem is that the people selling these items and gold are not the owners of the property, nor are they representatives of the owners of the property (such as on a stock exchange). The EULAs for MMOGs usually specify that users have only those rights granted to them, limited to use of the game on the developer/publisher's terms and that the folks running the MMOG retain all rights to the game (and, thus, everything in the game - including the individual characters). For the virtual i
    • Has a CBOT purchaser ever actually taken delivery of 2,000 tons of orange juice concentrate?

      Yes - 100% of contracts are delivered to someone. And that's where your analogy breaks down. All of the actual commodities trades (as opposed to stock market futures and the like) involve a contract for tangible assets with value in the real world. While most of the trades during the life of a contract involve speculators, the contract eventually connects a physical producer with a physical consumer.

      The market for
  • As long as I'm paying my virtual tax in virtual currency. I'm sure the creative folks at the IRS will be able to figure out what to do with 1 billion gold. Maybe we can even get a bridge from Alaska to Kalimdor out of it.

  • um.. (Score:3, Insightful)

    by (arg!)Styopa (232550) on Monday May 01 2006, @02:09PM (#15239430) Journal
    Not to sound like a complete radical, but why don't we ask ourselves why the government is entitled to step in and get 'a piece' of a private transaction between two people to begin with? The medium is irrelevant.

    If I trade you two chickens for a goat, are they entitled to take for themselves the drumsticks off one chicken and one udder from the goat? That's stupid.

    Almost as stupid as everyone taking it for granted that if I pay you $10 to mow my lawn (or $100,000 to build my house), somehow, the government is entitled to a cut of that payment.

    The moment they start taxing my 'virtual gold' I'm paying my IRS bill in WoW silvers.

    • Re:um.. (Score:5, Insightful)

      by Renraku (518261) on Monday May 01 2006, @02:30PM (#15239617) Homepage
      The government is entitled to take whatever they please as long as they can write it into law and enforce it.

      Do not confuse 'right and wrong' or 'justice' with 'law'.

    • Re:um.. (Score:2, Insightful)

      by ect5150 (700619)
      While most governments may not make 100% efficient use of tax dollars, how else do you think roads get made? Police get paid? Firefighters get paid? Public Transportation get made? Laws get made for the purpose of proecting your own private property?

      If I trade you two chickens for a goat, are they entitled to take for themselves the drumsticks off one chicken and one udder from the goat? That's stupid.

      While you might not like it, I think you'd like it even less if the other fellow beats the shit out of
    • It makes sense for the government to tax private transactions based on the premise that by providing for the safety, security, and legal backing of the transactional system, the government is making your transaction possible. As an example of why you need this to have a civilized society, what do you do if the guy with the goat tries to walk away with your chickens without giving you the goat, particularly if he has better weapons than you do?

      The typical answer is to have a police force and a legal system

    • Yes, bartering counts as income (Score:4, Informative)

      by Steve Hamlin (29353) on Monday May 01 2006, @02:43PM (#15239730) Homepage

      If I trade you two chickens for a goat, are they entitled to take for themselves the drumsticks off one chicken and one udder from the goat?

      Actually, yes. Well, not payable in drumsticks, udders or MMO silver, but....yes.

      You'd owe taxes on the excess of the market value of goat over the market value of the two chickens. If equivalent tranactions value the goat at more than two chickens, then you just made a profit, and probably owe personal income tax.

      Income doesn't have to be in cash, and bartering counts. An equal trade would probably be counted as a either [Revenue-Cost of Goods Sold=zero Net Income], or a like-kind echange of assets.

      Reportable on Schedule C (profit or loss from a business-sole proprietorship), or Schedule F (farm income and expenses)

  • Use the official conversion rate published by your government.

    If they don't provide an official rate you should be free to choose a reasonable rate, as the EULA states they may not be sold one could logically argue the exchange rate is zero.

    This may not work where there IS an official exchange rate.
  • Can you imagine how exponentially greater this amount will be in a few short years?

    Maybe, maybe not. It is just as likely that a few years down the road, we've come back to realizing that games are, first and foremost, games and meant to provide entertainment and fun - not income.
    Then again, maybe not. But right now, anyone claiming to know how it'll play out is simply a fool.
  • I really love games in general and RPGs inparticular. That said, I have to question why topics regarding the "real world" worth of game stuff keeps coming up. I think people like to imagine that, after all the effort they've put in, there's some actual value to the end result. There usually isn't. But when there is, don't we get excited at the prospect? I think if we're honest with ourselves, it's just a rationalization for spending an inordinate amount of time playing a fun game.
     
  • When the giant dragon drops game currency, the player should not be taxed. The virtual currency has no real world value if it remains in the virtual world.

    It only has value once sold for real world money. When the player sells their virtual currency on eBay or wherever, someone pays them money for it. That is income, and should be reported and taxed as such. Why the hell do we need special laws for crap like this?

  • Capital Gains (Score:4, Insightful)

    by robbway (200983) on Monday May 01 2006, @02:23PM (#15239547) Journal
    When you get an income, it gets income-taxed in the USA unless it is exempt. The fake-goods trailer was correct by reporting this income. I personally feel it should be taxed as realized capital gains, since it is worth nothing until sold for actual money. You should also be able to deduct the game cost. So, if game price is $50, and monthly fee is $10, and you sell something for $150 after 3 months, you've realized a gain $70. Plus, it is probably the seller's labor that is being traded (play-for-hire), not the virtual goods.

  • The answer is very simple (Score:4, Insightful)

    by SmallFurryCreature (593017) on Monday May 01 2006, @02:25PM (#15239569) Journal
    There are two points the taxman could become intrested. The first is when you convert you ingame assets to real world assets. That would be counted exactly the same as normal income and for all the correct reasons. The amount to be taxed is the amount you gained in real world assets totally unrelated to the game value. If you pay me a million to mine 1 piece of gold in EQ2 then I would be taxed for 1 million. If I deliver you the holy armor of gnolls for 1 dollar then I would be taxed on 1 dollar regardless of the fact it costs a gazillion gold pieces in game.

    To avoid this, simply do not convert your in game assets to real cash.

    But what if so many people do it that the taxman decides to attribute a value to ingame assets. What if the taxman would say that a gold piece in game has value.

    Well then it is very very easy. Just pay the taxman in goldpieces. IF they are supposed to have a realworld value then you should be able to pay in them.

    I think it would open up a can of worms if they would set a virtual to real exchange rate that could not be easily matched. I am not certain how the american tax system works but for instance the value of land is usually not an absolute. It greatly depends on what it is worth on the market and not some fictional market you use to brag about your wealth but what cold hard cash you can get for it today.

    It would truly be a nightmare to setup. The goverment would have to constantly check what the real value is of cash in dozens of games. Not to mention that most games have an inflation that makes african countries look well adjusted.

    It could happen in theory but I think that the taxman has better things to do. The only people who need to worry is those who make money off their in game wealth. The taxman taxing the money you receive. Wow, what a concept!

  • If people are making such a big deal about the IRS being able to tax MMORPGs... why not apply those same rules to games like Monopoly? The players gain 'goods' through play - and unlike MMORPGs they actually have a physical presence.

    Constantly saying that the IRS is going to tax in-game transactions is just scaremongering. You can consider it taxiable income once its converted into real-world cash and thats what would be seen as the transaction. Saying that any changing hands or acquisition of anything wh

  • Since the article is focuses on U.S. tax theories, this post will as well.

    Publication 525 [irs.gov] is what the article refers to when it mentions "tax law...clause #525". This IRS publication is put out to help taxpayers interpret various code sections, case law, and the fundamentally vague term "income"

    In general, "income" has been spoken about by the courts as an increase in economic position, and if this increases, the tax man wants a piece of it. This includes amounts paid to you for the services of your

  • I was going to build out an online stock market in There [there.com]; I was also going to build out an online bank. I thought about it really hard and decided that the US Gov't would come in and do several things:
    1. Tax income
    2. Check if I am an equal-opportunity lender
    3. Review my bank for proper loan reserves
    4. Bring in the SEC to investigate trades
    5. Ensure that I treat customer information according to the Graham-Leach-Blyley Act (GLBA)
    6. Probably something to do with Sarbanes-Oxley, too
    7. Ask to see my records.

    In general, I

    • For the entire duration of your time playing at Rob's house, Rob still owns every monopoly dollar; for the entire duration of your time playing WoW, blizzard owns your gold. You don't take your monopoly dollars home with you, nor your WoW lewt.

      You never own 'your' game money. As such, you can't be taxed on it.

      What you say actually applies to real money too.

      People trade "real money" for WOW gold because they believe that it has some value for them within WOW.

      People trade their labor for "real money" because

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