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Role Playing (Games)

Taxes, Second Life and Warcraft 441

Posted by CmdrTaco
from the get-on-the-ype-train dept.
An anonymous reader wrote in to say that there is "...a new law review article that explores the tax treatment of players in Second Life and World of Warcraft. The bottom line is that commercial activity that occurs in virtual worlds should be taxed the same as in the real world. But purely personal activity within virtual worlds should not be taxed."
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Taxes, Second Life and Warcraft

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  • by Churla (936633) on Monday April 09, 2007 @11:04AM (#18663185)
    It's the difference between an amature/hobbiest and a professional. Once you start making real world money off things you are at that point a professional and income from your profession should be taxed.

    Don't tax me just because I have 10k in gold in WoW... But if I sell that for the $1,600 or so I could get wholesale for it, then it's income and I should give unto ceaser and all that..
    • by UbuntuDupe (970646) * on Monday April 09, 2007 @11:17AM (#18663401) Journal
      Don't tax me just because I have 10k in gold in WoW... But if I sell that for the $1,600 or so I could get wholesale for it, then it's income and I should give unto ceaser and all that..

      The problem is that under that principle, investors could evade taxes. Basically, investors have long salivated at the thought of deferring taxation of all intermediate gains (reinvested dividends) until spent on consumption. (Yes, you can do this with retirement accounts, but I'm talking about once those are maxed out.)

      If you exempted those good-as-money gold transactions from taxation, investors could do something similar. Basically, they could set up "pseudo-dollars" that are instantly redeemable for real dollars (and vice versa). Then they would be exempt from dividend taxation until they want to spend the dollars on consumption.

      Now, I actually support the idea of allowing deferral of taxation on dividends that are re-invested, but I just wanted to point out the problem (from the IRS's standpoint) of exempting WoW gold.
      • Re: (Score:3, Insightful)

        by khallow (566160)
        Wake me up when they're hiding millions of dollars of investments and transactions by using WoW gold or the equivalent. I imagine in a few years, there will be some game stable enough that one could launder some amount of money through it. But you still have the problem of extracting the "money" from the system.
      • Re: (Score:3, Insightful)

        by cowscows (103644)
        If rich people want to hide their money in video game currencies, I say let them. That'll last until somebody loses a few million dollars worth of real money when their account gets banned, or a database server crashes and the data is lost, or a company suddenly folds and takes their game offline.

        Every MMO out there has a user agreement that lets them shut down your account for any reason, and no company is dumb enough to take legal responsibility for safeguarding your in-game currency. Second Life is doing
    • by nickname225 (840560) on Monday April 09, 2007 @11:51AM (#18663945)
      I'm an attorney and I do some work in the tax area. Your thinking is not the way that tax works. The rule is - you are taxed on all income from whatever source. Income is the receipt of anything of value. As long as the value is reasonably determinable, you are taxed on that value. If the value is not reasonably determinable, you are taxed on it once the value becomes reasonably determinable. Of course, if you play WOW and earn income, it is as a small business, not as an employee. So all your costs, such as fees to play, and a portion of the depreciation on your computer, and a portion of your internet service fees, etc are deductible against that income. Then you get into a sticky question - if you buy a special weapon, to help you earn more gold - it is a capital expenditure and must be amortized - so what is the amortization period of a virtual weapon? Best thing to do - is not hold it past the end of the calendar year and dispose of it at a loss and take the full loss as a deduction against your WOW earnings. In practice, I think, few people when looked at in this light are profitable playing WOW. But beyond a doubt those who are are subject to the tax laws, although it will not prove profitable for the IRS to pursue these cases, since the amount is so small.
      • BTW, if anyone wants to be a test case, here is a good idea. Follow all the rules for a home office (they are fairly strict) and attempt to deduct your home office on your taxes with your business as playing WOW. The IRS will most likely disallow the deduction since you are not pursuing a real business with a profit motive and will determine that your business is in fact a hobby.
  • Summary (Score:3, Informative)

    by chanrobi (944359) on Monday April 09, 2007 @11:04AM (#18663201)
    Is pretty much useless, get the 55 page paper here instead:

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id =969984/ [ssrn.com]

  • This could mean the end of the World......of Warcraft.

    Sorry, but I couldn't help it.
  • by east coast (590680) on Monday April 09, 2007 @11:08AM (#18663269)
    So if you make real money from virtual goods you'd have to pay taxes?

    Am I missing something here? So you make real money for selling a virtual product. I don't see this any different from paying real taxes on other virtual products in the past such as profits gained from 1-900 numbers. Why is there even a question as to the taxation of these funds?
    • by zyl0x (987342)
      She wants people to pay virtual/real tax on virtual items sold for virtual currency. Her example is that a "virtual sword" has "real market value" because it can be traded IN GAME for a virtual currency, ie: gold.

      It's preposterous.
      • That's not the way I'm reading it: FTA "I argue that players of games like WoW should be taxed if and when they cash out--that is, on real market trades. That approach would allow those playing for entertainment not be taxed on their game play (beyond the tax they already paid on the money spent on the game), while catching most profit-seeking activity."

        If you're not cashing out she's saying there is no problem. I agree.
      • by Firethorn (177587)
        traded IN GAME for a virtual currency

        No, her point is that the player could theoretically put said sword up on EBay*, and sell it for real world dollars.

        A step more distant would be to say that since you can establish a trade rate between game 'gold' and US dollars and you can also find the average going rate of said sword in gold**, you can, through an amount of wrangling, find the sword's value in US Dollars.

        Example: 10k 'Gold' goes for $20, on average. Some smucks pay $50, some pay $5-10. But the aver
        • by zyl0x (987342)
          I think the obvious fact that these situations are so poorly defined, should be ample proof that there is no way a tax should be introduced to these "markets", if you can even call them that.
  • Write Offs (Score:5, Funny)

    by JavaLord (680960) on Monday April 09, 2007 @11:13AM (#18663353) Journal
    Does this mean if I have an epic ninja looted from me I can write it off?

    • by khallow (566160)
      No, if I understand correctly. You would only be taxed on your real world profits and that epic never turned into cash. Besides epics aren't transferable, right? So there's no way (unless you sell off the account) for someone else to use those items.
    • by Wingnut64 (446382)
      Not only that, you could probably report it to the police, FBI or INTERPOL.
  • Just tax the sales like any other income at the time of sale? Income from sold items, virtual or otherwise, is supposed to be declared anyway. So just tax the sale when it happens on Ebay, which you should be doing now anyway.

    Unless of course you're trying to make a land grab for people who you would not normally be able to tax, like all those Asian gold farmers. That's the only logical reason I can think of why you'd want to put that burden on the game companies.

  • This is not hard (Score:5, Insightful)

    by Sycraft-fu (314770) on Monday April 09, 2007 @11:19AM (#18663433)
    It is real, real simple: If you make money doing something, you owe taxes on that. That's really all there is to it. You can cover all the in game situations with that. Spend hundreds of hours in WoW getting gold to spend on things in game? No tax, you didn't make any money. Spend hundreds of hours getting gold, that you then sell to another play for actual dollars? You owe tax (income and perhaps sales depending on the location) because you made money.

    It really is just that simple. You don't pay tax on what you do in game, any more than you pay tax for coding on your computer. You pay tax when you sell something in game. If your time spent in game is not for profit, there's no tax. Likewise if you write something and release it in to the public domain there's no tax.

    This is not a hard concept, and from everything I've seen the IRS agrees. They want people to report profits made form games, just like they want profits from eBay and so on. However no, they aren't going to start taxing items in the games themselves, that makes no sense.

    This doesn't require an economics degree, doesn't need all kind of theory related to what the game is like and so on. When you make money, you pay tax. No money, no tax.
    • by lionchild (581331)
      Not hard, just confusing. Here's why: The government can only tax 3 things. Tangible things, intangible things, and that which is real.

      Translation: Real - having to do with real estate, tangible - having to do with objects you own, and intangible - having to do with certficated monies, like stocks, bonds and similar assets, things you can't physically touch.

      So, that being said, perhaps all the confusion is coming from the fact that all this vitual property and assets are being thought of as intangible.
    • Re: (Score:3, Insightful)

      by CastrTroy (595695)
      This may work, but can you count your time invested as a write off? Can you pay yourself a salary for the time you spent in the game, essentially negating all your profits? Maybe even put yourself at a loss to offset that you don't want to pay as much taxes on your real income from your real job. If they want people to pay taxes for stuff that they do in a video game, then the time spent on the video game should count as working, and should be deductible as such, as should the fees for playing said game,
  • by Anonymous Coward on Monday April 09, 2007 @11:19AM (#18663437)
    Hypothetically, I could live in Canada while the WoW servers I play on are housed in the U.S. but do business with a guy in Germany whose playing through a proxy in France.

    OK, so thats a bit of an improbable example.

    Try this on: In Canada, I can buy computer hardware from Alberta - which has no provincial sales tax - and have it shipped free to my house in Ontario - which has some of the highest provincial sales tax in the country - and pay (*drum roll please*) zero provincial sales tax. Thats not improbable; it's real. I built my last computer using components I purchased in this way. I'm sure lots of people in lots of countries do this. This is because governments cannot rightly decide where the tax needs to be applied, and frankly, the federal government cannot force any province to implement a sales tax to solve the problem.

    So whose tax laws apply, and how do we enforce them?

    This article might work in theory, but rarely do authors like this think about real world application.

    Sadly, they often end up in government.
    • by Applekid (993327)
      " ... and frankly, the federal government cannot force any province to implement a sales tax to solve the problem."

      You mean like fines, paycheck garnishing, jail time?

      Federal governments hold power over local governments by making it worth their while.

      "Gee, local-government-A, you sure like that education grant, don't ya?"
      "Yes, it's great for getting the citizens to be well educated and productive in life."
      "That's great. By the way, we want you to teach creationism alongside evolution in your classrooms."
      "Y
  • by xxxJonBoyxxx (565205) on Monday April 09, 2007 @11:22AM (#18663485)
    The nice thing about articles like this is that they give us a handy way to figure out who should go up on the wall first when the revolution comes.
  • by zyl0x (987342) on Monday April 09, 2007 @11:26AM (#18663559)
    Everyone here seems to be thinking that she's only talking about taxing real profits from virtual sales.

    "..the taxation of exchanges within the game, such as the exchange of a virtual sword for gold.
    Read this statement carefully. She's not talking about bricks of gold from Knox, she's talking about in-game currency. For those of you familiar with World of Warcraft, she's talking about taxing player-to-player trading. Example; I find some cool world drop, and trade it off to another player for 500 gold. She's saying that in this situation, I should be taxed for making a virtual profit!

    It's insane!
    • by Firethorn (177587)
      It's an example of an extreme point, such as may be proposed by a extreme taxer. Later on she talks about applying taxes only when 'cashing out' into real money.

      I wonder about the usage of the word 'lindons'. I assumed this meant Lindon B Johnson, but he doesn't have any currency to his name. 'Franklins' would have been clearer.

      Or is lindons the currency of second life? - Oops, turns out it is!

      But it's a little clearer here, as there looks to be an official method to translate lindons into dollars. $250
    • Context... (Score:5, Informative)

      by MeanderingMind (884641) on Monday April 09, 2007 @11:57AM (#18664021) Homepage Journal
      ...why do we spurn it so?

      From the Article (Context in bold):

      I discuss two of the issues: the taxation of loot "drops" and the taxation of exchanges within the game, such as the exchange of a virtual sword for gold. From a policy perspective, my view is that drops and purely in-game trades should not bear income tax.


      Most people should have been able to pick up from the omitted opener to that sentence that she was discussing those two issues. Discussion is not the same as supporting a given subject.

      If you were tired or drunk you might have missed that, so we have the very next sentence to let us know she's not an idiot. She very clearly, in other sections as well, states that she believes attempting to tax transactions that are purely in-game is unreasonable.

      Unless you're playing WoW to make money, I don't know why so many people seem to be out to get this woman when she's basically defending us in our desire to play WoW-like MMORPGs without having to fill out a 13-37A Tax Form for our gains.
    • by aztektum (170569)
      You quoted a line that was essentially part of a summary of her article. Later she says such exchanges SHOULD NOT be taxed and goes into explaining why.
    • by gad_zuki! (70830)
      Sure, why not? Well, lets just say its doable. Just like sales tax, the onus should be on Blizzard to take care of things. If such a law was passed or current law was interpreted to extract tax like this the implementation should be blizzard taking 5% (or whatever) of the cut, calculating what the exchange rate for WoW gold is to american dollars, and paying the IRS en masse.

      Something tells me there will be no shortage of experts who say WoW gold is worth .001 pennies (think how little valued coupons are) a
  • Because economy of MMOG's so closely mirrors the real world it is natural to tax my World of Warcraft income just as they would my earnings in legal U.S. currency. I'd write more but I need to go outside and earn money by killing basilisks and selling their eyeballs.
    • by alexgieg (948359)
      I wonder what my Reputation Level with the IRS is. From Hated to Hostile it's 36,000 points. At 1 point per tax filling that's a long path ahead.

      Damn, I hate grinding.
  • So if i spend countless hrs farming plants to sell at the AH and the AH gets their cut on a sale, then I sell the gold profit I make outside the game, I pay tax on it, isn't the AH part of the cycle and responsible for filing earning reports directly associated with funds going outside the game?

    Come on, it's a freekin' game. What about taxing certain other 'services' that occure in the game. Things like... Sex... So I pay some pretty warrior in game to sit real close to my Elf and 'Chat' with me... Is
    • by brkello (642429)
      No. Learn to read. Selling gold is against the ToS. You shouldn't be selling the gold in the first place so the AH has nothing to with you being taxed on your income.

      If you paid the Warrior with gold then no, of course they wouldn't have to pay taxes. But the person who sold you the gold for real life money would have to pay taxes on that.

      It is really simple...I don't understand why people don't get it. You make money and you pay taxes on money. The end.
  • by RichMan (8097) on Monday April 09, 2007 @11:38AM (#18663725)
    So I play WoW. My time investment becomes unrealized gains as I have not made a real world transaction.

    Then my account gets hacked. All my stuff destroyed and definitly converted to real world market value.

    Does this mean I get to declare a loss for tax purposes?

    Also this means that online time is creating value.
    This would mean your payments to play are deductable.
  • As a Wow player, and as someone who also played Everquest heavily, I think things like this are absolutely ludicrous. Nevermind that we're already taxed into poverty, now let's start taxing our virtual entertainment.

    Apparently the tax I paid on the money I made at my job, then the tax I paid on the car that drove me to the store, the taxes I pay that (laff) "built" the road I drove on, the sales tax I paid on the game itself, the tax I paid on the fuel for my car, the tax that i pay on the electricity in

  • http://epicslut.ytmnd.com/ [ytmnd.com]

    (warning horridly loud attached music on that site)

  • A lot of comments say something to the effect of "of course if you cash out in US dollars you must pay taxes". It's not that simple because according to the IRS inventory is part of taxable income [irs.gov]. Thus, one has to start looking at intent. Past commercial activity would be a clear marker of intent to sell in the future for US dollars what one's virtual character possesses. But what of inventory being built up prior to the first sale? That's where it becomes difficult to distinguish between an avid fan
  • ... you take it out in US dollars and enjoy it in the real world. Hmmmm. So, if I travel to Country X and earn the equivlent of $3,000US in local currency - BUT spend it at a resort in in Country X, the IRS doesn't care? I think they do, so Second Life and the other alt realities are getting unique treatment, since it does appear that if you leave what happens in SL there and don't bring it home, the IRS doesn't care.
    Now, Leandra Lederman at the TaxProf blog seems to take a more strict interpretation -
  • Bwahahaha (Score:2, Insightful)

    by Leroy Brown (71070) *
    I can't wait to see WoW game and monthly subscription, PC hardware, video cards, internet connectivity, etc. written off as business expenses!
  • So, if my account gets closed by blizzard and I had 10000 gold on a character, can I then sue blizzard for the real world value of the gold?

    On the other hand, if I actually report income as coming from wow gold, does blizzard then get to sue me for selling their intellectual property (fraud)?
  • WoW gold sales are so clandestine (to hide from Blizzard so the accounts don't get banned) that I think trying to effectively track these transactions will be futile and possibly cost just as much as the taxes would bring in, if not MORE. For games like WoW that are against this type of activity there is simply no workable tax model. So, to Govt.: Step off. This baby is under the table.

    TLF

    P.S. This doesn't even begin to address the fact that the majority of gold sales happen from overseas providers. I
  • ...because if they have time to spend on this, then every other legal problem on Earth has already been solved.
  • Earning value (Score:3, Insightful)

    by WPIDalamar (122110) on Monday April 09, 2007 @12:07PM (#18664173) Homepage
    Earning real money for selling in-game stuff. Taxable. Generally everyone agrees.

    Devil's advocate time...

    a) Real money is taxable.
    b) You can sell virtual gold for real money.
    c) Virtual gold therefore has value.
    d) Receiving something of value is taxable as income. Example, if you win a car worth $20k, you have to pay income tax on that $20k. Or if you win a trip to outer space worth $200k, you have to pay taxes on that $200k.
    e) Therefore, receiving gold in game is taxable.

    For second life, it's almost obvious. Since you can transfer dollars to lindens easily and legally those lindens obviously have value.
    For WoW, it's not as obvious, but the same argument holds.

    Luckily... if I earn 2000 gold in WoW, then spend that 2000 gold on repairs, consumables, gear, etc, I should be able to write the value of that gold off making it a wash. (2000 gold earned, but 2000 gold spent) Or even better, if I start the year at 2000 gold, and end the year at 500 gold, can I claim a loss?

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