Taxes, Second Life and Warcraft

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."

Summary

[chanrobi]

Is pretty much useless, get the 55 page paper here instead:

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

Re:What is this bitch smoking?

[MBGMorden]

Also FTFA (only a few sentences after your quote):

For these reasons and others, I argue that players of games like WoW should be taxed if and when they cash out--that is, on real market trades.

So IF you choose to sell it, then they should be taxed.

Also, note that in Warcraft, nothing about cashing out is ILLEGAL. It's just against the Terms of Service. When you sell gold, or a character, or anything else, you're not selling anything physical: you're selling access to that (it never leaves Blizzard's servers).

While is is completely within Blizzard's rights to cancel any accounts associated with such activity (afterall, they technically own the accounts), there is nothing illegal about it.

Re:That pretty much nails it on the head.

[Churla]

The fact is this isn't something "new." This is still simply income.

You could be raising tomatos out in your back yard, then selling them to neighbors just as easily as you could be farming gold in WoW and selling it to desperate e-peen jockeys who need consumables for raiding... Same thing.

If you raised those tomatos and just gave them to your neighbors that's not income, ergo not taxed. It's when you charge for them that it becomes income.

So this isn't a matter of establishing a new tax as it is a matter of making sure we have definitions of what is and isn't income. A different medium makes no difference.

What are YOU smoking?

[raehl]

Obviously she's unaware that something cannot have "real market value" when it's illegal to sell.

Hey, look a slashdot comment about something that is 'obvious' that is entirely wrong!

You're wrong. Your first problem is that sale of WoW items is not illegal - it's merely against the terms of service contract you have with the service provider, which is NOT the same thing. Income earned in violation of a contract is still income, and you still have to report and pay taxes on it. If this were not the case, I could just have a contract with anyone who gives me money that says I must live in Trinidad and Tobago to get paid, and then turn around to the IRS and say that since I earned that money in violation of the contract it's not taxable. Clearly this isn't the case.

But let's say, for the sake of argument, that sale of WoW was actually illegal. Guess what? You're STILL wrong!

Income from any commercial activity is taxable, whether is is legal or not. And that's how the government often gets people involved in illegal activity - they don't prove necessarily that they were doing something illegal, they just prove that they had income that they didn't declare on their taxes and get them for tax evasion.

For example, if you make $1 million selling cocaine, even though the activity is illegal, you're still liable for the taxes on the income, and can still be criminally charged for tax evasion in addition to narcotics distribution.

A more mundane example is illegal immigrants - even if you're working here illegally, you still have to pay taxes, and that's one of the big reasons the IRS started issuing individual tax ID numbers - so people using fake social security numbers could still file their taxes. And believe it or not, a lot of illegal immigrants do pay taxes.

As a more general comment on the topic at hand, it seems logical to me that you'd only be liable for taxes on WoW and other virtual items if you actually sold them for real money. And if you did, you'd at least be able to deduct your subscription fees. But if you only keep your virtual items in the virtual world, I don't see how you have tax liability there any more than you have tax liability if you sew your own clothing. Start selling that clothing to others though....

Regardless, maybe you should go back to arm-chair quarterbacking and leave the arm-chair lawyering to the professionals.

Re:Only one answer

[tomhudson]

Whoa - all that "national" stuff is paid for, either directly by taxpayers, or indirectly through bond-holders, or as "consumers." There is no such thing as "government-paid" anything - it all ends up coming out of your pockets, or your kids pockets.

In other words, taxing transactions that don't involve the exchange of legal tender - you know - REAL money - is pure BS, because nothing or REAL value has changed hands. Or will the IRS start accepting payment in Linden Dollars and WoW points?

They'd be totally unaffected if our national government laid down its arms, gave up having a military budget, and let other countries invade at will.

Go look at New Jersey (google for "new jersey the armpit of the world"). Then tell me that letting another country invade it wouldn't be a "Good Thing". Heck, they're probably praying for a hurricane or other natural disaster. http://gilded-messiah.livejournal.com/2004/12/06/0 [livejournal.com]

I'm from New Jersey. That's right, New Jersey. The Armpit of America. The sewage capital of the world. New York's retarded little brother. You can keep your pity, however, because I'm here to defend it, mostly. Like many escaped New Jersey inmates, I have a unique variant of Stockholm syndrome when it comes to my home state. I've fallen in love with my captor.

Don't get me wrong. New Jersey is a cesspool, just as you might have suspected. There really are girls with big hair and awful accents living in malls, women so awful that they turned the governor gay. These women really do have 400 pound boyfriends with hairy backs and low IQs. Turn signals are considered worthless luxury features, and, God help me, the whole state really does smell. However, it's New Jersey's consummate crappiness that ultimately makes it so great.

Radio personality Jean Shepard once said that New Jersey was "the most American of all states. It has everything from wilderness to the Mafia. All the great things and all the worst. For example, Route 22." Route 22, for those of you who don't know, is- I kid you not- a 24 hour strip mall that runs the length of the state. What is more quintessentially New Jersey- nay, more quintessentially American- than that? It's also the only place to go at 3 AM when you decide it's a good time to get some coffee and disco fries, or perhaps visit White Castle, the only burger joint with the gall to call their visibly greasy laxative rat-patties "Sliders."

While not unique to the state, White Castle's hamburgers share a few characteristics with New Jersey: they're both guilty pleasures, they only appeal to a small portion of the population, and they're both ironically nicknamed. New Jersey is, after all, the "Garden State," which in New Jersey-speak means "densely populated paved hellscape." In fact, New Jersey is the most densely populated state of the union, which might lead you to believe that the state is crowded and polluted. It is. But the large population isn't all bad. Because of its population density, New Jersey serves as a cultural microcosm of America as a whole. It is the proverbial "melting pot," where Godless, homosexual, French hippie crackheads live just a stone's throw away from inbred, racist, unwashed redneck crackheads. I know, because they're throwing stones at each other all the time.

I know what you're thinking. You're thinking ,"This still sounds completely awful." Like I said earlier, it is awful, and everyone there knows it. For a while, New Jersey considered changing its state song to Bruce Springsteen's "Born to Run." Not only would this have been the only state song to contain the word "suicide," but also the only one about trying desperately to get the hell out of the state.

Context...

[MeanderingMind]

...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.

Re:Only one answer

[theckhd]

FTFA:

For these reasons and others, 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.

It doesn't make sense to tax someone who plays the game without selling in-game items for "real money," and the author doesn't suggest it. However, once you start selling gold on e-bay or through one of the well-known resellers, that money now counts as income, and you ought to be reporting it on your income taxes to begin with.

The whole issue of "taxing virtual money" or "paying with virtual money" is an invalid argument. This is no different than any other person who makes a profit off of one of their hobbies, and the tax system already has the means to handle it.

Deductions...

[Firethorn]

IANAA*, but my parents are. Believe it or not, yes, you could deduct all those things. Uncle Sam's going to want receipts, of course, but billing records suffice.

As long as it's used in your money making efforts and the applicable taxes are paid, you're good.

Developing the SL object - cash expenses you're good for, but not your own labor. Hire an artist to create some of the overlay? Deductable. Do it yourself - not, but the cost of your editing software might be.

*I am not an accountant

Re:Deductions...

[Jonny do good]

I am an accountant and you are correct. There are a few issues here though. One is showing intent to turn a profit. This will allow expenses to be used as business deductions.

Alternatively it can be looked at as an investment. As an investment active/pasive rules would apply hence losses can only be set against like category gains. Another problem here is determining the costs basis for the virtual items sold which could be very complex to determine but it possible. It comes down to determining the portion of you stake in the game that was sold and your "investment" in the game. If you want to try to deduct your cost basis maticulous record keeping is the key, both as "investments" are made and the % of your stake in the "investment" sold at the time of sale.

Re:Earning value

[mab]

>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.

Just a note, not all countries require tax to be paid on winnings, We don't here in Australia.

Re:huh!?

[ubuwalker31]

You have identified the flaw in the logic of most of the /. posters today: They don't understand how the income tax system works. In general, gross income is income from any source derived. So, what exactly is income? According to the IRS, income is an accession to wealth and is taxable as gross income only if it results from a realization event. Realization occurs when "complete dominion" is asserted over the property. Taxing unrealized appreciation would cause too many administrative problems and people may lack the money to pay the tax. This is primarily a timing question.

So, if you buy a "Vorpal Sword +5" for $1 on Ebay and then sell it a year later on Ebay for $100, you will get taxed for $99 when you sell it...not while you are using it during the game.

Get it? To see if you understand the concept, answer these two question:
1) You find a diamond ring on the beach in real life. Is the value of the ring gross income?
2) You buy a a stock at $1 a share,and it rises to $20 a share. Is the $19 taxable?
(Answers: 1) yes, u exercise complete dominion over it 2) no, you haven't sold it yet)
Bonus: You find a copy of the declaration of independence in the back of a painting. Is the value of the document gross income? Why? How much tax will you have to pay if you sell it for $1 million if you bought the painting for a dollar?

Re:Only one answer

[klx]

Fries with brown gravy. And perhaps cheese. Mostly gravy, though, I think.