When Tax Day Comes to Azeroth

1up is running a short piece originally from Games For Windows: The Official Magazine. It discusses the inevitability of taxation coming to virtual worlds, and a little bit about what that might mean in the indeterminate future: "Taxable income includes everything from tangibles like cookies to more ephemeral and subjective things like works of art, concert tickets, or advice. Those big, scary books that most sane people pay accountants to understand for them don't really narrow down what counts as taxable income so much as meticulously define it as damn near any piece of matter, energy, or information that should happen to pass into your possession over the course of the year. That goofy World of WarCraft gnome that GFW editor-in-chief Jeff Green's been leveling isn't any more intangible than, say, stocks."

Cashing out

[Metaphorically]

The intangible gnome may be something ephemeral that comes in to my possession (in the sense that it is under my control) but if the analogy is to stocks, then wouldn't it make sense to be taxed when I cash out? I mean gains in the stock market aren't taxed until the stocks are exchanged for money and a capital gain is realized. The funny part really comes later in the discussion when people agree with the concept seemingly based on the idea that anything which causes joy should result in negative consequences.

Take a deep breath.

[EveryNickIsTaken]

Despite that fact that every gamer site & mag likes to get all fud-tastic in regards to MMO taxes, let's use our brains for a second. The only time that a tax would be applicable would be if real-world money changes hands. Selling gold / items / characters for money? You'd get hit with a sales tax or have to report this as taxable income. It might "suxxors," but if you can make a living by gold farming, then I'd certainly expect you to have to pay your taxes, too.

No more tangible?

[Chris Burke]

Please! A share of stock is ownership of a piece of the company. It gives you the right to vote on decisions made by the board of directors, and it may entitle you to receive dividends based on the company's profits. There are limitations on a company's ability to issue new stock. These are the reasons why stocks are tangible and have value. Yes, your stock is probably just bits on server that keeps track of how many you own, but those bits represent actual ownership of an actual company. When someone buys my stock, they are paying for that ownership, not for the bits that represent that ownership. This is quite tangible.

Your gnome is bits on a server, and that's it. Those bits don't even represent anything in the real world; the bits are the entirety of the thing's existence. The server owners could delete those bits at no cost except your annoyance, or they could duplicate those bits so everyone on the server has three dozen exact copies of everything you own. If you can get someone to buy those bits from you, they are still buying nothing but bits. There is no connection to anything outside the world of bits, and hence the gnome is truly intangible.

I mean that's just silly. My bank account is just data on a server -- except that data represents very real, very tangible currency. Cash is no more tangible than your WoW character -- yeah right!

All this means is the same thing that it has always meant regarding taxation: The second my in-tangible, non-existent thing (my online gaming bits) is turned into something tangible (like a stock or wad of cash) then you tax it. How much do you value the bits at for tax purposes? The amount they were sold for. Simple. And we're done. We don't need a whole new section of tax code about the value of things that don't exist or even represent things that exist.

Oh Noes! Your Game is Going to be Taxed!

[Greyfox]

Honestly, the only thing that's being taxed here is my patience. Taxing in-game assets at any time other than when you cash them out would be retarded, and if you're a US citizen you're supposed to pay taxes on that transaction when you cash out anyway.

Nothing to see here, move along...

Re:Good luck finding me IRS

[zippthorne]

If they tax it, you can claim the subscription fee as a business expense.

Re:Frist Psot

[nuzak]

> it would be illegal for them to tax you on something you don't own.

They are taxing the income, not the asset. If I sublet my apartment, I can be damn sure the government will tax that income.

This isn't that ambiguous in most situations.

[sirwired]

If you receive "real-world" income for your MMO loot (i.e. eBay), than of COURSE that is taxable income, just as much as tips for juggling on a street corner are taxable income. If you never get money for the loot, and the trading of loot for eventual real-world income is not a business of yours, then it is not taxable.

For example:

Not taxable: I kill a Super-Mega-Nasty-Dragon and loot the epic Item Sword-of-Greatest-Butt-Kicking. I use it to slay more vitual things, and eventually get bored and let my account lapse, I have no taxable income. Since the TOS doesn't actually allow the sale of virtual items on eBay, my item theoretically has no value, and I have received no money for the worthless item. This is no different from (from a tax perspective) from taking a $5.00 canvas, $1.00 of paint, and making a masterpiece worth millions, but hanging it up in your living room until it falls apart.

Taxable: I kill the aforementioned Dragon and sell the sword on eBay. I have now sold something and received money for it. It now has a value (because I sold it), and that income is taxable, but I could possibly deduct my monthly payment, bandwidth bills, etc., according to the normal (extremely complicated) rules for deducting business expenses. Even if though the item is not physically tangible, you have essentially performed a service for somebody (by obtaining the item so they didn't have to), and they have paid you real money for it. (Similar example: You sell 500 copies of "eBay loot-selling secrets" for $5 each. The item consists of nothing more than a .pdf file, but you have received money for it. The sale of the items are most certainly taxable.)

Maybe taxable: I buy the sword off of eBay, and trade the sword with somebody else for an item that goes for more money on eBay. Is that taxable? Maybe. If you make a business off of selling items on eBay, it just might be. Barter is just as taxable as cash transactions. (Although harder to compute.) If you are just a player executing a trade for something nicer, and don't sell stuff for cash, I'm going to have to say that it probably is not taxable. You are trading an intangible item with somebody else. You never receive cash money for it (or any other item), it isn't a tangible object, I don't see the income.

The IRS will eventually have to write rules on this for the "Maybe", but I don't think they will affect the vast majority of players. No cash money for items, no taxable income, and almost everybody lives happily ever after.

SirWired

Bingo -- it's the sale.

[Kadin2048]

Hm. Wouldn't they only have to pay on the profit they made if/when they sold them?

I think this is really how the 'taxation' in online games is going to end up working. It's like stocks right now. If I go and buy stocks (with my post-tax income), I don't pay any taxes on the appreciated value of those stocks until I go to sell them. Then, the year I sell them, I have to go back and figure out what I paid for them, to establish the cost basis, and compute the capital gain.

I don't see why a +20 "Sword of Toestubbing" would be any different. Assuming you pay for it using a virtual currency that you bought using post-tax income, it's just like a stock. When you go and sell that, the income that you derive from the sale is taxable as capital gains, and if you want to avoid having 100% of the sale price taxed, then you need to go back and establish what the cost basis was of the investment.

IMO, the IRS doesn't seem to care too much about non-cash investments until you go to sell them. You can buy a stock, and that stock can split, reverse-split, do all sorts of stuff. It only becomes an issue (setting aside dividends) when you turn it back into greenbacks.

Re:Good luck finding me IRS

[Jaeph]

You are a fool. They will ask blizzard who you are.

Feel free to follow the logic train...you won't be allowed to play anonymously if they tax.

-Jeff

Re:Mod Parent UP!!

[RobinH]

True, but back to the original article, unless you made income in the game that was more than the monthly fee you're paying, you'd never have to pay any tax.

Also, since the value of your "money" in game isn't in actual dollars, you wouldn't be taxed on it until you "realized" the profit, meaning sell your character or account, or sell your "gold" for real money. If you never sell anything in exchange for cash, you never realize a profit. It's the same as if you own stocks and the stock price goes up. You don't pay taxes on the capital gains until you actually sell the stock. It works the same with art, etc. (AFAIK).