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."

That pretty much nails it on the head.

[Churla]

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..

Re:That pretty much nails it on the head.

[UbuntuDupe]

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:

[khallow]

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:

[cowscows]

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

Re:That pretty much nails it on the head.

[nickname225]

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.

Re:

[nickname225]

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.

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.

Re:

[gEvil (beta)]

...maybe you live in a state (or outside the states) that has a sales tax for online purchases but, I don't.

Are you sure?!? This form [state.tx.us] sure does look like they expect you to pay taxes for purchases made online.

From the first few lines of that form:
"Examples of items subject to use tax include purchases made over the Internet or the telephone from an out-of-state seller who does" (emphasis mine)

Re:

[gEvil (beta)]

Bah! The last part of that got cut off...

"Examples of items subject to use tax include purchases made over the Internet or the telephone from an out-of-state seller who does not collect tax, and items purchased while visiting another state or country."

You can find more information on Texas use tax on this page. [state.tx.us] You might want to read over the "at a glance" section...

Re:

[Churla]

I also live in Texas. What you are seeing in the "no tax on internet purchases" was a specific caveat made in order to foster and encourage the growth of e-business. In theory if you buy something on line from a retailer who has a storefront in Texas you're supposed to be paying sales tax on it as well. That is just not enforced because it's very impractical to do so.

An example is Borders, who I believe is spinning it's e-commerce stuff off from Amazon. They will have to charge sales tax on all purchase

Re:

[MeanderingMind]

BTW, I live in Texas, we don't have an income tax.

I just moved here for my first job. I did a merry jig when I realized the reason I hadn't received an income tax form from the state was because there was no income tax.

Soooooo much nicer only having to worry about federal.

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]

This could mean....

[willie_nelsons_pigta]

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

Sorry, but I couldn't help it.

What's the story here?

[east coast]

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?

Re:

[zyl0x]

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.

Re:

[east coast]

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.

Re:

[MeanderingMind]

Just because she's talking about it doesn't mean she's supporting it. She discusses that as an issue, but as the GP says her arguement is simply for taxation upon the aquisition of real world income from virtual items.

Re:

[east coast]

No, she's saying that there are (mostly administrative) reasons it's not practical and that taxation should be applied when virtual assets are turned into real cash.

If you take the pains of reading the sentence after your quote: "From a policy perspective, my view is that drops and purely in-game trades should not bear income tax."

I know it seems like she contradicts herself in several ways and I have to admit I think the article is poorly written. I think a rewriting of this article would clear up the co

Re:

[Zenaku]

Do you understand the difference between discussing something and arguing for it? She discusses two issues. She argues for taxing only one of them -- the one in which someone cashes out.

-1 (Poor Reading Comprehension)

Re:

[Firethorn]

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

Re:

[zyl0x]

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

[JavaLord]

Does this mean if I have an epic ninja looted from me I can write it off?

Re:

[khallow]

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.

Re:

[Wingnut64]

Not only that, you could probably report it to the police, FBI or INTERPOL.

Why Not...

[Greyfox]

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

[Sycraft-fu]

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.

Re:

[lionchild]

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:

[CastrTroy]

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,

Whose tax laws apply?

[Anonymous Coward]

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.

Re:

[Applekid]

" ... 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

The nice thing about articles like this...

[xxxJonBoyxxx]

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.

You're missing an important point..

[zyl0x]

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!

Re:

[Firethorn]

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...

[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:

[aztektum]

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.

Re:

[gad_zuki!]

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

Re:

[east coast]

I also had this same debate with the same exact user. Why am I not surprised to find that this has gone from a rational discussion of the article into a rantfest? Oh, it's because this is slashdot.

MMO = Real World

[Wingnut64]

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.

Re:

[alexgieg]

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.

Re:

[Wingnut64]

Good thing we all have Diplomacy.

Farming

[howman]

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

Re:

[brkello]

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.

Hack account == tax loss

[RichMan]

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.

I agree, not enough taxes.

[PixieDust]

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

Hell, they have someone is wow trading sex.

[Shivetya]

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

(warning horridly loud attached music on that site)

Inventory treated as income

[michaelmalak]

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

What happens in Second Life stays in SL unless...

[Glasswire]

... 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

[Leroy Brown]

I can't wait to see WoW game and monthly subscription, PC hardware, video cards, internet connectivity, etc. written off as business expenses!

Value vs. Income

[Kelz]

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)?

Under the table.

[The Living Fractal]

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

I'm glad that this is being looked at....

[ip_freely_2000]

...because if they have time to spend on this, then every other legal problem on Earth has already been solved.

Earning value

[WPIDalamar]

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?

Re:Only one answer

[UbuntuDupe]

Wah! I'm a geek who loves closing tax loopholes for the rich until I realize that means taxing my nerdy activities too!

Re:Only one answer

[drinkypoo]

Wah! I'm a geek who loves closing tax loopholes for the rich until I realize that means taxing my nerdy activities too!

Taxes on activities carried out in the Real World (tm) are taxes because those activities depend on certain services which are funded by tax monies.

If the activities take place only in a virtual world, and the entire transaction is carried out within the private sector and without government involvement, then precisely why should they be taxed?

The truth of course is that there is simply less government involvement. Thus such transactions should be carried out at a reduced tax rate.

Re:Only one answer

[UbuntuDupe]

Taxes on activities carried out in the Real World (tm) are taxes because those activities depend on certain services which are funded by tax monies. ...The truth of course is that there is simply less government involvement [in MMORPGs].

Oh, I basically agree, but this opens up a new can of worms: it commits you to:

a) separating businesses based on how much government they use, and taxing them differently (at least to a coarse approximation)

b) taxing the economy *only* at the rate required for the government provice the services needed for it to exist.

a) isn't so bitter a pill to swallow, but b) means much, much lower taxes, since very little tax revenue is spend on ensuring the necessities for the modern economy to exist, at least when honestly appraised. For virtually every government program, you can find a country that does without it, or has much less of it. (I can't sell items on ebay unless the government has a presence in Iraq? Come on!)

Re:Only one answer

[Maxo-Texas]

And the problems with doing a) and b) is that a primary role of corporations is to externalize their costs.

http://www.thirdworldtraveler.com/Rachels/The_Corp oration.html [thirdworldtraveler.com]

So you have two groups of people (citizens and government employees) who sorta, kinda want to tax fairly and one group of people whose entire purpose for existing is to push those costs on to the other two. Who is going to win in this struggle?

Our problem with b) is that if you want a swimming pool and I do not. And I want a recycling program and you do not, we both end up with a swimming pool and a recycling program. Extend that to 300 million individuals and you end up with all sorts of wacky stuff. I think you would get a better result if you fixed the tax rate (which would require a constitutional amendment) and then let everyone scrabble over that fixed amount.

And then we have the problem of words.
If we say we tax activity "A", then people doing that activity find a way to change it just a little and then call it activity "A1". That applies in this case. Likewise, if we had a constitutional amendment limiting taxes, they would define a new word (usage fees, service fees.. who knows) instead of the word "tax" to get around the amendment.

You have people working 8 hour shifts to make a product that they sell for real money to consumers. But because it is phrased as "playing a game", they have managed to get away untaxed.

Likewise the gambling issue in S2 where lindens could be won gambling and then sold for real cash.

And let's turn it around... Say I start mowing lawns for 100,000 platinum in EQ? That's $21 value for a lawn mowing but it's just "EQ Plat", not "real" money. It takes me about 120 hours to earn 100,000 platinum so it's a very good deal for me, removes taxable liability.

The more virtual worlds we have- and the more time people send in them- the bigger this issue becomes.

I don't go to a real movie, out to eat, or to a real ball game- instead I spend 30 hours in a virtual world that week. Provided food, a place to live, and a good computer/network connection I could probably go 10 to 15 years doing almost nothing as far as the real world is concerned.

It's a fascinating issue.

Re:Only one answer

[UbuntuDupe]

You make a good point about the wastefulness and complexity that attaches to taxation under democracy. But:

a) I think you give citizens and government employees way too much credit. They, too, are self-interested and intend to enrich themselves at the expense of everyone else.

b) I think your characterization of corporations as being *for the purpose* of externalization of costs, is misleading. Yes, it is possible (though rare) that a corporation can impose costs on others that its current assets can't compensate for, and the victim could be stiffed while wealthy silent partners (passive shareholders) are immune. But this happens all the time with poor criminals. Johnny Thug kills someone and doesn't have to pay a dime (because he's too poor to be worth suing) and gets his incarceration paid for by his victims. To the extent that we can't enslave him to pay compensation to his victims, is that too an externalization of costs?

Re:Only one answer

[drinkypoo]

b) this is silly anyway because we all know that corporations exist to separate the corporate offices from responsibility. There is no other need for them to exist.

Re:

[drinkypoo]

It's not about the shareholders, at least to me (although they certainly share in some of the blame, I'm not sure you can reasonable assign them responsibility) but the corporate officers. They only seem to get in trouble when they piss off the IRS. Makes you wonder what would have happened if Al Capone had found a way to pay taxes.

Re:Only one answer

[pinkocommie]

Isn't that a good thing, a honest appraisal of what you're being taxed for? come tax day

1. $2,400 for your share of the Iraq war (guesstimating 50 million tax payers, 1 in 6 people , 120 billion budget sent to the president at the moment)
2. $1,120 for education (56 billion / 50 million)
3. $8,400 for the department of defense (420 billion excluding war spending / 50 million)

If people actually realized what the government spent money on, it would be a little easier to have them put a stop to frivolous spending and costly wars. Not to mention selling a war with a cost of $1,000 tops with cashbacks (oil sales) of most of that and then an annual cost upwards of 2000 dollars would've had the average voter thinking whether it was worth it or not versus sending others kids out to die.
http://www.house.gov/schakowsky/iraqquotes_web.htm [house.gov]
http://www.washingtonpost.com/wp-srv/politics/inte ractives/budget06/budget06Agencies.html [washingtonpost.com]

Re:Only one answer

[UbuntuDupe]

Isn't that a good thing, a honest appraisal of what you're being taxed for?

Well, yes, but I was referring to an honest appraisal of the necessity of specific government programs to specific economic activities. People typically put up the false dichotomy of "you don't like being taxed at 95%" (the marginal rate in some times and places)? Well gee, I guess you think we should disband the police!" My point was just, that this justification of taxation is flimsy: the tax doesn't need to be that high, and the transaction doesn't require each and every government program that exists. Please folks, just admit that you're using a taxpayer for another purpose, even if it is ultimately justified!

Re:Only one answer

[Anonymous Coward]

Less government involvement???

You've obviously failed to account for the effort governments expend in monitoring all online activity so they can enforce those taxes.

Sheesh!

Re:Only one answer

[Surt]

Yes, the virtual world is totally non-dependent on telecom fiber lays supported by our governments, don't use any government subsidized power, and never rely on the roads to move server equipment. 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. And the people who participate in these things are totally independent of the social benefits network, as none of them have any children, or parents or ...

Anyway, you get the idea.

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.

Re:

[cayenne8]

"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..."

What are "disco fries"?

Re:

[klx]

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

Re:

[budgenator]

I'm not sure what this has to do with the price of tea in China, but here goes, everything you mentioned is either taxed or not taxed without regard as to whether the bits connect to WoW, 2nd life, sleazey-porn.com, BrotherJim-bibleThumper.org or OMGponies.com. If the IRS was able to legaly tax imaginary money, I'd be totally screwed because the wife keeps dreaming about winning the lottery. Seriously the guy is a law professor, when he says "commercial activity" he talking about somebody preforming real-wo

Re:Only one answer

[Dachannien]

The term "virtual world" should not be taken literally. It's not like these people are playing from their apartments on Mars or something. They are in the real world, and where their virtual actions touch real world money, the government has a legitimate interest in recouping its expenses, e.g., law enforcement concerning online fraud. This is what's meant by "commercial"

Where transactions are purely virtual - i.e., the transaction does not touch real money - the transaction has zero value in the real world, and the taxes should also be zero. But if you're talking about RMT, whether it's sanctioned by the game developer (Second Life) or not (most MMOGs), then the transaction is no longer purely virtual.

This isn't exactly what the article author indicates - she believes that if you are dealing in Lindens, then you're essentially engaging in barter with intangible property - but I would argue that Lindens are worthless until there is an interface with a non-virtual good, service, or money, and that's the point at which tax could be assessed.

Whether or not from a public policy perspective it's a good idea or not to tax online transactions is another question entirely (e.g., tax moratoria, etc.).

Re:Only one answer

[WaXHeLL]

If virtual property was taxed when convered back to real money, then you'd also have to account for the expenses incurred in obtaining that virtual property.

Deductions for my World of Warcraft monthly fees?
Deductions for my ventrilo server?
Deductions for the costs incurred in developing a SL object?
etc

I don't think anyone has really taken a look at that issue, but much of it is already covered under existing US tax laws (business expenses).

And if I cash out less than what I originally put in, can I write off the loss?

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:

[Kijori]

Taxes on activities carried out in the Real World (tm) are taxes because those activities depend on certain services which are funded by tax monies.

This mindset is, in my opinion, both incorrect and disturbing. Firstly, activities carried out in the Real World are dependent on services funded by the government, but it does not follow that these taxes serve only to reimburse the Government for the money spent to provide these services. This is where the "disturbing" aspect comes in, in my opinion. There are a lot of services that the Government should, in my opinion, provide but which aren't directly funded by taxes on their use. Healthcare would be o

Re:Only one answer

[Kijori]

Many of us do NOT believe in the all powerful Nanny state. We believe that we can do many things, like provide for our own retirement, health concerns more efficiently if we keep more of our own money, and invest and save it towards such things.

This works rather nicely if you assume everyone earns enough money to provide for their own retirement and healthcare; this simply isn't true. Taking a look at America, the self-styled champion of this Conservative ideology, 10.5 percent of elderly people are living below the poverty line - and this percentage tends to be made up of minorites; 8% of those over 65 are black, but 24% of the elderly poor are. Right now in America, working for your entire life - up to 65 - at 45% of the average wage will still put you below the poverty line after you retire; this hardly seems fair, should the Government really not intervene?

It works even better if you assume that privatisation is more efficient; this isn't true either. Take healthcare, for example; if private companies are "more efficient" than government schemes, why is it that the USA spends more on healthcare per capita than any other developed country (OECD, 1998) without, according to the NBER, an improvement in survival or recovery rates? Surely this is an indication that a centralised system of healthcare is less wasteful than one in which everyone pays for the cover they want - if they can afford it.

I'm not saying that the govt. doesn't have its place. For common good...we do need it for defense, law enforcement, etc. But, shy of things that really cannot be best done by private citizens...I feel they need to let me keep most of the money I earn, and let ME decide my fate by allowing me to plan, and invest for the future.

Why draw the line there? Surely if you could be allowed to choose the level of law enforcement you needed, and pay for it, you could do a better job than the Government? After all, the problems in this area are similiar to those in healthcare: those who need it most are often poor and those who need it often don't anticipate the need. And as America has shown us, a profit driven atmosphere will lead only to improvements in efficiency, not in sacrificing peoples needs for profit. I'm sure there's a justification for costs to go up by three times the increase in wages, while simultaneously hospitals across the country shrink the profit-haemorrhaging Emergency Department that doesn't involve the word "greed".

Re:Only one answer

[Kijori]

OK, so life isn't fair. But that doesn't mean that we can't try to make it better. It's a fallacy to think that the only reasons that someone won't have put aside money for retirement or healthcare are stupidity or poor planning; recent research has shown the US to have lower social mobility than a lot of developed countries - should we really punish people for being born into a poor family? And as I pointed out before, people from minorities are massively over-represented by those under the poverty line - are they just stupider?

What incentive is there in it for ME to work hard to succeed (measured solely in $$'s earned for my expenditure), if I basically have to give it back to the country to support those who earn less, especially due to above mentioned stupidity?

If you really succeed - whether by working hard or by being born into money and power - you will be in the top tax bracket. You will pay 35% tax on an income of at least $336,551, leaving you $218,758 per year to live on. You've taken a hit, but you're still not going to be groping behind the sofa for food money - and by European standards this is very low taxation. On the other hand, if you make $11,340 a year, with 2 dependant children, you will receive $4,536 a year in assistance through the EITC scheme. This is quite possibly the difference between eating and not eating. (again, by European standards, this seems very low; even in the UK, which has a comparatively conservative policy regarding benefits, the same family would receive $8,200.) Now take into account John Rawles' veil of ignorance; imagine you haven't yet been born and have no idea where in society you will end up. You have (rounding to the nearest integer) a 22% chance of earning less than $12,500 and a 43% chance of earning less than $25,000. Your chance of earning more than $50,000 is 29%. Things look even worse if we take into account other possibilities - what if you have an accident, or are unemployed? Nationally, you have a 4.8% chance of being unemployed, roughly the same as your chance of earning over $100,000. If you were making your decision based on these chances, rather than in the knowledge that you aren't in a position to need Government assistance to stay alive, would you still think that people shouldn't have to lower their living standards to put food on someone elses plate - despite the fact that otherwise, that plate might be empty?

Re:Only one answer

[MadJo]

I'd only want to pay this tax, if I can pay these taxes with virtual money.

Re:Only one answer

[jandrese]

In fact for games like WoW that is the only way I can see that you would be able to tax it, since there is no generally agreed upon standard for converting WoW Gold into US dollars. Third party out of country gold farmers do not make for a nationally recognizable conversion rate.

Secondlife however has a money market and maintains an up-to-date exchange rate of Lindon Dollars to US Dollars. It would be entirely possible to tax earnings in Secondlife in real dollars, although 99% of the time the tax would come out to pennies per month (effectively not worth the government's time), some of the larger Land Barons however could easily make enough to have to pay taxes on it.

Re:

[SL Baur]

In fact for games like WoW that is the only way I can see that you would be able to tax it, since there is no generally agreed upon standard for converting WoW Gold into US dollars. Third party out of country gold farmers do not make for a nationally recognizable conversion rate.

If you had read the article you would have seen that those gold farmers are the only ones she is proposing to tax.

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.

Re:Only one answer

[Endo13]

Except you're just confusing the issue by using "virtual income" when what you really mean is just plain old "income" generated from virtual goods or services rendered. Virtual income is an income in-game that has not been converted to real-world currency.

Taxing virtual income is pure insanity; taxing real income generated from virtual goods or services rendered only makes sense.

Re:

[Mr. Underbridge]

The bottom line is that commercial activity that occurs in virtual worlds should be taxed the same as in the real world. BULLSHIT

As long as the taxes are payable in virtual currency, I'm OK with it.

Re:

[theckhd]

Except that "commercial activity" implies trading virtual content for real-world money. The article (hell, even the summary) goes out of its way to point out that as long as a transaction involving real-world money isn't involved, no tax would be assessed.

Re:Only one answer

[Atlantis-Rising]

You mean you don't realize that money is taxed at every step where it changes hands? This is how it has always worked- why should the internet be any different?

Re:

[Aladrin]

Close, but not quite. Every step at -retail- that is changes hands. I don't get taxed when I sell my neighbor something, and resellers don't get taxed when they buy good to resell.

Putting a tax on virtual goods/money would mean that every NPC shop would have to charge tax and give it to the government, unless the player was registered as a reseller and was buying the goods to resell to someone else.

But that isn't even the beginning of the problem. The problem is that -nothing- changes hands. Players do

Re:

[tomhudson]

You mean you don't realize that money is taxed at every step where it changes hands? This is how it has always worked- why should the internet be any different?

doh - maybe because money ISN'T changing hands until you actually "cash out"?

Re:

[Atlantis-Rising]

An argument that seems to make sense but is logically fallacious. 'money' itself is nothing but a medium of value exchange. 'Money' is indeed changing hands.

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:

[esme]

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

Right. Just like illegal drugs have no market value, and nobody's ever been busted for income tax evasion because they didn't report their drug dealing income...

-Esme

Re:

[Churla]

There are actual regulations and laws regarding how to list illegally gained income on your taxes. The funny thing is you can list illegal income and because you list it is not considered a viable reason for the police to investigate you unless they have other evidence.

Re:

[CastrTroy]

But would listing this on your tax return give them a reason to go collect more evidence? Couldn't they start collecting more evidence so that they could just use that, and pretend that they never knew that you reported it on your taxes? Sure they couldn't search your house, but they could conveniently be in the right place at the right time (by following you) in order to catch you doing these illegal activities.

Re:

[Churla]

Depends on how honest the cops are.

And if you've got dishonest cops you have far bigger things to worry about. I mean what kind of governmental system would be able to operate if you had an executive branch playing fast and loose with the rules of law...

Um.... nevermind.

Re:

[drinkypoo]

I don't think I really have to say anything after that aside from "Wow, what an idiot!" Obviously she's unaware that something cannot have "real market value" when it's illegal to sell.

What? Of course it can. It also comes with a built-in risk. But the fact is that many things have a commonly accepted market value in spite of being illegal to sell in most places. Marijuana is pretty much the prime example; illegal to sell in most situations in all 50 states, illegal to sell in all situations in something l

Re:

[Volante3192]

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

Tell that to Al Capone and anyone else arrested for illegal activities for not paying their taxes. Or to news organizations when a raid on a marijuana farm turns up "a $47 million street value haul." Obviously it has $0 value since it's illegal...

Frankly, once you get into real world monetary exchange, expect to pay taxes. Heck, this should be a duh for Second Life since this is built in to the system. Some

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:

[Wingnut64]

Income earned in violation of a contract is still income, and you still have to report and pay taxes on it.

In WoW you do not own any virtual items you have, they are the property of Blizzard; they simply let you use them so long as you have an active account. At least in that case the players are immune to any half-baked idea like taxing iron mined from infinitely respawning deposits.

Re:

[guruevi]

Yeah, but if you're making $1 million selling illegal drugs, and then putting it on US banks, you're f*in stupid. Usually, if you're that deep in the game, you have a shill company you 'work' for, which gives them a 'legal' income (be it foreign or not) for reported living expenses (house/gas/water/...) while you pay cash or with a foreign credit card for the other unreported necessities and luxuries of life.

The judges/IRS cannot convict you for living very, very cheap or getting 'good deals' on cars/houses

Re:

[Deadstick]

Income received illegally is taxable income and you are required to report it on Line 21 of Form 1040. If you don't, you go down for tax evasion in addition to whatever you did to get the money.

rj

Re:

[MrShaggy]

Look at Al Capone.

Thats the only reason they got him.

Now if they happen to find anything else while they are busting these people,they get the warrent and go from there.

The government wants their cut of everything. I think that it might be, that pot is still illegal. They might be getting more tax money off of that, then if it was legal.

Re:

[superwiz]

I don't think that many people would argue with taxation at the conversion point. The problem is when killing boars gets you notices by IRS. That's BULLSHIT.

Re:

[Austerity Empowers]

I think she thought of that, but because she can make a sizeable amount of money by giving birth to children and selling them off, she's worried that her reproductive system is in danger of being taxed. This article is a metaphor, trying to distinguish usage for "fun" versus "profit" as a straw man. Based on the outcome, she may indeed "seek more lay".

Now having seen the picture next to her review, I think regardless of how tax laws are interpreted, she is free from any tax liability whatever.

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?