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IRS Eyeballing Virtual World Tax Policies 226

Kotaku points out a Washington Post report about this year's recommendations from the national taxpayer advocate (an official who suggests improvements and updates to the tax code) which include developing clearer protocols for reporting taxable income from virtual worlds. We've previously discussed the implementation of such policies in China. Quoting the report summary (PDF): "By one estimate, about $1 billion in real dollars changed hands in computer-based environments called 'virtual worlds' in 2005. ... IRS employees have been unable to respond to taxpayer inquiries about how to report transactions associated with them. Economic activities in virtual worlds may present an emerging area of tax noncompliance, in part because the IRS has not provided guidance about whether and how taxpayers should report such activities. To improve voluntary tax compliance, the National Taxpayer Advocate recommends that the IRS issue guidance addressing how taxpayers should report economic activities in virtual worlds."
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IRS Eyeballing Virtual World Tax Policies

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  • by zwekiel ( 1445761 )
    You truly can never escape the two inevitabilities of life: death, and taxes.
  • by Anonymous Coward on Monday January 12, 2009 @12:55AM (#26413469)

    No taxation without representation. Please vote Spongebob.

  • by KronosReaver ( 932860 ) on Monday January 12, 2009 @12:58AM (#26413485)

    If your generating enough income from "virtual worlds" that it needs to be taxed...

    Well, taxes are probably the LEAST of your problems.

    • Re: (Score:3, Insightful)

      by philspear ( 1142299 )

      No, the economy has just gotten THAT bad.

      • by drik00 ( 526104 ) on Monday January 12, 2009 @03:42AM (#26414305) Homepage

        Not even that. The average tax-payer in the US is hit for 35-40% of earned income. How much more do they need before they realize that they're wasting money. Most of the US tax dollar is already going to non-military spending. We're a federalist republic, the federal government SHOULDN'T be paying for every program, it should be up the states on anything other than a certain couple of programs.


        • Re: (Score:3, Insightful)

          by philspear ( 1142299 )

          We're a federalist republic, the federal government SHOULDN'T be paying for every program, it should be up the states on anything other than a certain couple of programs.

          I might be more convinced by that argument, except California is currently doing its best to prove to the world that state legislatures are even more incompetent at coming up with a rational budget than the federal government. The lesson I'm getting here is that the same types of people get elected to the state and federal levels of government, but at the federal level there's some scrutiny and accountability as opposed to the state level.

          I'm not making any statement as to what SHOULD be the case, and I to

          • California is currently doing its best to prove to the world that state legislatures are even more incompetent at coming up with a rational budget than the federal government.

            Not even close. The federal deficit is far larger percentagewise than the California budget hole. California is forbidden to have deficit budgets, unlike the feds; the feds have been running deficits for so long that people are used to them -- thank you, GWB!

          • Re: (Score:2, Insightful)

            by Anonymous Coward

            What that proves is that the people of California (and just about every state) are proving to be incompetent at selecting who represents them.

            "You'll do what for me? Oooohh.... I'm voting for you!"

          • Re: (Score:3, Insightful)

            by Lulfas ( 1140109 )
            California could return immediatly to surpluses if it stopped paying for poor states. For every dollar a Californian pays in taxes (to the federal government), they get 80 cents back. Random states like Alaska (2.40 back per dollar), Mississippi (1.45 per dollar) and such get to be welfare.
        • by wisty ( 1335733 )

          I thought that 40% of tax payers in the US didn't pay any net tax (from Wikipedia's Income_tax_in_the_United_States). I guess that the median tax payer pays about 10%, and the top tax payers pay a fortune. That's pretty common pattern in democracies - a small minority gets gerrymandered into taking it in the rear, for the benefit of the majority. In Australia it's worse - the rich don't pay tax, and the poor don't pay tax, but well off wage earners pay a fortune.

          • by Retric ( 704075 )

            No, the median tax payer pays ~50%. The major taxes in the US are Medicare, SS, Income tax, Sales tax, and Property taxes. Out of these Medicare and Income tax scale with income but as a percentage SS, sales, and property taxes tend to drop as peoples income increases.

    • by wisty ( 1335733 ) on Monday January 12, 2009 @06:10AM (#26414883)

      So can I deduct my new gaming rig as a business expense?

      If they tax gold farming as income, gamers should have the right to deduct their account costs, computer, and internet use as legitimate business expenses (provided they make some money from their endeavors).

      When I say should, that is my moral judgment, and it doesn't mean the IRS won't try to screw people.

      • by Hatta ( 162192 )

        And suppose you're not farming, and just playing. Is all that gold still considered income because you *could* have sold it?

        If you play any sort of game IRL, and win something that has value IRL, you're stuck with the taxes whether you sell it or whatever. So there's a good argument that you'd be stuck with the taxes on the virtual gold you get. It has value whether you plan on selling it or not.

        But that could turn a whole lot of causal players off of the game. Why play an MMORPG and get taxed when you

        • Re: (Score:3, Informative)

          by Sancho ( 17056 ) *

          And suppose you're not farming, and just playing. Is all that gold still considered income because you *could* have sold it?

          Well, you're not really selling it. See, it's all owned by the MMO owner. There's even something in the EULA about that. So if the IRS comes knocking on my door, I'll just pull out the EULA and explain that they should go talk to Blizzard.

          (Not that I play WoW anymore, but you get the idea.)

  • feh (Score:2, Insightful)

    by moniker127 ( 1290002 )
    flat income tax. only way to go. anyone have a clue about how much freaking money is wasted on calculating this crap? its in the hundreds of millions of dollars annually.
    • Re:feh (Score:4, Interesting)

      by cgenman ( 325138 ) on Monday January 12, 2009 @01:37AM (#26413699) Homepage

      Why do tax stories always bring out the extremists?

      Not everybody draws a clean salary. What is your income rate if you are buying and selling virtual goods? Heck, what is your income rate if you're buying and selling real goods? Or if you buy a good and the value goes up, but you haven't sold it yet? What if you're trading goods with value for other goods with value, and it never passes through a cash phase? What if a portion of your salary is drawn against goods that you have on loan to others?

      A flat income tax isn't the answer. Forgetting about how it would shift the tax burden to those least able to pay, it would still be a nightmare of bureaucracy anyway. It would just be a different bureaucracy.

      Considering the 2008 US federal recipts was in the range of 2.5 Trillion dollars, a cost of 500 million spent dealing with th emoney would be actually only .00002 of the total. That's less than one fiftieth of one percent. That's a monetary transaction cost that any business would love to have, and is a hundred times better than the 2% or so of every transaction that Visa skims off the top.

      • by harl ( 84412 )

        Why do tax stories always bring out the extremists?

        Because taxes have never been fair and never will be. Thus there are always people to complain about it.

    • Re: (Score:3, Insightful)

      by EdIII ( 1114411 ) *

      It will never happen. What it comes down to is a choice:

      1) Use a passive system that does not have to rely on the gathering and verification of data from individual citizens. No paperwork. No money spent on preparing taxes.

      2) Use an active system that allows control over information, excuses to invade privacy, reasons to seize property and bank accounts.

      Which one do you think the US government prefers? Which one favors their "war on Terrah"? Taxes are just as much about how to control people and informa

      • Re: (Score:2, Flamebait)

        by philspear ( 1142299 )

        Which one do you think the US government prefers?

        The one that works.

        We're already in a spending deficit and people think that taxes are too high. If it were all voluntary, we aren't talking about the military having to cut back, we're talking about the military being unable to muster enough strength to defend ourselves against CUBA. And then suddenly taxes are once again not voluntary.

        Control people? That's a ridiculous way of putting it. Oops, sorry, didn't see your tinfoil hat.

        • Er... sorry, little bit of misreading there. On second look, you weren't talking about voluntary taxes, you were talking about flat tax. Well I'll just go cry in a corner now...

      • A passive system requires "no paperwork" but it requires a far greater invasion of privacy. I agree it would be far easier for the citizien to simply let the Government automatically determine what your tax burden is without filling out forms and paperworks but that requires the government to intimately track how many children you have, what your income was for the year, how much money you spent on medical expenses, what the value of your home is, how much you payed in interest for student loans... etc etc

        • Re: (Score:3, Interesting)

          by EdIII ( 1114411 ) *

          Well all of your considerable comment aside, MY passive system requires no math and has ZERO invasion of privacy.

          I was not thinking of a flat tax rate on an existing system involving the IRS. I was thinking getting rid of the IRS entirely. I was actually thinking something along the lines of a consumption tax. I admit that I misread the comment of the poster I was replying too. I should have not implied that a flat tax has no paperwork, associated control over citizens and their information.

          I don't want

          • I stopped reading at "consumption tax" - all sales taxes are inherently regressive (that meaning the poorer someone is the higher percent of their total income goes to tax)

    • Re: (Score:3, Insightful)

      by jcr ( 53032 )

      flat income tax. only way to go.

      Limit the activities of the federal government to its constitutional powers, and there would be no need for an income tax at all.


  • by CrazyJim1 ( 809850 ) on Monday January 12, 2009 @01:07AM (#26413527) Journal
    I think we concluded that if we can write off losses in the virtual world, and pay our real tax in WOW dollars that it would be welcomed by all gamers.
    • I meant WOW gold.
      • Re: (Score:3, Funny)

        by Anonymous Coward

        I meant WOW gold.

        Gold hell, do they take wolf pelts?

    • If that's the case, I want to write off the depreciation of my leet T6 sets that are now worthless after another expansion.

      I invested a lot of time (therefore money) to get those things, now they aren't worth diddly.

      In a way, I don't mind being taxed, but it works both ways.
  • The solution is... (Score:3, Interesting)

    by jonwil ( 467024 ) on Monday January 12, 2009 @01:26AM (#26413641)

    To apply tax to things when they earn real income. For example, if you sell 3000 in WOW gold on ebay for US$500 (to make up an example since I don't know real values), you have to pay tax on the US$500 just like any other income. In that case you would not pay any tax at all on the ingame stuff.

    The only issue comes up with currencies like the Linden Dollar that can be converted back and forth with US$ and other currencies, for those you could treat it like any other currency (presumably if I give you 500 euros as payment for something, thats still income and has to be reported as such, the same could apply to L$)

    • Re: (Score:3, Interesting)

      by cgenman ( 325138 )

      It's actually closer to 30,000 gold for 500 dollars.

      However, what if you bought bits of that gold for 200 dollars? Can you write that off as a business expense? Can you write off your salaried time? If you bought Epic Armor to sell, but an expansion suddenly made it less valuable, can you write it off as capital depreciation? What if you spent salaried time to get Epic Armor, only to have to write down that value on a re-balance?

      It gets messy. IRS issuing guidelines could clear up a lot of the messy de

      • It gets messy. IRS issuing guidelines could clear up a lot of the messy details.

        It's a freaking game!!! The guideline should be simple: There are no business expenses you can write off because it's a game, and if you do sell game stuff for real dollars we'll tax your non-virtual ass for it.

        Seems pretty simple to me.

        • by khallow ( 566160 )
          Baseball is a game too, but some of those people are making several million dollars a year. Frankly, I don't understand why current IRS rules don't apply. If you're making real money income from an online game, then it can be treated either as a hobby or as a job. There are tax laws already in place for both scenarios. Hmmm, maybe it's because they're worried about what happens when your income and assets in games are large enough that they could affect how you are taxed. For example, the Alternate Minimum
          • 'In theory, you could hide assets in a game and in that way avoid triggering the AMT.'
            Fucking ingenious... though i'm sure there are easier ways than that.

          • by Lulfas ( 1140109 )
            Bigger problem is that the people making real money are Chinese, so this won't affect regular people unless they set it up and screw everyone who plays MMOs
    • This taxpayer advocate in the link sounds like anything but. I agree with you, in that the current laws are sufficient. You sell "Virtual Item" on ebay for $500, you pay taxes on those $500 (minus expenses such as game purchase, subscription, etc). It's really not that confusing. They also want enhanced implementation techniques (monitoring) so that happens.

      On top of that, it also sounds like they want to figure out a way to tax virtual-only transactions, which is about as inane as finding a way to tax

    • I think the sticking point is over whether the virtual money should be assigned a value before you cash it out too. With other goods, even sometimes hard-to-value ones, it is: if someone pays your consulting bill with a rare baseball card, you have to value the baseball card and consider it income when you receive it, not just when you sell it.

      If virtual money isn't taxed when it changes hands, then it can be used as a tax dodge. since a bunch of economic activity can go on using virtual money as a tax-free

  • by MSTCrow5429 ( 642744 ) on Monday January 12, 2009 @01:28AM (#26413649)
    The IRS only exists in the real world. It should stay there. Otherwise, it could cause a reality breach, and soon find itself the target of thousands of nuclear warheads, tens of thousands of orcs, millions of heavily armed commandos, and a giant green pulsating penis.
  • by the_raptor ( 652941 ) on Monday January 12, 2009 @02:19AM (#26413941)

    Taxation of virtual worlds will mean players will have ownership over their accounts (currently trying to monetize your WoW assets is a bannable offence), and fraud and theft in virtual worlds will fall under standard criminal statutes.

    Trying to enforce that mess will drain resources from trying to create copyright cops or other nonsense.

    • The only thing it'll do for WoW is make Blizzard even quicker to ban farmers, and possibly get your example eBay seller up on fraud charges. The gold isn't yours, any more than any other aspect of the account is, so there's no legal way to exchange it outside of the context of the game itself.

      The big thing here isn't going to be traditional MMOs, but the 'item shop' games like Fly For Fun, where there is a direct legal conversion between real money and rewards in game. Second Life is definitely going to b

    • by im_thatoneguy ( 819432 ) on Monday January 12, 2009 @04:41AM (#26414515)

      Or an even better solution.

      The IRS can charge me taxes in WOW items. But I can defend it using WOW laws.

      So the IRS agent must catch me in a raid and take my items by force. Because if I'm in a WOW world I'm going to fight by WOW rules and kick his sorry tax collecting ass.

      Just think how much more interesting collecting a 400 gold piece tax will become when you can draw a sword and protect your property. Of course the IRS raiding parties will be top level well orchestrated teams working in concert across Azeroth it will add a whole new level of excitement every february for most players. The IRS would also probably add bounties for top
      level characters leading to an interesting new dynamic of payed free agents for whom money is on the line.

      Orrrr... if you sell your gold you report your "Other Income" like you're legally obligated right now. But that would be far less exciting.

      *thatoneguy does not play WOW nor has ever played WOW. However adding IRS agents as a force might... just might convince him to open an account.

      • by UID30 ( 176734 )
        We should request that all tax collectors be a faction unto themselves, lvl 5, and permanently flagged PVP ... and that they have to carry all the gold they collect, so if they happen to ... ummm ... have an accident, the wealth can be re-distributed.
      • Re: (Score:3, Funny)

        by mattwarden ( 699984 )

        Your ideas are intriguing to me and I am interested in receiving your newsletter.

    • Re: (Score:3, Interesting)

      by stephanruby ( 542433 )

      Second Life makes this very clear. You own your account. You own your own stuff. You can monetize it. You can even take your intellectual property outside of Second Life and put it on your own server (not that you'd want to, since you'd be alone on your own server). But this is a growing trend for virtual worlds that want to attract and keep content creators.

      WoW I suppose is a different kind of virtual world, where it's not so much dependent on user-generated content or user-generated scripts?

      • ""WoW I suppose is a different kind of virtual world, where it's not so much dependent on user-generated content or user-generated scripts?""

        There's a pretty vibrant addon-developer community for WoW, but partially due to the way that Addons are implemented, it's all pretty much FOSS.

        The only real-money, direct transaction is paying your game subscription. There are quite a few other things like guild web hosting, voice chat hosting for things like Ventrillo, some paid game guides (both books published thro

  • Fake money has no real value until converted to real currency. And this article, this topic, is a bit tricky.

    Person A pays Person B to do a task in a virtual world, and gets paid virtual money. If the virtual money is converted to real currency, sure, why shouldn't it be taxed?

    Person A pays Person B to do a task in real life, and pays that person in virtual money. If the virtual money is converted to reall currency, sure, why shouldn't it be taxed? But, would it be legal to pay someone virtual money for a t

  • by Aiml ( 1450363 ) on Monday January 12, 2009 @02:47AM (#26414075)
    Can I write my WoW characters off as dependencies?
  • by laron ( 102608 ) on Monday January 12, 2009 @03:17AM (#26414201)

    Gaming companies by and large insist that they own everything within the game. Basically a player "owns" stuff the same way a monopoly player "owns" his cards, houses and money, i. e. only in the context of the game. If there is a transition to real world money (gold on ebay), that is already taxable.

    • Re: (Score:3, Interesting)

      "Gaming companies by and large insist that they own everything within the game. Basically a player "owns" stuff the same way a monopoly player "owns" his cards, houses and money, i. e. only in the context of the game. If there is a transition to real world money (gold on ebay), that is already taxable."

      Why are you giving them even more stupid ideas? This is Washington we're talking about. Politicians who've never met a stupid idea they didn't like ... like the bailouts.

      Mind you, if they're going to st

  • Is it voluntary or compliant?

    Funny how there was no income tax until 1913, and now they want to tax some "Imaginary Property" ??

    How 'bout we focus on the real problems such as Social Insecurity being broke (I.O.U.S.A.) [], becoming poor in order to receive benefits [], or the outright theft by Haliburton [], instead of worrying about virtual ones.

    End the bullshit - one simple tax law: 10% of any income. No fucking loopholes. Plain and simple that doesn't requires thousands of wasted pages.

    I can't wait when money

    • Re: (Score:3, Interesting)

      by QuoteMstr ( 55051 )

      End the bullshit - one simple tax law: 10% of any income. No fucking loopholes.

      The vast majority of the complexity in the tax code comes from figuring out what exactly qualifies as income. Flat tax proposals like yours address none of the complexity issues.

      I can't wait when money disappears...and people learn to put TRUE stock in something that only increases in value -- themselves

      I think prostitution ought to be legal, but it'd be foolhardy to base all exchange on sexual favors. Actually, on the second tho

  • Taxman mob (Score:3, Funny)

    by Aceticon ( 140883 ) on Monday January 12, 2009 @04:45AM (#26414529)

    Will we get a Taxman mob?

    Large boss, slightly human looking but with fiery red eyes and decaying flesh. Fights with a magical Tax Form and spawns an army of goblin-lawyers as adds.

    Players will only have time to go OMGWTFBBQPWNED before they die.

    • Re: (Score:3, Funny)

      by Culture20 ( 968837 )
      Even Scarier: It's nigh invulnerable, and does damage to Gold instead of Hit Points. Maybe it could be paired with Death.
  • by itsdapead ( 734413 ) on Monday January 12, 2009 @08:18AM (#26415389)

    Nobody would argue that income suddenly became immune from income tax simply because it was earned using a computer and the internet. OK, which have convoluted rules about cross-border transactions, but not income tax. I think you'll also find that the taxmen also have existing arrangements [] (took 30 seconds on Google to find that) to deal with any attempt to use alternative currencies or barter exchanges as an end-run around tax.

    The only difference between income from selling software or art on your dollar-priced internet shop and income from running a virtual hat shop in Second Life is a sprinkling of fairy dust. If second-lifers try too hard to make it sound like something new, different and scary, the danger is that the tax authorities will be only too keen to invent new, different and scary rules...

    What I find depressing is that these "virtual worlds" are all taking the form of capitalist economies. Communism/Socialism may or may not work in the real world, but if I'm going to move to a virtual world which is supposedly limited only by the imagination of its inhabitants, I'm holding out for a post-scarcity utopia like The Culture [] or even the freakin' United Federation of Planets! If you don't have property then its much harder to have tax...

  • by UID30 ( 176734 ) on Monday January 12, 2009 @10:49AM (#26416713)
    Isn't this how the Boston Tea Party started? How can they possibly think to tax online gamers hard earned gold without some form of representation? This is blatantly taxation without representation.

    I, for one, think that this opens up a need for seats in congress for Night Elves, Gnomes, Orcs, and even Tauren (as long as they promise to first take a bath). Sorry Humans, you've already got enough reps on the hill. We'll need HUGE multi-panel monitors setup all around the House chambers ... at least ... 130" tall so that each representative can be rendered at his/her real size ... and full sound systems for each so that their voice can be HEARD!

    And why stop there? We need seats on appropriations committees, too! Lets put those tax dollars ...err ... tax golds to work! How about a fast train system linking Ironforge to Undercity? Faster gryphon rides? or better yet ... FASTER LOGIN QUEUES for overloaded servers??

    Until we get all of this, I say we should each buy Tea from a local vendor and then drop it while standing at the harbor in Booty Bay. Below is a helpful list of some of the teas which might be appropriate:

    Honeymint Tea [], Green Garden Tea [], Thistle Tea [], Goldthorn Tea [], or even Green Tea Leaf []
  • If you read the EULA it states that you don't own these things.

    Unless you're using the MMPOG to generate real world cash the only tax liability I see is on the part of the people running the games. If you're using the game to generate cash then you already fall under the current tax law.

Money is better than poverty, if only for financial reasons.