US: IRS taxation of online game virtual assets inevitable

[Hamilton]

Although this is somewhat old news, not everyone knows about it.

NEW YORK--If you are a hard-core player of virtual worlds like World of Warcraft, Second Life, EverQuest or There, IRS form 1099 may someday soon take on a new meaning for you.

That's because game publishers may well in the not-too-distant future have to send the forms--which individuals receive when earning nonemployee income from companies or institutions--to virtual world players engaging in transactions for valuable items like Ultima Online castles, EverQuest weapons or Second Life currency, even when those players don't convert the assets into cash.

Link:
http://news.com.com/IRS+taxation+of+online+game+virtual+assets+inevitable/2100-1043_3-6140298.html

"Given growth rates of 10 to 15 percent a month, the question is when, not if, Congress and IRS start paying attention to these issues."
-- Dan Miller, senior economist

[khil1]

Your kidding, they want to tax people for stuff they get in a video game?!?!

[Szunyog]

Why not?  Just one more thing they can and will suck money from the working stiffs.

They tax sex, this is just one more way to get cash for nothing.

[khil1]

Come on, thats like taxing you for typing out a story online.

[Mr_Red_X]

To arms! fight these mensheviks!

Vote X for US prez in 2039!

[Grozzer]

I'll give you my honest outlook on this situation.

in terms of when there's a sale of some online "merchandise" (such as a really nice piece of loot), there's no reason it shouldn't be taxed.  It's a transaction of services, essentially--one person's time spent getting something for another person's money.

However, I think that the IRS will probably run into a problem when trying to put this law into practice, as anyone who has a decent understanding of the EULA they agree to every time they log on will know.  The catch is this: in an online game environment there is only one fundamental transaction that takes place, between the customer and the company.  As far as the company is concerned the customer does not actually own anything which resides on the company's servers.  The customer agrees to pay the company a subscription fee to be able to log into a virtual world and play within that environment.  As a result of all this, when there is a transaction between two customers in the space of the environment (a piece of loot for x amount of in-game economy money), All that is really happening is that the company is moving data from one place to another on their servers.  No actual transaction between players takes place.

The second trick, as the article states, is that the IRS or government has to somehow link the in-game economic growth to outside economic growth as well.  Unless the US government incorporates in-game economies into the US monetary system and sets up a "value exchange" so that people can make a conversion between in-game cash and real cash, I highly doubt that they'll be able to pull the connection (but you never know, senators and the IRS are slippery).

The third catch comes back again to the EULA, since a player cannot, under contract, make money off of the game, there is no real way to determine the net worth of a "character" on a company's server.  Because of this, the companies could probably at worst declare a set "value" for an account (kind of like how the coupons you get in the sunday ads are worth 1/20 of a cent, but can be redeemed for $5 off soda or something).  Being able to set a value the company could set an insanely high ratio which would determine a conversion point, even if that conversion would not be able to be made.  Imagine the "real value" of your character being 1 cent for every 2 trillion credits you earn in a game that hands out 300 credits per mission on average...It would be extremely difficult to even fathom taxing someone on this worth, and ultimately it would cost the IRS too much to either worry about or pursue anyone for "tax evasion"--it would cost more to call the person and tell them there was an error than to let it go.

The final catch that I see right off the bat is that the game development community would/will be up in arms over this.  Not only would it cost them millions/billions of dollars to deal with this sort of thing, their customer base would be furious!  How are people supposed to pay for taxes if they're cornered in every way from making money for their game assets?  No one would like the idea of being told that they need to pay money when they haven't actually made money to pay for it with (kind of like earning privileges to withdraw more often from the bank, having a "value" placed on it, and being taxed on that is the way i see it--being charged for something there's no money from in the first place).  If players are furious (and more importantly feel that they're getting screwed over), they'll stop playing.  After all what's the fun in getting charged more depending on how well do you? It would discourage people from succeeding in any way, and the game environment would quickly deteriorate from a lack of player base and moving economy.  It comes down to a massive opposition by game companies (who earn billions of dollars from online games) who have a lot to lose and will pay a ton of money to fight such laws.

So, to give the short and sweet of my opinion on this, I think that the IRS will find that they're wasting time.  There are way too many methods for game companies to work around the system, and even if the IRS manages to get everything to work to their standards, I would not be surprised if online games are reduced to free games such as CS and Age of Empires, which simply provide a meeting place on the internet rather than a garage for LAN games.

[Hamilton]

Good thoughts there Grozzer.

I personally can see taxation towards the purchases of in-game material with real money, such as a sales tax with typical mailing and Online purchases; but not as an income tax.  Additionally I can see there being a tax if a player can cash out his/her account and that a profit was made; that is gold/credits can be transfered to real money for a player.

But that is about it...
I can't see how a person can be taxed for property they do not own; just like renting a house.  The renter isn't taxed for renting a better piece of realestate than before; and the renter cannot sell the property either.  Actually renting is the best example; a Time Share would be.
And to think that a game company could revoke or ban a person from their property.  Or what if the game company closes the game?  The realestate is gone, poof into the four electronic bins.  Would the players of such a game file for capital losses then?

Also if the economies of online games were to be taxed, then what games would be exempt?  Would the online version of Monoply be excluded?  Also game companies can find loop-holes, the easiest being, that money is called points and the economy is a Scoring System.  It is the same thing, but called by different names.  If that is not good enough, then all games will be considered taxed, for example:
- The players of Online Arcade Games could face taxes.  Since a Highscore does have some value to it, even though it is based on points.  The player of the Highscore could sell the account (even if the account is just a name and nothing more) to someone who has an ego problem.  (I will accept that it is up to the seller to report the sale as with any other transaction; but not because of having a highscore if the player never sold it)


I can only see a few games ever being subjected to this; such as Second Life and Project Entropia.

[Tattnall]

actually incase no one has noticed it..the actioneers in wow charge a sales/action tex when you sell something.

come to think of it so do the actioneers in ddo...ddo's tax is extreamly more substantial lol.I sold a very valuable high end axe in ddo a few months back for 1 mil plat on the action and they took 30% in fees,taxes out of that...grrr was i upset lol.

[Kellzz]

The IRS can look at it all they want, but there is no way they can make it stick.
People already grumble about paying $15/mo for a game, but then they have to pay an income tax on stuff they do not own? (per-se)
Someone can argue Intellectual property but in the end, its just code, and the developer owns that code.

[Falcon]

Flag out to Canada or something. Problem solved.

Also, the IRS would be requiring RL cash for in-game valuables. That's a breach of the EULA in itself, and so the IRS should then be auto-banned from any game they wish to tax.

[Ashton Black]

And what happens when a game you've spent years playing and paying taxes on finally ends? Are you going to be re-imbused your tax by the company that ran the game(think bank) ? I think not, but could leave themselves liable to a class action.

[Hamilton]

Those are interesting concerns...
I figure that "virtual products and real estate" would be considered as Leasing or paying rent; but if not, then such real estate could be used as a Tax Deduction.

My concern as has been mentioned above, is what happens when a company ends a given game title or social world?  Such items or property is treated as a Capitol Gains tax?

[Ashton Black]

Those are interesting concerns...
I figure that "virtual products and real estate" would be considered as Leasing or paying rent; but if not, then such real estate could be used as a Tax Deduction.

My concern as has been mentioned above, is what happens when a company ends a given game title or social world?  Such items or property is treated as a Capitol Gains tax?

As the U.S, is the most letigious nation on the planet I can already see the story : "

(10 o'clock news BBC1 Dec31st 2013)

Newsreader(turns to camera): ... and finally tonight, Once mighty Blizzard, makers of World of Warcraft has been brought to it's knees in the stunning case "Blizzard Vs. 2.3million South Koreans." The judge ruled that the pain and suffering caused by Blizzard's decision to finally close the aging, record breaking game was tantermount to genoside as so many South Koreans committed suicide soon after the closing of the last server. Blizzard are to be fined $46.75billion to be paid directly into the Korean economy. Lawyers for the plaintifs, A.M Blulance and Chaser, read this statement, "Dudes!!!!WooHoo that's Blizzard Nerfed. Now for SOE".