Virtual Taxes

Archon

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CNET has posted an interesting article [http://news.com.com/Are+virtual+assets+taxable/2100-1043_3-6027212.html] discussing whether acquisition of virtual assets from a massively multiplayer game could be taxed by the IRS. Here's some further thoughts.

The U.S. tax code provides for taxation of goods and services earned via barter. Imagine, for instance, a law firm and an accounting firm, where the law firm provides "free" legal services to the accountants in exchange for "free" accounting. The IRS would rule that each firm has income equal to the fair market value of the services received. In other words, you can't leave cash out of the equation and barter your way to tax freedom.

So what is the potential impact for MMG gamers? Well, let's say you receive 10,000 gold in your favorite MMG by dauntless questing. And let's further say that, thanks to the likes of IGE, the fair market value (based on their arbitrage) of 10,000 gold is $100. Legally, the IRS could tax you as having receive $100 in income, even if you don't actually sell the gold for $100. From the IRS's point of view, you've received income -- so-called imputed income [http://stuartbuck.blogspot.com/2005/02/imputed-rental-income.html].

We'd be looking at transactions occuring in violation of the game operators' terms of service, buying and selling assets the game operators deem to be their sole property, resulting in an imputed value to the assets which could lead to everyday entertainment-oriented gamers incurring tax liability.

Now wouldn't that just ruin immersion? "Sorry, Bob. I can't afford to quest in that instance with you. The taxes on rares are just too steep."

Back in 1999 my law school classmate Jake Okun wrote his thesis paper on this topic - as far as I know the first scholarly work ever done on the topic. I'm going to see if I can't score a copy for our edification.
 

Archon

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Original Comment by: Randall Fitzgerald
http://www.ikimashou.net
Well, since we're taxing things that are a violation of their proper uses, why not go ahead and find and tax drug dealers for their drug related income? So far as it seems to me, for them to tax a thing that only has a market value through a violation of intended uses is unethical in the least of things and it makes me wonder if they could even manage it. Say you have a priceless antique that you've never had appraised. You don't have to declare it as an asset because you don't know it's worth anything. When you have it appraised and find out it's worth a million billion dollars, suddenly, it could be classed as a luxury item and taxed based on its worth or what have you. As far as that seems to be the case, I would argue that the government should only be able to tax the gold you have in WoW if you intend to sell it, or you put it up for sale.

Moreover, the law covering the entire thing is entirely too broad. Will we start charing children taxes on their Chuck E. Cheese tokens next? Oh man, I hope so. I want ot be the collector for that job. When you make the connection there, you can see that the government will likely just stay away from the idea of taxing in game property and income, as at the end of the day, while it has a market value, it has no tangible benefit in the form that it's in. Once it's sold, it is directly taxable as income, so they get their money anyway.
 

Archon

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Tax law can quickly become surreal. In law school I posited this hypothetical to my professors:
A man is a gigolo and charges $100 / hour for sexual services. His girlfriend is a prostitute and also charges $100 / hour for sexual services. If they have sex with each other, is it a barter of services such that they are both taxable? I never really got a straight answer in the halls of ivy.

Law always raises interesting questions and then leaves them unanswered.

 

Archon

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Original Comment by: Randall Fitzgerald
http://www.ikimashou.net
But then, since neither of their incomes is a legal means of income, does it fall subject to the same sort of taxes? Since their trade is illegal intrinsically, how could you tax them for not charging?

Excluding Nevada of course. Then the question needs answering. But it raises a bigger question... do you really want to sleep with a prostitute who has a boyfriend at all? Let alone a gigolo boyfriend.

In all seriousness, the prospect that such illegal types would likely still pay taxes, how much of the governments money is dirty money? That's sort of scary (well... maybe just ironic) that maybe drug money that was paid for with dozens of lives is going to fund our law enforcement sector.
 

Archon

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Original Comment by: Randall Fitzgerald
http://www.ikimashou.net
Also, a second subject jumps to mind. With the massive bank spent on massive land-grabs in Project Entropia, and the nature of the land being owned, even though it lacks real world tangibility, could it be considered property? Surely a $250,000 virtual island is an expense, but should it be hitherforth considered an asset of the owner? Should his tax class be raised based on this asset and should things like homeowners insurance be adjusted based on something he now permanently owns(at least for each fiscal year until the game dies out)? How do you determine the networth of such non-tangibles as that with regard to taxation and personal wealth?

Moreover, should I buy pet insurance for my Epic Mount?
 

Virgil

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Well, since we're taxing things that are a violation of their proper uses, why not go ahead and find and tax drug dealers for their drug related income?Actually, they already are required to report and pay taxes on it, technically. You can be prosecuted for tax evasion even if the income is illegal (in addition to any other crimes). Here's a legal brief that covers it [http://laws.findlaw.com/7th/003032.html], I turned it up in a quick search. The relevant part, if you're not interested in the whole thing, is:Furthermore, the fact that illegal income is taxable is widely known, even among lay people. Everyone knows that Al Capone, for example, was nailed for income-tax evasion, not for the bootlegging, loan-sharking, extortion, and prostitution that generated the income. Accountants know better than anyone except tax lawyers that illegal income is taxable.
 

Archon

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Original Comment by: plangent
http://plangent.underhanded.org
Since people who harvest gold in games are called gold farmers might real farmers be used as an example? For instance, if a farmer grows peaches is he taxed for each peach he grows? As far as I know you are only taxed for the legal tender which comes from selling said peaches. Potential is not a taxable item. Thank God...

From what I've read, the whole point of non negotiable legal tender is to prevent this very issue. WoW gold is not the currency of a soveriegn nation. Thus it is not taxable. Were this not the case, the IRS would be dependent on the likes of IGE for currency valuation. I doubt that's a position the IRS would care to be in.

As for the gigolo and prostitute, the day the government begins assessing barter in the bedroom will be the day the holy institution of matrimony hears its death knell. Practicality has been known to roughly shove theory out of its way from time to time.
 

Archon

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Original Comment by: Dubi

If what I earn in an MMO is taxable, then shouldn't my monthly subsription be a tax write-off? It's an investment in a business, of sort, isn't it?