Will I Be Taxed On My Holy Avenger Sword?
The big to-do this week is an article on C/Net News entitled, "IRS Taxation of Online Game Virtual Assets Inevitable." It quotes Dan Miller, a senior economist with the U.S. Congress' Joint Economic Committee. He said, "The question is when, not if, Congress and the IRS start paying attention to these issues (of the real-world monetary value of in-game items)." In other words, sooner or later, governments are going to start figuring out how to tax you for your entertainment. Well, beyond how much they already tax you.

Do Items In A Computer Game Have Real-World Value? Part 1.
Courtesy of "RMT" or Real Money Trading, it's very possible to calculate the value of virtual property in online, persistent games (specifically Massively Multiplayer Online games). I think companies engaging in RMT are the ones that are at greatest risk of becoming extinct.

I did an exercise about a year ago with a FREE, web-based game, "Kingdom of Loathing." While it was free, you could get a unique item (limited-edition, only available for one month only) by donating $10. In Kingdom of Loathing, the currency of the realm is meat. (Yes, it's a very silly game). These "Items-of-the-month" routinely sold in auction for about 6 million meat at the time. So you could figure an exchange rate of 600,000 KoL meat to the US Dollar. Though I don't know how many people actually "cashed out" and sold items for real-world money to make the exchange two-way. But still, it was a neat idea.

And freaky.

Do Items In A Computer Game Have Real-World Value? Part 2.
But that's largely academic to me. And, I suspect, to the majority of players out there.

The only money that I exchange in these games is my monthly subscription bill, which has already been taxed when I earned it, thankyouverymuch, and I'm sure it gets taxed on the other side. While certain virtual worlds might be the exceptions to the rule (I'm thinking Second Life and Entropia, specifically), I think the vast majority of players are like me. We're playing for entertainment, not to earn cash. The idea that I would get taxed by the IRS for defeating a dragon and getting my new magic sword of uberness would be more than enough to make me quit Massively Multiplayer Online games altogether. I doubt I'd be alone.

While my Sword of Uberness may theoretically have some monetary value at some auction site, I'm only dimly aware of it. For me, the grand total of the value of the sword to me is how much it helps me lay the smack down on some virtual monsters.

What's A Poor, Downtrodden Tax Agency To Do?
Technically, if you are in the U.S.A., you already have a tax liability if you sell your Boots of Butt-Kicking for cash. In practice, I doubt many people actually report it on their income taxes each year. Although as the article points out, according to a 1913 provision in the U.S. tax code, even bartering goods or services which have inequal worth on the open market is technically a taxable event. Difficult and expensive to enforce, of course, which is why they don't bother unless it's a very large exchange. But they brought up the case of the guy who exchanged the paperclip for a house.

I expect that if Miller is actually a fan of virtual worlds, as the article claims, then his comments shouldn't be interpreted as a cry to invite the IRS to set up office in Azeroth, so much as an announcement to the community to make preparations so that we can frame it in a way that's favorable to us. More likely, he's looking to limit what could be considered "taxable events" to actual cashing-out. So we non-gold farmers don't have much to worry about. He's simply stating something that we already know: Hoping the U.S. government doesn't notice is not the answer, and trusting the U.S. government to "do the right thing" when it does get around to it is about like trusting your average five-year-old to guard a plate of cookies all day.

Why I Am Not Worried
The problem is in enforcement. I mean, if I'm a Chinese "player" (or run a sweatshop in China employing "players" to farm gold for me at pennies an hour), playing a game based in the U.S., and sell a power-leveled character to some guy in Germany for Euros... who do I owe the tax to? And even if the U.S. government decides it is owed a piece of the pie, how will it collect?

It's the answer to THOSE tricky questions that makes people worry abut intrusive measures being instituted in online, virtual worlds by tax agencies. Could every gold piece (or unit of meat) you acquire get reported to Uncle Sam (or, likely, multiple tax agencies). Could a Swedish player in an American game getting twinked by a Brazillian guildmate could theoretically be surprised by three different countries (not to mention local tax agencies) claiming he's liable for taxes?

I doubt it, at least without LOTS of additional legislation happening in my country. For two reasons:

Number one - the costs of setting up enforcement in this wild, unfamiliar territory are prohibitively high for tax egencies. Unless they expect the revenue to exceed all the effort they have to take dealing with multiple countries, currencies, tracking tons of data and values of items, it's not going to be worth it. It's far easier and cheaper to try and capture what they can on "cash out" events, even though it suffers from decentralization. A couple of high-profile audits should do the trick.

More importantly, if I was running an MMO and found myself having to face the cost of complying to government tax regulations for in-game items, I'd realize that it would kill my business two different ways (cost of implementation, and 90% of my player base leaving for the greener pastures of non-persistant gaming). So I'd quickly make RMT against my terms of service, slap "Intended fo Entertainment Purposes Only" on the box and splash screen, claim that NOTHING in the game has real-world value, and let the IRS worry about hunting down the violators.

Problem solved for the game, and problem solved for most players. The only ones who are now out-of-luck are the guys profiting from RMT, and the tax agencies. From the perspective of the tax agencies, that would be killing the goose that lays the golden eggs.

Either way, the players win.

Labels: Mainstream Games, Politics

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