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October 19, 2006
JEC Warns IRS: Do Not Tax Virtual Economies
Joint Economic Committee Chair Jim Saxton has issued a press release warning the IRS to not tax participants in on-line games: Virtual Economies Need Clarification, Not More Taxes:
“There is a concern that the IRS might step forward with regulations that start taxing transactions that occur within virtual economies. This, I believe, would be a mistake,” Chairman Jim Saxton said today. In response to this concern, the staff of the Joint Economic Committee has begun an examination of the public policy issues related to virtual economies. A virtual economy is defined as the universe of transactions that occur within an online community, such as Second Life or World of Warcraft. These transactions include the sale of goods and services and take place entirely within virtual economies; there is no real-world or physical exchange. However, a real-world value can often be assigned to such transactions using exchange rates or other methods.
Based on existing law, if an individual generates cash income in U.S. dollars from transactions in virtual economies, the question may arise whether a tax is due on that real-world income. However, if the transaction takes place entirely within a virtual economy, then it seems there is no taxable event. Such distinctions should be addressed and resolved in a common-sense manner. Clearly, virtual economies represent an area where technology has outpaced the law. The goal of the forthcoming JEC study is to help lawmakers understand the issues involved and head off any premature attempt to impose a tax on virtual economies.
For prior TaxProf Blog coverage, see:
- Bankman: On-Line Gamers Not Taxable Until They Sell Virtual Assets in the Real World (1/18/06)
- Can the IRS Tax Virtual Profits in On-Line Gaming? (1/10/06)
- Virtual Games, Real Taxes (6/1/05)
- Virtual Taxes: The Next Frontier in Virtual Property Rights in On-Line Gaming? (12/6/04)
For press coverage, see:
- Motley Fool: IRS to Tax Your Second Life?
- New York Times: A Virtual World, but Real Money
- Reuters: Lawmaker Opposes Taxing Online Virtual Economies
- San Francisco Chronicle: Second Life and Taxes
- Washington Post: Virtual Economies Attract Real-World Tax Attention
October 19, 2006 in Congressional News | Permalink
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» http://instapundit.com/archives/033360.php from Instapundit.com
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Comments
As someone who is not just a player in Second Life, but also a virtual land owner and beginning virtual entrepreneur, I welcome this recommendation from the JEC and hope lawmakers will give careful attention to it. As stated above, there already exists sufficient means and tax law to ensure colelction of REAL taxable income in the form of REAL currency. No need to overcomplicate matters in this new realm of virtual interaction with more bureaucracy and governmental interference.
Posted by: Rick Jenkins | Oct 19, 2006 11:06:53 AM
As someone who is not just a player in Second Life, but also a virtual land owner and beginning virtual entrepreneur, I welcome this recommendation from the JEC and hope lawmakers will give careful attention to it. As stated above, there already exists sufficient means and tax law to ensure colelction of REAL taxable income in the form of REAL currency. No need to overcomplicate matters in this new realm of virtual interaction with more bureaucracy and governmental interference.
Posted by: The Mad Builder of Periwinkle | Oct 19, 2006 11:17:28 AM
It seems obvious that the virtual income should only be taxed if and when it become real income. If someone sells virtual gold pieces for dollars, he has a real income in real dollars, which could be taxed. Otherwise it's all play money. It would be like withholding tax from the $200 you get for passing Go in Monopoly.
I don't see how this is even really a matter of debate. It makes no sense to tax fictional things.
Posted by: Bruce | Oct 19, 2006 11:30:49 AM
Just pay the tax in virtual dollars.
Posted by: tpaine | Oct 19, 2006 12:20:04 PM
Holy Cow! If this press release came out on April 1, would anyone think it was for real?
Tax it when becomes real income. Otherwise, you'll have to treat it like any other business, including crop subsidies for gold farmers.
Posted by: Bill | Oct 19, 2006 12:53:58 PM
It just highlights the stupidity of taxing income or %age slavery as it's more accuratly described.
Posted by: AnticitizenOne | Oct 19, 2006 3:28:57 PM
Just exchange your dollars for Quatloos, then ask the IRS to convert 'em back when they receive 'em in payment.
Posted by: TombZ | Oct 19, 2006 3:41:42 PM
I'm definitely no expert on these games, but I'm not sure that the items in a virtual game aren't "real."
I mean, if I write a software program, and then email it to someone else in exchange for a software program that he wrote (and which is valuable), surely I've realized "income," and the exchange would be a recognition event, absent a specific statutory exception. That I traded what amounts to a bunch of binary digits for a bunch of other binary digits would not be determinative.
Similarly, if one player trades his Gandolf sword for Smeegel's slime, and that slime has value, then the sword-for-slime exchange would be a recognition event (absent statutory exception), no?
Posted by: andy | Oct 19, 2006 4:20:14 PM
Oh, and any chance I can escape taxation on the grounds that what I get paid in amounts to nothing more than bunch of atoms (quarks?), and no one should have to pay taxes on just getting atoms.
Posted by: andy | Oct 19, 2006 4:22:05 PM
Here's an interesting discussion link.
http://volokh.com/posts/1156799663.shtml
EVE-Online has one of the purest market trading systems going, so you get real world effects and profits can be created via a vast number of strategies.
I can't seem to persuade the developers to do EU-Online, where you are massively taxed and regulated, are allowed no self-defence and the police are more motivated about Pirate/Law-abiding diversity than crime.
Posted by: AntiCitizenOne | Oct 19, 2006 7:36:28 PM
A good article on this subject:
Matthew J. Dowd, State and Local Tax Implications of Virtual Worlds, 41 State Tax Notes 225 (2006).
Posted by: joe | Nov 23, 2006 5:35:34 PM
they could use www.rpgSE.com to track how much you owe! Can you pay the IRS in WoW Gold? Will you get banned for xferring the gold to the IRS?
Posted by: Jon | Dec 13, 2006 10:54:16 PM
