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Pepperdine University School of Law

Monday, December 4, 2006

Taxation of Virtual Assets in Online Gaming Is "Inevitable"

New York Law School hosted the fourth annual State of Play/Terra Nova Symposium on Friday and Saturday.  Here is the description of the Tax and Finance panel from the program:

When the history of taxation of virtual assets is finally told, the blame will almost certainly fall on Julian Dibbell. He may have been joking when he wrote about trying to get the IRS interested in the tax status of his Ultima Online assets, but look who’s laughing now? The Joint Economic Committee of the U.S. Congress is examining the question, the Australian Tax Office thinks that these assets are taxable, and various people are asking, “Why shouldn’t we think of virtual assets in the way that we think about other financially-valuable assets?” This panel will venture into the uncharted terrain: the taxation of virtual assets, money-laundering using virtual worlds, and the myriad financial implications of virtual assets. There are no maps for these territories but this should not deter us.

Tax Profs on the panel were:

  • Bryan Camp (Texas Tech)
  • William LaPiana (New York Law School)
  • Ann Thomas (New York Law School)

CNET News reports on the panel in IRS Taxation of Online Game Virtual Assets Inevitable, by Daniel Terdiman:

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....

"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," said Dan Miller, a senior economist with the Congress' Joint Economic Committee, who is also a fan of virtual worlds. "So it is incumbent on us to set the terms and the debate so we have a shaped tax policy toward virtual worlds and virtual economies in a favorable way."....

Prior TaxProf Blog coverage:

https://taxprof.typepad.com/taxprof_blog/2006/12/taxation_of_vir.html

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Comments

If you think this can happen you are an idiot, like the listed professors and the person writing this article.

Players do not "own" their virtual currency in an online game. The game developer owns anything and everything in the game as outlined in their End User License Agreements.

Since you don't own the virtual currency, it cannot be considered an Asset.

Posted by: zatx | Dec 5, 2006 7:17:53 AM

i think this is more likely in an instance where virtual assets can be converted into actualized gains.

Posted by: OMGbearisdriving | Dec 5, 2006 8:58:10 AM

Obviously you have not ready the EULA for Second Life, You own the intellectual property rights (IP) of everything you make, including your Toon(avatar) and can convert Lindon(in game currency) to cash or buy Lindon with cash. But in all reality, you should only pay taxes on the "GAINS". So if you never make more than you put in, via subscription fees then you have no gain. But they could tax you based on you "net worth" in the game. ie. Amount of goods and lindon, liquidated into real currency. There would also be the implication of sales tax for each state(in the US). But unless you are a super player, you would nevver really hit a mark of "tangable" assets. So really only a few would be effected.
The real danger is in a potential 1099 filing for all players in the US. This overwhelming task would be expensive and near immpossible to track and accurately report.

Obscurous

Posted by: Obscurous | Dec 5, 2006 9:04:37 AM

Except for the fact that millions of dollars of sales a year go on involving this currency. What is the difference between 10 million dollars on the internet and 10 million dollars in real gold at your feet? Its for all intents and purposes equal - so why not apply tax law?

Posted by: jarlath | Dec 5, 2006 9:11:58 AM

While it's true that current EULA's state that all in game items and articles are the sole property of the developer, they also have the right to ammend these EULA's at any time. That point is moot.

As of now, you technically have to report the money made from the sale of these assets as non-employment income anyway. Just because the IRS can't track it at the moment doesn't mean it's not income.

While I highly doubt we'll see a day where you get taxed on selling rat tails and griffon feathers for an in game profit, I assure you there will be a crackdown on taxation the moment you convert said virtual currency into real-world currency. You're already taxable on that money. It's just a matter of enforcing it.

Posted by: Slye | Dec 5, 2006 9:18:28 AM

God...Morons, WoW, EQ and all of those MMORPG's are not like online gambling, you are not playing with real money. Let me break this down for you, It is like when you got chocolate coins for easter when you were a kid, it's not real money, therefore, it will not be taxed. I really hope this is satire...

This is why our forefathers gave us the right to bear Arms, come to Texas with this kind of crap, and we'll be shooting tax collectors left and right.

Posted by: Johnny Mac | Dec 5, 2006 9:27:02 AM

In SecondLife you actually do own the currency and the things you create you can sell them you can destroy them, you can give them away whatever you want. The EULA just says that whatever you create they can use it for advertising purposes. At least thats what it said two revisions ago, I have not read it lately as I quit playing around there. You pay rent for the land that you put your house or store or whatever on. They call it a Tier fee but in the end is rent for a virtual plot of land. You can turn around and sell that land if you want, for profit or loss. I have witnessed people sell plots of land for amounts that would add up into the hundreds of $US. SL uses a credit system that is traded like a stock market, you buy credits with $US and you can cash your credits back into $US. This fluctuates depending on how many credits are currently in the game. You can earn credits without investing any $US just by taking the time to build something someone wants, then sell it to them and cash the credits out for $US. I know of virtual stores in SL that sell virtual things, that bank near $3000 US per month.

Posted by: JustaComment | Dec 5, 2006 9:31:15 AM

It will never happen.

Posted by: TexasRainmaker | Dec 5, 2006 9:40:53 AM

You did work to create something. Someone else paid you for it with something of real value. How is that not a taxable event?

Posted by: Andrew | Dec 5, 2006 9:46:13 AM

taxing real money made by selling ingame items- fine and dandy

taxing ingame money that has not been converted to real money- stupid and unenforcible

Posted by: bct | Dec 5, 2006 9:49:54 AM

So, in the case where, under the EULA, you don't retain ownership to any virtual rights, couldn't the exchange of payment be considered a service fee? I.e. you agree to perform a service (giving them your magic sword, or whatever) and they agree to give you real money.

Posted by: Andrew | Dec 5, 2006 9:51:00 AM

It is a game. If the IRS wants to tax the game assests then we should be able to pay with game currency. Even better since we as players would have to pay taxes on in game assests we should get paid to play the game. It only makes sense. If the IRS is able to tax us on playing a game then we should be compensated for our time. I want my back pay, and on that same note if I get banned from game I should be able to collect unemployment. Also, if I don't have food, or water where can I get food stamps in the game?

Posted by: matrickx | Dec 5, 2006 10:21:07 AM

It is a game. If the IRS wants to tax the game assests then we should be able to pay with game currency. Even better since we as players would have to pay taxes on in game assests we should get paid to play the game. It only makes sense. If the IRS is able to tax us on playing a game then we should be compensated for our time. I want my back pay, and on that same note if I get banned from game I should be able to collect unemployment. Also, if I don't have food, or water where can I get food stamps in the game?

Posted by: Matrickx | Dec 5, 2006 10:23:28 AM

I've got a virtual bridge to sell you......

Posted by: Neil | Dec 5, 2006 10:28:08 AM

So, why don't the MMORPGs collect their own taxes? Shouldn't taxes on Second Life dollars go to a Virtual IRS?

Posted by: David Givens | Dec 5, 2006 10:29:42 AM

Let me get this straight. The game companies "create" the currency by way of shops run by NPC's or the Second Life weekly stipend for premium accounts. US Congress wants to recognize this currency as a taxable income. So by this logic... wouldnt the game companies be more or less printing money?

Posted by: Tony | Dec 5, 2006 10:58:44 AM

Recently in Ultima Online I killed an arctic ogre lord. I got only 1000 gp, instead of the 1200 gp that I was expecting.
I rather suspecct that the other 200 gp has been withheld for taxes. I look forward to filing a tax return to get my refund.

Posted by: emucompboy | Dec 5, 2006 11:31:18 AM

Another game example. Take EU (Entropia Universe), here, the game service provider has taken steps to ensure that, while they claim the game is free, charge you a fee for playing. I really see this as taxation in a Virtual World, so if they are taxing us, the IRS and any other country that decides to make games VR assets/profits taxable, should take their share from the revenue taken from the company based on the % of players from each country.

In EU, we pay a fee to use the auction system, regardless of whether or not the item is sold. Second, EU has implemented a TAX on that item once it's sold so now you have 2 charges on your item. The problem here is MA (Mind Ark) will charge you the SALES TAX regardless of whether or not you sell the item. If the item is sold, you will be charged a % based on how much higher you actually sold your item for. They call it a fee, I call it extortion/TAXATION without representation/ or simply just MA's way of screwing players out of more money.

Take into account the fact that the player base does not come close to owning any items in this game, everything belongs to MA (Mind Ark), and people are paying thousands of dollars, so since we are technically paying to use these items, why should we pay the IRS or anyone else taxes for that matter?

If I have property in RL (IE. A house) and I sell it, sure I can pay taxes because it's a real piece of property and will always hold value, but what about when we dont' own anything like in EU (SL you own wha tyou create so it's a diff story there). MA will not pay what you pay for any item, they have also prevented this by stating that they will only pay up to the tt value (current item value per condition at present time) completely disregading that fact taht you might have pay $10k USD for an item. If details show it's only worth 25 tt then you only get $2.50 USD's :)... amazing right!!! so yeah, the IRS will have a tough time figuring all this out, but maybe this will force games like these to hand ownder ship to players and since the moneys are held within the game, make the game provider responsible for the value of items in game not game set values... After all, it's a real economy we are talking about...

Posted by: Ji Ji | Dec 5, 2006 11:39:47 AM

When are you people going to realize that the only solution is to shoot IRS agents on sight with a throw-away gun.

They are NAZI trash deserving of death.

Some of them wear body armor, so aim for the head.

Posted by: Federal Agent | Dec 5, 2006 12:16:50 PM

I'll pay the IRS with virtual dollars! All kidding aside, why a lot of you seem fine with taxes is a testimony to just how stupid and pliant Americans have become. If you knew anything about freedom and history, you would be storming the IRS HQ in Washington and hanging the workers from light poles. I just can't believe you idiots are so comfortable being slaves to the State.

Posted by: Bill | Dec 5, 2006 12:34:19 PM

Just another Unconstitutional tax by Big Brother. Add it to the list of gov't abuses by rountinely violating our Constitutional rights.
They violate the 1st Amendment by caging demonstraters and banning books like "America Deceived" from Amazon.
They violate the 2nd Amendment by confiscating guns during Katrina.
They violate the 4th Amendment by conducting warrant-less wiretaps.
They violate the 5th and 6th Amendment by suspending habeas corpus.
They violate the 8th Amendment by torturing.
They violate the entire Constitution by starting 2 illegal wars based on lies and on behalf of a foriegn gov't.
Taxes are just another addition to this long (and incomplete) list.
Final link (before Google Books caves to pressure and drops the title):
America Deceived (book)

Posted by: 5th of November | Dec 5, 2006 1:24:00 PM

Thanks 'Federal Agent'...couldn't help but think of the same thing. How is trading your labor for equal value of something else taxable? Are you all slaves??

Posted by: Michael | Dec 5, 2006 1:31:56 PM

Simply put, I have no problem as a United States Citizen with paying taxes on money I earn. It's part of the deal, it always has been, and taxpayers receive benifits of their efforts. However, virtual assets cannot be reasonably assessed for value until they are sold. This is the kind of pandora's box that even a group as idiotic as the IRS is probably smart enough to leave closed. If I'm charged a tax for the value of my virtual assets, what happens if the account is canceled or if I'm cought cheating and my account is banned/canceled? can I claim a capitol loss on my taxes?

if the 35 year old guy living in his parents basement doesnt pay his taxes on his lvl 200 avatar will the IRS seize his character to sell on ebay?

this whole discussion is preposterous. which is why I'm terrified that it will happen.

~r

Posted by: Ryan | Dec 5, 2006 1:35:25 PM

Where is the standard to determine online currency in game real-life currency? Wouldn't it then have to be traded on the stock market? And since most of these games are international, wouldn't that cause a much greater ripple?

Come on in all seriousness they can have a panel or debate or whatever they want. It just won't happen.

You tax in game stuff and people stop playing the game. We already pay a fee of a certain amount to play these online games on a monthly basis ... you add more fees and soon the cost outweighs the fun. So what then happens when taxation shuts down a game or closes a business because of it?

I come from a state riddled with unnecessary taxation and I can tell you right now that if they start taxing my games, they might as well start taxing me for reading, watching TV, movies etc. Because they are obviously looking to tax intellectual property.

With that said, I will reserve my 1.50 dream and idea tax daily so I will be prepared.

Posted by: Brad | Dec 5, 2006 1:44:16 PM

It's stuff like this that makes me glad I never really not into any of those sort of games.

Posted by: Bobonymous | Dec 5, 2006 2:01:02 PM

Hey Ryan, so you don't have a problem being robbed of your earnings every month? That's amazing. No, taxation on earnings has not always been part of the deal. Americans weren't forced to pay income taxes until after 1913, the same year they created a private for-profit central bank. And we get benefits these taxes? Think about that seriously. Do you really get the equivalent benefits OUT of the government relative to the cash you give them? No, and I am hard pressed to find ANY benefits we get. Do we get universal free health care like other countries? No. Do we get free university education? No. And the benefits you DO get, they charge you fees for.

Posted by: Chris | Dec 5, 2006 2:57:45 PM

if this happened, i would move to another country =) k thx

Posted by: David | Dec 5, 2006 3:53:20 PM

WHAT?

Posted by: bob | Dec 5, 2006 4:14:47 PM

This seems utterly ridiculous, as numerous people have stated, the in-game assets (aside from being owned entirely by the developer, in the case of WoW) have no real world value until (if)they are sold, which is expressly forbidden in most EULA's. If the IRS wants to tax me on the virtual gold I earn, they shoud expect to see payment in virtual gold. Also, they should expect me to claim all losses from AH buys, as well as resales that go for loss, and my repair bills on equipment/cost of items needed to farm taxed gold (potions, etc.).
I see this as equivalent to taxing a community baseball team on homeruns scored or some other nonsense. They pay their taxes on fees to use the field and supplies they buy to play, same as gamers do on monthly fees and initial purchase of product. Its a lesiure social activity, if I never sell a single virtual item for real cash, then I never incurr a taxable event.
If they can pull this off, they may as well tax pages read in books, and that could impart a virtual wealth of knowledge or any other event that takes time and incurs no tangible benefit. The only reason at all to target this is that developers can actually track growth and virtual assets in these games, so the gov't can see it is missing out on something and wants to sink its ever-greedy claws in.

Posted by: Zac | Dec 5, 2006 4:39:19 PM

Funny, I invented all this stuff well over a decade ago, and back then no one had a clue what I was trying to tell them.

Suddenly, Linden Lab is "genius" (not), and the state is pretending that it's going to have another source of revenue (when in fact the state deserves no source of revenue in the first place).

Posted by: Todd | Dec 5, 2006 5:53:47 PM

I don't even want to think about how many gold coins I've found in the Mario Brothers series. No more 1ups for me, I won't be able to afford them.

Posted by: bob | Dec 5, 2006 6:44:54 PM

Uh, wouldn't this be akin to taxing MONOPOLY MONEY, as in the board game???

Posted by: Wuf Wuf | Dec 5, 2006 10:10:40 PM

If they intend to charge a tax on virtual income that has not been converted to real world currency, then we should be able to pay the tax in virtual money.

Posted by: Noob | Dec 5, 2006 10:33:07 PM

i wonder if anyone is actually reading these comments like i have. im sure if they did, they would notice that they are all saying the same thing.

Posted by: Tony | Dec 6, 2006 6:31:10 AM

What if I use my highalch spell to convert all my assets (runescape) into gold, and then just drop the gold. Can i take a tax deduction in real dollars?

Posted by: spreadneck | Dec 6, 2006 11:27:26 AM

We pay taxes every day. We give up benifits in the real world to gamble with false lives in the virtual world. It's fantasy. If some one give his money (after tax dollars) for a vitual item
should the IRS have a cut? If you loan a dollar to a friend should they have a cut in the transation? If the friend repays you should they have a cut again? No. Why is that? You bought the computer and pay for the access and what ever fees that the game incures. The only way the should tax is if the virtual worlds is created and copyrighted by you. All real would structures and housing therein. Meaning the actual creators of the virtual world. OK. Working backwards. I heard "You Tube" sold.
The people actual made it great. Does this sale
generate a profit to every user? No. Only the "owners" of the real world structurses profited. The people who paid for the access via
computer purchase and connetivity gained free exposer and imaginiative entertainment. And that is all this is. By taxing users is like calling them shareholders which they are not. If the virtual game companies handed shares of its stock with they game then thats diffent. Untill then they need to go reverse those rich income tax breaks they allowed to happen.

Posted by: Martin | Dec 6, 2006 10:40:54 PM

brilliant,
now all games will need to do is convert their in-game economy into a barter system to avoid the whole mess. socialism rocks.

Posted by: hollywoodarsonist | Dec 12, 2006 9:21:12 AM