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The Virtual Taxman Cometh?

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The other chainmail shoe finally dropped. After years of wondering when this moment would come, the United States government has officially turned its giant head toward the cottage industry of “real money trading”, the exchange of virtual goods and services in online worlds like World of Warcraft and Second Life for real cash.

News of this was first reported over the weekend by Reuters’ Adam Pasick– who is also, appropriately enough, chief of Reuters’ new bureau in Second Life— and it quickly spread through the MMO/gaming blogosphere. After all, gamers and game academics have long been waiting for this moment to happen, when the government finally realized that thousands of people were making some or all of their real life living from the buying and selling of virtual currency, “power-leveled” characters, and other goods and services that make life in an alternate online world worth living.

“Right now we’re at the preliminary stages of looking at the issue and what kind of public policy questions virtual economies raise — taxes, barter exchanges, property and wealth,” Dan Miller, the senior economist for the House of Represenatives’ Joint Economic Committee told Reuters. This is quite a leap in sophistication for a government official; only a year ago, technology journalist Julian Dibbell visited his local IRS office to ask them how he should pay taxes on the money he’d made on eBay selling magic items from Ultima Online, only to have the flummoxed tax man respond with, “That’s so weird.”

But now, the House’s top economic expert is speculating that “the law has fallen (behind) because you can have a virtual asset and virtual capital gains, but there’s no mechanism by which you’re taxed on this stuff”, and that’s no abstract concern to, say, the several thousand Second Life residents who make $20,000 or more annually by selling virtual goods and services for the in-world currency of Linden Dollars, which they trade on the open market for US$. (Especially since many of them make that through Second Life casinos and betting games, which the government could conceivably see as an end-run around the recent law against Internet-based gambling.)

Are their tax-free days about to end?
Enter Rep. Jim Saxton (R-NJ) to the rescue. In a follow-up posted Wednesday, Reuters notes that the chairman of the Joint Economic Committee has declared that “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” [emph. mine.], and went so far to publish a press release on the House of Representatives’ site, “Virtual Economies Need Clarification, Not More Taxes“.

Maybe Rep. Saxton is just pandering to the all-powerful gold farming lobby during an election season, but even the initial report left ample hints that there wasn’t too much to worry about, any time soon. Reading between the lines, I tend to suspect House economist Dan Miller is secretly a hardcore gamer (“[he] became interested in the issue when he began exploring some of the virtual worlds in his free time”), and understandably wants to incorporate his off-hours fun with his otherwise dry occupation. Most other staffers, he admits, “have trouble wrapping their head around [the topic]”. So given the glacial pace of democratic deliberation, I’d wait a few years before itemizing your Elvish armor inventory in Turbo Tax.

11 Responses to “The Virtual Taxman Cometh?”

  1. 2 things come to mind as I read this:

    1) If all gains would have to be reported, it sounds like every game/world developer would need to 1099 every subscriber annually with a statement of virtual earnings. Game companies would become almost as highly regulated as banks.

    2) The more fun question is: if my WoW avatar is a thief, would I need to report my stolen (virtual) goods to the IRS? How would I schedule that on my tax return?

    Jay Parkhill

  2. “the real issue that will impact them medium term, I believe, is possible money laundering.”

    I have this image of Tony Soprano and Osama Bin Laden sitting down to a game of World of Warcraft…

  3. Jesse Kopelman

    Russ, you are right that this covered by existing rules, but the real issue is enforcement. The IRS doesn’t want to have to check on individuals, but see an easoer target in people running the worlds in which the virtual economies exist — force 2nd Life and others like eBay to help them keep track of real money changing hands. Clearly this is very complex (but something completely electronic systems are good at) and without the “moral imperative” of gambling, sex, or drugs, I don’t see the government having the will to make any serious plays any time soon. Now if the people warning of online gaming adiction start gaining political ground . . . watch out!

  4. It seems to me that if you are involved in an activity be it a hobby or small business. If you make money doing it the IRS has rules about declaring that income. We don’t need additional regulation or taxes handle this issue. Once again congress is wasting it’s time on issues that are already handled by existing regulation and laws.