Death, taxes, and MMORPGs
When you play Everquest or Ultima Online and amass a small fortune in virtual chainmail and platinum pieces, you can, of course, go and sell it to another player for real-world cash. But what precisely are the tax implications of this? Have you created any value -- and if so, how much of it do you owe to the IRS? What is it: Income? Capital gains? A gift?
Julian Dibbel, one of my favorite high-tech journalists, recently decided to find out. During the 2003-2004 tax year, he made $11,000 in real-world money by winning, buying and trading virtual items in Ultima Online. Then he tried to get the IRS to tell him precisely what part of the tax code would apply to virtual-world goods -- and reported it as a story for Legal Affairs magazine. Much hilarity ensues, including this terrific exchange with John Knight, Dibbell's local IRS official in South Bend, Ind.:
"O.K., so I got a fake jewel that's worth 80 million points, gives me all kinds of invincibility," said Knight, striving doggedly to nail down what I was talking about. "But I got two of them, or don't want to play [anymore]. And I can go on eBay and sell my jewel to some other character?"
"Uh, yeah," I confirmed.
Knight considered the facts and offered a nonbinding opinion: "That's so weird."
In the end, Dibbell doesn't get a solid answer: The IRS suggests he pay a $650 fee to request a ruling on the issue, and he doesn't really want to pay that fee. But eventually someone will, and it'll make for a damn interesting ruling. With tens of millions of people now playing multiplayer games online, there's a significant amount of tax revenue potentially locked up in these games.
(Thanks to Naureen for this one!)
Posted by Clive Thompson at January 13, 2006 06:36 PM
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Well there is no exchange of goods for money. But there certainly seems to be an exchange of services for money. He invested his time, some money, and created something of value that someone else was willing to pay him for.
Is selling software or music you've written any different?
Posted by: Brock Lee at January 13, 2006 7:17 PM
Ha, I like the bit about having to report goods! I guess they needed this to get Capone.
I'm don't quite understand the theoretical problem with taxing virtual goods, though. The IRS hasn't set out what should happen, sure, but wouldn't you expect it to work pretty much like the share market? Which, on the face of it, seems like a closed system of completely virtual "goods" not dissimilar to UO.
As I understand it, in most countries, simply owning shares means nothing from the point of view of income tax (even if they increase in value). But once they're sold (i.e. transformed into real money), you may or may not realise capital gains, in which case they are taxed as profit/income. So this part should carry over into UO just fine. (And if they're not sold, but bartered for "real" goods or services, they can be taxed likewise.)
Posted by: Michael S. at January 13, 2006 11:07 PM
These are all good questions, and I'm frankly surprised that there's nothing in the tax code that wouldn't apply rather straightforwardly to the sale of virtual goods. This is probably more a comment on the fact that the IRS is overworked and overburdened and pretty out-of-it when it comes to video games. Interestingly, the legal world seems to have a much easier time grokking the idea of virtual property -- there have been a few instances now of court cases involving virtual goods, and the judges seem to have "gotten" it. But then again, legalists have a long history of treating wildly intangible, otherwise meaningless things as rock-solid items over which to spend several decades fighting, Jarndice-and-Jarndice style.
Posted by: Clive at January 14, 2006 12:33 PM
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Well there is no exchange of goods for money. But there certainly seems to be an exchange of services for money. He invested his time, some money, and created something of value that someone else was willing to pay him for.
Is selling software or music you've written any different?
Posted by: Brock Lee![[TypeKey Profile Page]](http://www.collisiondetection.net/nav-commenters.gif)
at January 13, 2006 7:17 PM
Ha, I like the bit about having to report goods! I guess they needed this to get Capone.
I'm don't quite understand the theoretical problem with taxing virtual goods, though. The IRS hasn't set out what should happen, sure, but wouldn't you expect it to work pretty much like the share market? Which, on the face of it, seems like a closed system of completely virtual "goods" not dissimilar to UO.
As I understand it, in most countries, simply owning shares means nothing from the point of view of income tax (even if they increase in value). But once they're sold (i.e. transformed into real money), you may or may not realise capital gains, in which case they are taxed as profit/income. So this part should carry over into UO just fine. (And if they're not sold, but bartered for "real" goods or services, they can be taxed likewise.)
Posted by: Michael S.![[TypeKey Profile Page]](http://www.collisiondetection.net/nav-commenters.gif)
at January 13, 2006 11:07 PM
These are all good questions, and I'm frankly surprised that there's nothing in the tax code that wouldn't apply rather straightforwardly to the sale of virtual goods. This is probably more a comment on the fact that the IRS is overworked and overburdened and pretty out-of-it when it comes to video games. Interestingly, the legal world seems to have a much easier time grokking the idea of virtual property -- there have been a few instances now of court cases involving virtual goods, and the judges seem to have "gotten" it. But then again, legalists have a long history of treating wildly intangible, otherwise meaningless things as rock-solid items over which to spend several decades fighting, Jarndice-and-Jarndice style.
Posted by: Clive![[TypeKey Profile Page]](http://www.collisiondetection.net/nav-commenters.gif)
at January 14, 2006 12:33 PM