Thank you, Gordon, for the kind introduction, and to my Conglomerate hosts for the chance to guest blog. Gordon mentioned that one of the things I’ve been working on lately is the question of how virtual worlds should be treated by the federal income tax. For those who are unfamiliar with them, virtual worlds include such popular massive, multi-player, online role-playing games (MMORPGs) as World of Warcraft and Everquest. They also include virtual environments that aren’t as structured, such as Second Life. Today’s post will focus on World of Warcraft (WoW); I’ll discuss Second Life in a subsequent post.
Games like WoW raise income tax issues, in part because items in them, though part of a "game," have real market value. In the paper Gordon mentioned, I discuss two of the issues: the taxation of loot "drops" and the taxation of exchanges within the game, such as the exchange of a virtual sword for gold. From a policy perspective, my view is that drops and purely in-game trades should not bear income tax. One of the problems with taxing them would be the regressive nature of the tax because players who put in the most time and the least money would owe the most tax, although players who put in the most time (40-80 hours a week or more) tend not to be employed full-time (e.g., students). Players with higher incomes tend to be those putting in less time; they tend to spend money in the "real market" in lieu of hours of "grinding" to level up. Such a tax would also pose administrability issues because of its enforcement difficulties. For these reasons and others, I argue that players of games like WoW should be taxed if and when they cash out—that is, on real market trades. That approach would allow those playing for entertainment not be taxed on their game play (beyond the tax they already paid on the money spent on the game), while catching most profit-seeking activity.
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1. Posted by Eric Goldman on April 5, 2007 @ 15:39 | Permalink
Aren't physical world barters generally taxable? i.e., if I barter my legal services in exchange for my dentist's dental services, each of us are supposed to report taxable income, right? If so, why are VWs unique/special/different? Eric.
2. Posted by Vic on April 5, 2007 @ 23:35 | Permalink
Hi Leandra. Welcome to the Glom!
I'll expand a bit on Eric's question. Isn't there a real concern that on-line exchanges might start substituting for real world exchanges? This strikes me as more of a concern on Second Life, where there is real commercial activity (marketing, etc.) taking place, than on the other sites. Presumably it's inefficient for the tax code to favor doing business on-line vs. off-line.
Looking forward to your Second Life post, and to reading the paper.
3. Posted by Leandra Lederman on April 6, 2007 @ 9:19 | Permalink
Hi, and thanks for the welcome! Great questions. Vic, like you, I see an important distinction between Second Life and games like WoW. Unlike WoW and similar games, Second Life is designed to facilitate commercial activity. I agree that it would be inefficient for the tax law to favor doing business online rather than offline. Thus, I think most transactions within Second Life should be taxable. More on that soon.
With respect to WoW, there is still the question of whether a trade of one item for another within the game (such as a sword for a cloak) is barter that should be taxable, as “real world” barter is. As a policy matter, I think not, because the concerns that underlie taxing barter in the real world do not have the same force in WoW. In the real world, were barter not taxed, services and dispositions of property could escape taxation if no cash were received, which would be costly for the fisc and inefficient in that it would provide taxpayers with an incentive to avoid the receipt of cash. Failing to tax exchanges of items in WoW (or exchanges in WoW for gold) doesn’t create the same problems. Trading virtual items within WoW is part of game play, not a way to avoid cash transactions.
4. Posted by Jake on April 6, 2007 @ 20:28 | Permalink
If I follow this premise, the IRS has missed a bet for the last 70 years by not requiring that anyone who plays Monopoly, and hits Boardwalk when an opponent has a hotel there, file an information return to report the transfer of "wealth."
It certainly is true that barter is taxable. But taxing barter cannot rationally be extended to exchanges of intangible phenomena (for want of a better term) that give the parties mental satisfaction of some kind, but aren't proxies for hard currency exchanges in the real world. If such exchanges of intangible phenomena equate to taxable barter, I'd better stop kissing my wife.
5. Posted by John on April 7, 2007 @ 12:05 | Permalink
We've all lost our minds.
6. Posted by Greg on April 7, 2007 @ 12:12 | Permalink
While these are nice legal arguments, if the government were to tax transfers in virtual worlds like Second Life, then to be fair and equitable, if Linden Labs were to go bust tomorrow, all of those "virtual" assets would vanish and those with such losses should be able to write them off.
7. Posted by Thomas Stewart on April 7, 2007 @ 12:55 | Permalink
I suspect that the first legal proceeding to attempt to put a real world value on virtual assets will be in a divorce court. No legal scholars working with an eye toward setting precedent, just two parties fighting over how the 50-50 split in joint property affects their 70th level elf.
8. Posted by Avatar on April 7, 2007 @ 13:04 | Permalink
How complicated would this make my return? I mean, am I gonna file 100 pages worth of accounting on my expenditure of health potions and armor repair? Do I have to withhold FICA taxes from the gold we win? If I construct a spaceship and another player destroys it, has he committed a tort? Wow, talk about your legal nest of snakes...
9. Posted by Daniel on April 7, 2007 @ 13:13 | Permalink
I think all of this has growing importance:n First, Jake is right. Taxing a game is nonsense, and forcing computer-game companies to go through a bureaucratic mess while the IRS attempts to tax something that doesn't tangibly exist, is nonsense. Imagine the difficulties:
-If Blizzard introduces a new uber-magic sword that everyone wants, this will utterly change the economics of the game (especially if they make it extremely available). If they thereafter realize it's a problem and remove it from the game, can the people who "own" those swords, who paid taxes on those swords, sue to have them returned? Blizzard has taken the legal position that EVERYTHING in the game belongs to Blizzard. You can't tax a trade that doesn't happen. If one man is renting a car, and he lets someone else drive it, you can't tax him for gifting someone that car, because it wasn't his to begin with.
- But let's get to the illegal real-life exchanges. If you can tax someone who cashes out their uber-sword (someone got it, through alot of work, and then offers to give it to someone for real money), what if that person HACKED the system and created that sword from nothing? Is it still taxable? Or is he now considered guilty of... what, forgery? Scamming? He's "creating" goods out of thin air, just as Blizzard is... and yet, that's all all code is. Information. Intangible nothing. I, as a programmer, expect to be paid for my intangible nothings, and Microsoft gets paid quite a bit for their intangible nothings, and both are quite taxable. How does all this fit into a game like WoW?
- Imagine, in ten years, that WoW and games like it have advanced considerably, using neural interface technology (or, more conservatively, using motion-sensitive devices and sensation feed-back equipment so you can wear gloves that let you "feel" items and goggles that let you "see" the world. Don't laugh, the Wii already gives you the ability to swing a sword with a swing of your hand, and the Virtual Boy was a old-tech attempt at those goggles. This is doable, certainly in 10 years). These virtual words become a mainstay of the gaming world (already are), and people begin to use them for other things: Why not hold a business conference for people from all over the world in a nice, lush, digital lounge rather than paying huge amounts of money to fly?
If such a thing becomes the case, people may make a living out of generating beautiful places for people to explore and hang out. That luscious business lounge had to be created by someone. But it's an entirely virtual exchange. No real items passed from one person to another.
You might argue that the office was "code" and that a sword is just a bit of a game, but that bit of a game is "code" too. It's just code that ONLY works in that particular game (just like the luscious business office is code that only works in Telepresent Business Offices Suite, or whatever it gets called in 10 years).
If music code for your mp3 player is taxable, and upgrade code for your computer is taxable, why not code for a sword? But then, if you can tax someone getting a sword in WoW, you can tax someone updating their windows, even if it's for free (it's a "gift," and gifts have tax prices on them).
I think we need a whole new look at taxation to accomodate the digital world. It's going to get bigger, not smaller.
10. Posted by Jake on April 7, 2007 @ 13:44 | Permalink
If virtual wealth is to be taxed, someone should create a virtual IRS that can issue virtual notices of deficiency and slap virtual tax liens on virtual property.
Novelists, watch out!