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.

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.

Vic

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.

Doctrinally, difficult questions of virtual property arise that affect the tax analysis, since what constitutes property for federal income tax purposes depends on state law rights. My colleague Joshua Fairfield and others have been arguing that players own the virtual items they possess in WoW and other virtual worlds. Games’ governing agreements often say otherwise (as WoW’s Terms of Use does in paragraph 8). I argue in my Taxing Virtual Worlds paper that if players do not own virtual property but have a mere license to use it, than exchanging virtual items within the game is not a realization (just as swapping the use of one chair on a cruise for the use of another would not be). But if players win the virtual property battle, exchanges within a game look like realization events. In that case, I think a non-recognition provision should be enacted, so that players don’t owe tax on their entertainment. Those playing WoW for commercial purposes wouldn’t escape taxation because they will owe tax once they cash out. That would allow some (probably minimal) deferral for those profit-oriented players, but, on balance, I think that result would be a lot better than taxing every player on their in-game trades.

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.

We've all lost our minds.

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.

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.

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...

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.

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!

Not having gone to the right prep schools, not belonging to the proper brie and white wine social groups, and not having sufficiently absorbed post-modernist Baudrillardian virtual world analysis, I take the simple man's approach. That is, it is CRAZY to tax virtual realized gains in games unless such gains are realized and recognized for tax purposes in the real economy (there I go with the simple-minded approach of assuming that there is a real economy). If this approach doesn't satisfy the enlightened ones in society, I have a suggestion that those enamored of the recently departed Jean Baudrillard might appreciate, namely, that a virtual tax might be imposed by a virtual government. But please leave the real wallets of the game players alone!

I think we're all thinking too much here. From the high class virtual conference to the hard won sword, there's an easy answer: when your efforts bring in hard currency usable in the real world, it's taxable. Till then, it's part of the game. The best analogy is the casino: I don't have to catalog what I won and lost on every hand for income tax purposes. Rather, I have income if, at the end of the night, I get more for my chips than I paid for the chips I started with.

If a college student spends hours to win a sword that he sells, he pays tax on his labor. If I buy that sword and resell it for a few dollars more, I pay taxes on my gain. I suppose you could argue about whether you should pay as though it were interest income, earned income or capital gains. My recommendation, from a pragmatic point of view, would be to tax money taken out of the internet gaming world the same way gambling winnings are taxed, and to see how long it takes people to find a way to use these things to manipulate their taxes. At which point we'll be reminded that the really foolish bit isn't the debate about how to tax this online stuff, but about how we already tax stuff in the offline world.

I'm inclined to agree with you, GeoffB, but let's look at your Casino analogy, and extend it further.

Let's imagine that someone chooses not to cash in their casino chips, but asks the casino to store them in a safe for him for his return. He has this stash of chips that he uses to gamble, and nothing more or less. The casino gets a great idea of letting people us their chips to do other things, such as enjoy entertaining shows or "purchase" time at nicer, cozier tables. Is that taxable?

What if I use the chips, which aren't currency, to buy a drink. Is that taxable? What if a friend, who is gambling, offers to give me his car in exchange for my huge volume of chips?

Some of those are probably pretty clear: if I'm buying a car with chips, that's probably taxable. The drink is a little more questionable, the show less so, and simply the priveledge of sitting at the cushiest table maybe not taxable at all.

And yet, this is all quite similar to what we see in Second Life. I create a virtual item (and, as I understand Second Life, I don't do so by pushing some buttons and getting an item designed by Second Life developers, but rather, I CODE this item. I actually CREATE it), and then I offer it to someone for in-game currency. Is that taxable? No real currency was used, and yet, a real service, a real item, was purchased (at least as real as Microsoft Windows: both are code).

If you argue that taxation should only be involved when real dollars are involved, you allow a "work around." Our virtual conference room designer can ask for, instead of dollars, "digital favors," where these business men give her stock tips and do other things that might help her make real money, without actually giving her money. Or they might give her access to server time, or access to a ton of code.

I can think of any number of ways to make a profit off of virtual items that don't actually involve real money. There's someone on Second Life who is staggeringly powerful, and I'm quite certain she can turn that influence into real-world benefits, and not a penny of that wealth can be touched by the government.

I'm not arguing in favor of taxing virtual economies (You begin to raise lots of questions, like the Monopoly money issue. I run lots of table-top games, where I often give away "experience for pizza." If you can tax a video game object, can you tax my experience for pizza exchanges? That seems kinda daft), but rather, I think it's more complicated that alot of people realize, but I totally agree with your final point: taxation codes are strange.

Thanks for all of the comments on my post. To be clear, I am arguing that transactions within games like WoW should not be subject to federal income tax. I agree with the posts saying that gains from WoW are not realized until they are converted into some “real world” item, such as cash. I don’t think there is much controversy over the notion that if virtual items are traded in the real market, the gains are subject to tax. That’s true whether or not the items actually belong to the game’s owner instead of the player (sales of stolen items, for example, are still subject to federal income tax).

The question of whether trades within WoW are taxable the way real-world barter is can’t be dismissed merely because of the intangible nature of WoW items. Many intangibles (such as copyrights) are recognized as property by the law. However, this is not to say that everything is subject to federal income tax. “Imputed income” is not taxable under the federal income tax. Neither are transfers that constitute “gifts” for federal income tax purposes. If my husband does my laundry for me, for example, I don’t have income subject to federal income tax.

If there were a real market in Monopoly properties—say an ordinary “Get Out of Jail Free” card would sell for $100 on eBay and Boardwalk would sell for $500—tax questions would arise when a player received the “Get Out of Jail Free” card as a result of time invested playing the game, or swapped a few other properties acquired through investment of time for the Boardwalk card worth $500. Obviously, that’s not the case, and those kind of events within a game of Monopoly don’t bear federal income tax.

By contrast, WoW and other MMORPGs raise tax issues because of the significant real-world value the market puts on a variety of items received as drops or exchanged in trades. I agree that players don’t run into a tax problem if they don’t actually own the items they’re trading in the game; they would not actually be disposing of property. But the virtual property fight hasn’t been resolved yet, and there are many contexts in which players will want to have property rights in their virtual items. So, I think we need to think about how the tax law should treat players if they actually own virtual property. If players swap virtual items they own for other virtual items they own, that looks like barter, notwithstanding the intangible nature of the items. Nonetheless, my view (which is developed a lot more in my paper) is that the better result as a matter of policy is not to subject drops and in-game trades to federal income tax.

Leandra Lederman wrote the following:

"So, I think we need to think about how the tax law should treat players if they actually own virtual property. If players swap virtual items they own for other virtual items they own, that looks like barter, notwithstanding the intangible nature of the items. Nonetheless, my view (which is developed a lot more in my paper) is that the better result as a matter of policy is not to subject drops and in-game trades to federal income tax."

The "ownership" appears to be more of an emotional nature than an intangible property right which the current federal income tax law would subject to tax on a "real world" realization and recognition event. I know it may be argued that by contrasting the gain in these game exchanges with "real world," I am open to the comment that I am using "real world" as a slogan without setting forth parameters for defining it. Yet, the common sense notion of "real world" here would seem to resolve substantially all of the cases. In a very basic sense, these kind of exchanges occur all the time, even if not on the game board. The dance of friendship may include emotional exchanges such as introducing each other to one's friends and family. Although we may not often think of it in this way, we build up emotional capital by the way we act toward people which we sometimes "exchange" for emotional and perhaps even financial support later on. These transactions would't be a federal income tax realization or recognition event (although the financial support if large enough might trigger a gift tax or at least a gift tax return filing requirement).

Perhaps when the day comes that our primary sustenance is from virtual activities as opposed to real food (including the food of nutrition, the food of "hands-on" work and the food of face to face (or at least voice to voice) human interaction), we will no longer really be human in any meaningful sense and the federal income tax will be a relic of a lost age of human innocence.

You all need to go outside and play. Now.

I agree with the conclusion that taxes should only be applied when the virtual property is exchanged for virutal money. However, I think the reason for doing so can be justified without going into the regressive nature of the tax.

Most players (like me) spent time in virtual worlds as a hobby or recreation, and not for profit. Likewise most people who paint, sculpt, build model railroads, etc. do so for recreation, and not to make money. They do not pay taxes on their creations, even if they spend thousands of hours of "labor" to creat them.

Those people who do paint, sculpt, etc. as a business pay taxes on what they sell. They do not (as far as I know) pay taxes on the creations that no one buys.

Similarly, I think that the hobbiest/recreational gamer should not be taxed on their vitual creations *unless* those virtual creations are exchanged for real-world currency, goods, or services.

WHY is everyone making this so hard? Obviously, you file a virtual return and write a virtual check to cover your virtual taxes. The IRS should proceed cautiously, however. People might begin to realize that the "money" they use in the non-virtual world bears a striking resemblance to the "money" they use in their "second", maybe it should be third? life.

Doug: Shhhh... Money is NOT like Tinkerbell. Money is a real thing with inherent value. It is not an illusion given life by mass belief (hysteria).

For everyone else: Why does this matter? Would it be so absolutely horrid if transactions take place that are not taxed? Must EVERYTHING be taxed? God forbid something slips through the cracks.

If I sell my obsolete CD collection do I have to pay income tax on that? Can I write off the capital loss (for were they not an "investment" on which I have lost money)? This is all very silly. No one will follow the rules, whatever they may end up being.

This is why cash will never be replaced by "plastic" or electronic payments - cash can be easily hidden from the TaxMan.

Don't people realize that these are video games? It's not real. If someone does something in WoW and makes real life money as a result, then that is against the terms of service anyways. Who cares what they do when they are playing a video game?

"We've all lost our minds."

You're right John, people play these games for enjoyment, to escape the world of Taxation and negativity of Corporate America. People who propose nonsensical ideas on taxation with games need to watch their boundaries. It's bad enough they tax for VAT and extra fees to those who play MMO games in Europe, I feel bad for them. I understand Internet taxation but here in the US it defeats the purpose of Free Enterprise.
The last thing I want to do after coming home from a day of work somewhere, is to worry about what I'm getting taxed on in the game I love to play so dearly.

Might as well just start taxing on breathing or how many times our heart beats.

Yes in WoW, real currency is made but it's an offense against Terms of Service. And that usually results in an account ban, why would you want to tax on something that can get taken away from Blizzard or any other MMO Company just by terms of service?
Especially since most of our taxes has been going to fund a war that people aren't too happy about.
I also feel that it's offensive to suggest such ideas to the Blizzard Team who worked hard on their game for others to enjoy. These people are artists and they spend alot of time making the game feel immersed. They play the game too!

These online transactions are considered under the table money, anyways. Such as a contractor who couldn't make his deadline in time, subcontracts help outside of his circle. It happens all the time.

Age Market for MMOs is of all ages, even 4 year olds play, so would we be taxing a 4 year old on that rare drop? They don't even know how income tax works.

All in all I think the selling of virtual items should be made illegal. The punishment should be a slap on the wrist though, just pay some fees. Maybe the law could be written in a way to permit the I.P. Owners of the game to permit the sale of Virtual Items, which could be closely monitored and taxed.

The buying and selling of ingame items ruins the gameplay. I find people in the game who you can tell just bought their character, and guess what happens? They wipe the group because they don't know how to play.

To answer mrsizers question, there is a reason why "EVERYTHING" must be taxed - it has to do with allocation of resources. If certain industries (such as virtual businesses, for example) are not taxed, it may become more profitable or at least more desirable for some people to start up virtual businesses instead of real ones - there will be less available resources allocated to things people really need. Of course, I can't see this happening on a massive scale any time in the near future, but as the virtual industry grows it may eventually reach proportions where it causes a bit of a problem.

Also, it's easier if we try to establish firm taxation laws from the beginning, rather than waiting until there are thousands of successful businesses that stand to lose a great deal once we start to tax them - I can only imagine the legal problems that would arise then.

To answer mrsizers question, there is a reason why "EVERYTHING" must be taxed - it has to do with allocation of resources. If certain industries (such as virtual businesses, for example) are not taxed, it may become more profitable or at least more desirable for some people to start up virtual businesses instead of real ones - there will be less available resources allocated to things people really need. Of course, I can't see this happening on a massive scale any time in the near future, but as the virtual industry grows it may eventually reach proportions where it causes a bit of a problem.

Also, it's easier if we try to establish firm taxation laws from the beginning, rather than waiting until there are thousands of successful businesses that stand to lose a great deal once we start to tax them - I can only imagine the legal problems that would arise then.

I get it. This is a late April Fools Day joke. Ha ha ha.

In the case of WoW this is a null issue. Blizzard entertainment owns EVERYTHING. Players are simply paying to, in a sense, rent their character. All virtual content is (according to the TOS) owned in full by Blizzard and because of this no actual transactions are taking place within the virtual world. You are simply shuffling content around among several characters that blizzard ownes. Its just like a landlord swapping two doors in an apartment building. It may seem like a barter, but no transaction actually took place.

How can you possibly justify taxing a line of data inside an database? A line of data the user does not Own, has no legal rights to in any fashion.

In the case of World of Warcraft, if you sell an item or 'gold' inside the game, you have just violated their Terms of Use you agree to when you play. Blizzard makes it very clear, you do not own anything in the game. Anything in the game belongs to them, if you use it for monetary gain, you are banned from their service.

The only way I can see legaly taxing anything related to this, would be in taxing companies who run a business selling 'virtual' items for real world money. Which is justified, they run a business which earns money. But trying to tax for virtual items which the user has no ownership of, and can be removed at will by Blizzard (for example)... I do not know how describe it thoroughly outside of saying, completely idiotic.

I leave this question to Leandra Lederman:
How can you justify wanting to tax virtual items that the users of the service have no rights to (such as ownership)? And if caught selling for real world monetary gain, be banned from the service?

Companies who sell virtual items for real world money are taxable, as they are a physical entity earning tangible income. But a game with the users having no ownership at all of what they 'gain' is not.

Side note, nearly all companies who practice this selling of 'virtual to real' items are outside the US, good luck taxing them.

I think the real issue I see here is the EULA that any game imposes on its players. If the EULA allows for real world trades on site such as Ebay then I think taxing is appropriate. However, the EULA on World of Warcraft strictly forbids the selling of in-game material of any kind in a real world market. This does actually happen, but it is a breach of the EULA when it does. Since the EULA forbids the activity then we can't tax what amounts to a breach of contract can we?

"In the case of WoW this is a null issue. Blizzard entertainment owns EVERYTHING. Players are simply paying to, in a sense, rent their character. All virtual content is (according to the TOS) owned in full by Blizzard and because of this no actual transactions are taking place within the virtual world. You are simply shuffling content around among several characters that blizzard ownes. Its just like a landlord swapping two doors in an apartment building. It may seem like a barter, but no transaction actually took place."

That's pretty much it, dead on. In addition, how much of this paper was based on the Slashdot article and Wall Street Journal article from a few weeks back? This topic is hardly new, notable, or original.

As someone who does not even play this game...I am astonished that our government has nothing better to do then actually debate taxing a video game...WOW! (and not the acronym, but actually, wow)! I fear for this world...

Have we already forgiven Pelosi for illegitimate peace treaties, not to mention emminate attacks?

Where is the WOW, I want to move…will I still get a write off if I am over 250 miles and move for employment purposes? I can totally capitalize on this online realm, damn, should have joined this game…don’t think I have any gold!

Such tax would be unenforceable:

The T&Cs of WoW are that all rights to in-game items belong to Blizzard. To sell in the real world is against the EULA and T&Cs.

So: someone sells an item for real money. The tax authorities if they detect the sale, have a legal obligation to report this to Blizzard because it is a theft (sale of anothers goods without their permission).

Blizzard can either: sue for the proceeds of sale and then pay the tax on the sale, or delete the item in-game (as is their choice)leaving the purchaser to sue the seller for return of their money.

Which option do you think Blizzard will opt for?

So if in-game transactions (your sword for my cloak) are taxed, or out of game transactions (your character for my $200) are taxed, what about all of those wonderful countries that provide internet access that *aren't* the United States? Do only american players get taxed? Are we going to start forcing game developers to scan IP addresses as they connect to servers to see how much the tax applies to them? What gives the IRS the right to decide what's taxed in a global environment like the internet? What about the people gaining "loot" just because they *want to play the damn game* and aren't trying to make a buck selling their character? What happens when a US citizen sells his character to someone in another country, or plays on a european server? There's only one word for even thinking about this: Ridiculous. The IRS needs to keep it's green eye off my video games, sorry. It's NOT REAL, nor is it US currency backed by the federal reserve, they don't own it, it's just pixels and a variable stored on some private server. They have no right to be taxing me for it. If they did this with games like WoW and EQ, if I wrote a small online game where you could level/get loot and only played it with my friends, they would have the same rights to tax me for all of my ingame trades because of the *potential* that I could possibly sell it to someone for a profit. Are they going to start taxing us for yard sales and flea markets too?

Thank you for the comments. Again, to be clear, I do not suggest that trades within WoW (such as sword for cloak or sword for gold) be taxed. There is an argument that could be made that such trades resemble taxable barter, but I don’t think that is the winning argument if players are not treated by law as owning virtual property. Even if they were to be treated as owning virtual property, I still think the right result is not to tax trades within WoW, as my paper discusses.

But certainly if U.S. taxpayers sell WoW items in the real market (in violation of the EULA and Terms of Use), they owe tax on their profits. Existing federal income tax law already taxes profits from sales at garage sales, on eBay, etc. (Of course, many sales made at garage sales and such are not actually at a profit, so they do not result in federal income tax liability.) Again, my analysis applies to U.S. taxpayers, not to players in other countries who are not liable for U.S. taxes.

Even though the sale of WoW items is forbidden by Blizzard and banned by eBay, it still happens, and it still has tax consequences. Even sales of stolen property and contraband result in federal income tax liability, even though the seller could be criminally prosecuted and have the items seized. Otherwise, criminal activity would be favored by the tax system over legitimate businesses, which would not be good policy. Of course, it is very hard for the government to actually collect the taxes due on most illegal activity, but that does not mean that the tax law does not apply to it.

We were wondering the same thing?