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?