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.

In WoW, players complete quests and raids to take an avatar from level 1 to level 70. As Professor Richard Bartle has described, these games allow ordinary people to engage in a "hero’s journey." Players buy the WoW software and pay a monthly subscription fee for access. They can earn "loot" that has value in the game when they kill computer-generated monsters (MOBs). There is an in-game currency (gold) and an in-game economy in which players can buy, sell, and trade items with each other. WoW’s Terms of Use forbids "real market" trade in game items, but it happens all the time.

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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