Taxation Of Virtual Games 'Inevitable'

Dan Miller, a senior economist with the Congress' Joint Economic Committee, says that taxation of income provided from virtual worlds such as Second Life and World of Warcraft is on the way.

"Given growth rates of 10 to 15 percent a month, the question is when, not if, Congress and IRS start paying attention to these issues," said Miller at a panel discussing legal, social and economic issues in virtual worlds. "So it is incumbent on us to set the terms and the debate so we have a shaped tax policy toward virtual worlds and virtual economies in a favorable way."

The real money players earn selling virtual content is growing rapidly, with Second Life players earning millions in assets and cash. Miller claims that congress is not out to gouge virtual entrepreneurs, but they do want a piece of the pie.

"The Joint Economic Committee is not seeking to impose a new tax on virtual economies," Miller said. "We have a very clear record of supporting lower taxes in free market."

In order for congress to tax anything, tax liability would need to be determined. In other words, it would be necessary to figure out how much profit is derived from a transaction. Just how much is raiding that dungeon five times a week worth?

Miller and the Joint Economic Committee will be producing a report early next year that will address taxes, cybercrime, education and how these virtual worlds may be used in the future. Ultimately, the report needs to identify what a "taxable event" in a virtual world is.

Closing out the panel, Miller warned that, "Congressional and IRS interest in this issue is simply a matter of time."

Source: C|Net

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This sounds like taxing people for winning a poker hand before you even cash out. I really don't think they grasp the concept of this at all. Would they want to tax you for trading an item that was worth 15 gold even if you never received real cash for it? Just sounds silly. Like we really need anymore tax laws on the book. If people make an income selling things inside a game they report their income and get taxed like everyone else. The place for them to track is eBay not in a game.

My question is in a very different realm: Where is the money made? If I (in the U.S.) play a Korean game, on a European server, is the virtual cash taxable in the US? Korea? the European country the server is in? And is it still taxable if I play WoW, which has a clause in the EULA that says that nothing in the game has any value (Second Life has no such clause).

To make my point in a bit more archaic way, you know all those game tokens that arcades give you, the ones that have printed on them "no cash value". If I were to recieve a gift of a million of them, is that a quarter million in income?

Any tax lawyers out there?

ZacQuickSilver:
To make my point in a bit more archaic way, you know all those game tokens that arcades give you, the ones that have printed on them "no cash value". If I were to recieve a gift of a million of them, is that a quarter million in income?

Any tax lawyers out there?

Those are taxed at the point of purchase. They have "no cash value" but are purchased with a cash transaction, and are therefore subject to sales taxes.

The questions you raise are exactly the right questions, however. More precisely, if property in a virtual realm is purchased, where did the money change hands, and where does the property actually reside? Who's sales, and/or property taxes do the buyer and seller pay, in other words.

At this year's AGC, virtual taxation came up a number of times. Second Life's Cory Ondrejka was perhaps more vociferous on the subject than anyone else. The developers know it's coming and have for some time.

Its good that developers have a handle on this, at least to some degree. That way they can play a hand in shaping the way taxation of virtual items will be performed, rather than being forced to implement systems that would no doubt be full of holes.

Personally, I have no interest in buying or selling virtual items for real world money. As long as I can play a game without x% of my virtual loot going missing everytime I go to the virtual shop, then I'll be satisfied.

Well, even just inside the US, they'd have to figure out a way to tax regular online sales first. That would require some pretty severe alterations to sales tax laws, since the transactions would be taking place across state lines.

This can be taken further:
If I buy SL items and furniture to improve a house, which I then sell... would these be elegible for tax returns?

What about insurance for all this virtual property? A crashed server can cause srious problems for someone making his money from selling virtual property.

sharp_as_a_cork:
What about insurance for all this virtual property? A crashed server can cause srious problems for someone making his money from selling virtual property.

This exactly the number one problem, IMO, with virtual property. These guys aren't just creating worlds, they're creating governments.