Virtual Taxes

CNET has posted an interesting article discussing whether acquisition of virtual assets from a massively multiplayer game could be taxed by the IRS. Here’s some further thoughts.

The U.S. tax code provides for taxation of goods and services earned via barter. Imagine, for instance, a law firm and an accounting firm, where the law firm provides “free” legal services to the accountants in exchange for “free” accounting. The IRS would rule that each firm has income equal to the fair market value of the services received. In other words, you can’t leave cash out of the equation and barter your way to tax freedom.

So what is the potential impact for MMG gamers? Well, let’s say you receive 10,000 gold in your favorite MMG by dauntless questing. And let’s further say that, thanks to the likes of IGE, the fair market value (based on their arbitrage) of 10,000 gold is $100. Legally, the IRS could tax you as having receive $100 in income, even if you don’t actually sell the gold for $100. From the IRS’s point of view, you’ve received income — so-called imputed income.

We’d be looking at transactions occuring in violation of the game operators’ terms of service, buying and selling assets the game operators deem to be their sole property, resulting in an imputed value to the assets which could lead to everyday entertainment-oriented gamers incurring tax liability.

Now wouldn’t that just ruin immersion? “Sorry, Bob. I can’t afford to quest in that instance with you. The taxes on rares are just too steep.”

Back in 1999 my law school classmate Jake Okun wrote his thesis paper on this topic – as far as I know the first scholarly work ever done on the topic. I’m going to see if I can’t score a copy for our edification.