January 17, 2006 4:00 AM PST

Are virtual assets taxable?

Journalist and "Ultima Online" junkie Julian Dibbell issued himself a very public challenge two years ago.

"On April 15, 2004, I will truthfully report to the IRS that my primary source of income is the sale of imaginary goods," Dibbell wrote on his blog at the time, "and that I earn more from it, on a monthly basis, than I have ever earned as a professional writer."

Essentially, he was telling the world he thought he could make a profit selling to other players in the real world the weapons, currency and other goods he had accumulated in the fantasy game "Ultima Online," and that he was willing to tell the IRS so. He ultimately came up short in his personal challenge, making more from his writing, in fact, than from his online trafficking.

News.context

What's new:
Some wonder whether valuable goods frequently bartered in the online game world can be deemed a taxable possession before they are sold for real-world money.

Bottom line:
Some say there's no theoretical reason the government shouldn't come calling for its fair share of valuable game assets that haven't been sold for real-world money. But observers of online games worry that the IRS doing so could be a disaster.

More stories on virtual worlds

Now, with a new article published in the latest issue of Legal Affairs magazine, Dibbell has the virtual-world community buzzing over a new question: Should online game players' assets--the weapons, characters, clothing and such--they've accumulated but not yet sold for real-world cash be taxable by the IRS?

"If you haven't misspent hours battling an Arctic Ogre Lord near an Ice Dungeon or been equally profligate spending time reading the published works of the Internal Revenue Service," Dibbell's essay begins, "you probably haven't wondered whether the United States government will someday tax your virtual winnings from games played over the Internet. The real question is: Why hasn't it happened already?"

It's a question insiders at academic conferences like State of Play that study online games have been talking about for some time.

After all, since the trafficking of virtual goods from games like "World of Warcraft," "City of Heroes" and "Star Wars Galaxies" on exchanges like eBay sets their fair market value, the millions of online game players are collectively holding tens or even hundreds of millions of dollars' worth of these digital assets at any one time. And some would say that's a target the IRS can't ignore forever, raising the tricky question of whether virtual goods that are frequently bartered and exchanged in the gaming world can be deemed a taxable possession before they are sold for real-world money.

I just don't think it would be the catastrophe that everybody imagines.
--Julian Dibbell
journalist

While most online game publishers try to sidestep the issue by saying in their terms of service that players don't control the property rights to their game assets, some say there's no theoretical reason the government shouldn't come calling for its fair share.

"From the standpoint of economic theory...there's no fundamental distinction between selling euros and buying magic wands," said Ted Castronova, an expert on virtual economies and an associate professor of telecommunications at the University of Indiana at Bloomington. "They carry value with them. If you're going to tax exchanges in the real world, you've got to tax exchanges in the virtual world, in economic theory."

The problem, said Castronova, is that it's not about economics.

"It's about common sense," he said. "Common sense says that when people are playing a game of Monopoly, you don't tax (the properties they buy and sell)."

Dibbell isn't so sure. He said that while the IRS has ruled that some forms of goods with inherent value--such as then St. Louis Cardinals star Mark McGwire's record-breaking home run ball from 1998--are not taxable assets until they are sold, that may not always be true.

"As the RMT (real money trading) markets get bigger and more normalized, how long are the tax agencies of the world going to forebear?" Dibbell asked during an interview with CNET News.com. "At a certain point, it will be less crazy-looking to everybody and therefore more palatable, and there will be more money involved."

No one knows the exact worth of the virtual assets of the millions of online game players. But with estimates for the sales of such goods going as high as $880 million a year, the unconverted assets are surely worth similar amounts. Thus, the government's share, if the government were ever to lay its claim, would be substantial.

78 comments

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The US Government at it Again
What gets me is the fact that they want to basically pre-tax the items before they are even sold. How is that even possible?

For starters, many users that play MMORPGs never sell their items from the game in the first place. And very much like the part in the article where they talked about an autograph from a celebrity but never selling it, the government has no right to tax on items where a profit was never made. What next, paying tax on your kids' construction paper art that they made because you could sell it to someone?

Secondly, as a player in WoW, I know that selling items is against the ToS so, how could that even be taxed? There is no way I could sell my items without my account being in danger.

The last part that really gets to me is how Cnet really doesnt seem to fight or take the side of the consumer and seems to instead push the idea multiple times in the article of why these items should be taxed. Maybe it's just me but, I feel like its the beginning of the end...
Posted by magman68 (1 comment )
Reply Link Flag
I wouldn't worry about it
Read the terms of use included with World of Warcraft - the player doesn't actually own any of the items associated with their character. If you owned the items on your character Blizzard would not be able to stop you from selling them on ebay so you're merely paying for access to their servers.

If such a tax is implemented Blizzard would be on the hook for paying it.
Posted by aethelworth (5 comments )
Link Flag
Careful what you wish for...
<<The last part that really gets to me is how Cnet really doesnt seem to fight or take the side of the consumer>>

And I say, thank goodness for that. I much prefer to get all the facts and opinions without the influence of author bias. Intelligent readers can come to their own conclusions.

The U.S. government is right to take a look at this issue. Some of the UO players have started businesses selling virtual items. If your business generates profits, then there is taxable income. So long as your business isn't operating illegally, what argument could possibly stop the collection of income tax? You may not see the items as "goods" to be sold, but in that case, the sale is clearly for a "service." The service, is being delivered by the person(s) who play the game to obtain items, and then make them available to you.
Posted by David Arbogast (1709 comments )
Link Flag
Surely gamers would also be entitled to rebates and deductions, right?!
If they can tax on virtual capital, then lost or stolen virtual goods would be tax deductable. What about depreciation of the items?

Ha, I'll bet the IRS won't see it this way, but it will be funny to see them try to justify one thing, but not the other.
Posted by jmaestro26 (7 comments )
Reply Link Flag
Insurance!
The answer to this is when you buy the game, you add it onto your Insurance package and lose even more money to paying for insurance, that will drop you as soon as you need it ;)
Posted by caskhyron (5 comments )
Link Flag
Deductions...
I will start adding the cost of the game software, computers, Internet connection and monthly fees to my tax forms... Any money I would have left over in value of saleable items should be less, and there for not a profit.
Posted by zaznet (1138 comments )
Link Flag
Credits, deductions, even capital losses
I think you are on the right track. It certainly makes sense that if we are taxed for in game goods that, losses incurred in making this wealth should be reported and accounted for as well. My two cents:

All repair bills for items/weapons/armor should be a straight up deduction to our adjusted gross income(Recompense for all those Molten Core runs)

As games decrease in popularity, we should be able file the depreciation of our assets as a capital loss (I personally will be holding on to my Everquest and Diablo II accounts now, just to cash in on this one).

Guild members, friends, and alternate characters in a game to whom we provide assistance or aid should obviously be dependents.

Itemized deductions should be available for money/time/items spent to accomplish quests or develop in game skills/trades.

Hmmm....maybe H&R Block will set up shops in games to help us do all this....
Posted by Javabeing (1 comment )
Link Flag
This is the same as OnLine Casinos
The same rules that apply to on-line casinos should apply here.
Posted by jsargent (98 comments )
Reply Link Flag
sure...
Except people play at a casino with the idea of winning jackpots(money and/or prizes).

I play WoW to have fun, with no expectation of making money, and to be with friends.

I will worry when I see it is more than some writers flight of fancy. This is some nutjob, who has less brains then pencils whining because somebody has been able to do what he cannot. The people who sell in game items should be taxed on all transactions they make, end of story.
Posted by schubb (202 comments )
Link Flag
Holy Organ Bank, Dibbell!!!
You're so full of wonderful ideas!!!

Should the IRS tax me because I have one kidney, one lung, and one cornea I might potentially garner income from should I choose to sell them in, say, Asia or South America?

Certainly they represents asset growth - I didn't pay a damned thing for them.
Posted by missingamerica (6147 comments )
Reply Link Flag
If you sell an organ,
you're going to incurr certain costs as well as potential profits.

From an accounting perspecive its a real nightmare.

That's why people are restricted in their transplants to 'gifting' an organ.
Posted by CharlesRovira (97 comments )
Link Flag
If the IRS taxes play money...
... then how about other non-financial
transactions? It seems to me that Monty Python
thought of this long ago when they observed that
taxing "thingy" would make accounting much more
interesting.
Posted by Zymurgist (397 comments )
Reply Link Flag
Taxing online gaming assets??
This whole subject matter is rediculous and Dibble is nuts. I'm not reporting online gaming assets to the IRS. What kind of lunacy is this? The IRS gets more than enough money from taxing people's actual wages. I'm not EVER going to report to the IRS some virtual income made in a video game.
Posted by Mirlin11 (2 comments )
Reply Link Flag
Agreed, but....
I agree that virtual assets should not have to be reported to the IRS... but if you sell virtual assets for real money, you have no argument against claiming the income. You have provided a service, and you have benefitted financially. Its a legitimate business model and the income is legally taxable.
Posted by David Arbogast (1709 comments )
Link Flag
The theory goes like this
If you "find" an item (i.e., "dropped" from a mob and you find it on the ground after you killed it or you find a vein of ore) then obtaining that is not a taxable event. If you create an item (sword, shield, etc.) then that is not a taxable event either. Neither of these type of events would be taxable in the real world either. (Find a 200 year old coin on the ground in the park and stick it under your mattress and even though it might be worth $100,000 it is still not taxable income to you. Make a chair in your home and sit on it. You are not taxed for the chair.)

The taxable event comes in if/when you sell or trade it (even within the game). Trade the fantastic sword you found for gold or platinum and you now have a "taxable event". Trading is taxable in the real world. The concept the IRS may use is the person you traded the sword to may sell it in the real world. That person may try to deduct the "cost" of purchase from the income on the sword thus coming up with a "net profit". (You can be sure if I sell that chair I made in my garage I'm going to deduct the cost of the materials I used to make it.)

If the person you sold/traded the item to tries to deduct what s/he "paid" you for it, then the IRS is going to want to come after you for your "income".

For those that claim such real world transactions violate terms of service, I believe SONY recently set up a set of servers in either EQ or EQII (don't remember which) in which they actively support real world transactions. SONY is inherently recognizing the real world value of the items. This is not true of all games. However, the IRS could easly claim that a magical item in the virtual world in which SONY actively supports real world value is inherently the same as a similar item in a different virtual world.

My personal opinion is that the IRS should do a simple ruling which encompasses: 1. All transactions within the game(s) are non taxable. 2. All real world transactions for virtual items (receiving real world money for virtual gold/platinum/swords/spells/characters/etc. or receiving a real item [http://car, trip, boat, etc.|http://car, trip, boat, etc.] for a virtual item) are taxable. 3. Deducting the "cost" of the virtual item is not allowed.
Posted by shadowself (202 comments )
Reply Link Flag
LUDICROUS
"2. All real world transactions for virtual items (receiving real world money for virtual gold/platinum/swords/spells/characters/etc. or receiving a real item [http://car, trip, boat, etc.|http://car, trip, boat, etc.] for a virtual item) are taxable. "

This already is the case. If you sell something over ebay, and make over a certian amount, you are taxed. No matter what you sell over ebay. Trying to say the IRS could or should tax a in game transactions for VIRTUAL FICTIONAL items is LUDICROUS.
Posted by jwhitt (2 comments )
Link Flag
Found wealth IS taxable by IRS
They call this doctrine "treasure-trove," and here is what IRS says about it online:

"Found property. If you find and keep property that does not belong to you that has been lost or abandoned (treasure-trove), it is taxable to you at its fair market value in the first year it is your undisputed possession."

I knew I remembered this from my earliest tax classes - never thought it would come up in practice, however. I've been practicing tax law for 23 years now. Jerry Parshall

P.S. The above can be found at <a class="jive-link-external" href="http://www.irs.gov/publications/p17/ch12.html" target="_newWindow">http://www.irs.gov/publications/p17/ch12.html</a>
search on "treasure"
Posted by gparshal (15 comments )
Link Flag
Don't flatter yourselves
This tempest in a teapot is being generated by a bunch of gaming blowhards who want to draw attention to their hobby and a bunch of tax wonks who want to show how clever they are. Online gambling would be the closest analogy to this if the blowhards keep talking long enough for someone at the IRS to be hoodwinked into believing there may be something there. The assets are "owned" by the web site operators and not the players, so there would only be a liability for an actual exchange of money. In fact, routine exchanges of money as part of the game would make the games into a form of gambling, hence illegal, and cause sales to be forbidden by the game owners.
Posted by Razzl (1318 comments )
Reply Link Flag
Clever Tax Wonks
there aren't any clever tax wonks. in many states personal and business property is a taxable asset (no, not by the irs, but by the local tax office). now, i don't own any of my software since it was all shrink-wrapped, pre-packaged, eula-gized purchases. but i pay the taxes. if there were truly any clever tax wonks, they'd be taxing those folks who own all that software .. instead of me.

mark d.
Posted by markdoiron (1138 comments )
Link Flag
Blowhards?
Name calling is always a clear sign of intelligent thought, don't you think? Look... if you perform an action that can benefit another and you charge for that action, then you are in business.

It is a business of services. "I'll play the game and get the items. You pay me in real money, and I'll give you the items."

There is no more obvious business structure for a service-based organization. What you are apparently suggesting... is that people should be able to collect legal income for services rendered without paying taxes... because... because the service is online?? Related to software? None of it makes sense.

If I make $30,000 per year providing this type of service, how could I possibly argue to the IRS that I owe them nothing?

I do see the argument against taxing virtual income, but lets be fair... people are making real money by running businesses that provide a service. Such is legally taxable and should remain so.
Posted by David Arbogast (1709 comments )
Link Flag
Actually this is NOT a hard IP problem
While everyone agrees that these 'objects' aren't real and that trying to limit (re)production is impossible, paying real money for them places them in the same category as ART (and you pay more than the cost of the materials for a finished work,) or SERVICES (like a hair cut.)

Sadly, if any REAL money changes hands, the tax man gets involved.

Just be glad that 'Quattlus' are considered game pieces and trading in them or using them is not considered taxable.
Posted by CharlesRovira (97 comments )
Reply Link Flag
Duh! Income is taxable?
Wow! What a shock! Almost all income is taxable by the IRS! Anyone with an accounting or tax background already knows this. Every adult American should already know this too. It's funny how leftists who want the most government programs are the most outraged that the government wants some of their money. To answer the question "Are Virtual Assets Taxable", few cities and states are taxing virtual assets as personal property. However, profits from the sale of virtual assets are certainly taxable at the federal level.
Posted by lingsun (482 comments )
Reply Link Flag
Income of course, but assets is a different beast
The apocalypse is if the *virtual property* were to be assessed
and folks tried to have their profits taxed as capital gains rather
than income.

Don't worry, the IRS won't even come near this because income
is taxed at a much higher rate.
Posted by zmaniac (3 comments )
Link Flag
What is the exact law that does that again?
I'm trying to find it, but cannot seem to. What's the title/section of the law that makes you liable to pay income tax again?
Posted by nazzdeq (74 comments )
Link Flag
realworld profit already taxable
We've heard that there are people who participate in these games for the purpose of real-world profit from selling these virtual universe items. I'd have though this would either go on the "other income" line of 1040, or would go through a Schedule C to account for business expenses of purchasing the boxed game disks and the monthly fees. And thus be taxed at the rate just as any other method of income using the same forms.

Hey, if you're going to tax me on income, you better allow me to deduct expenses that allowed me to generate that income! And that means my game purchase and subscription fees are tax-deductable!

If they're going to go beyond that, and start real-world taxing people that never take their gameplaying out of the game, and who never make real-world income from their fun, well, that'll become a bit more complicated. Will they tax us on what we potentially could have sold something for even if we never do, something akin to what many people fear about exercising stock options due to the AMT?

For Final Fantasy XI, which I played for a short time, World of Warcraft, and any other game title that would be a target of such real-world taxation, it's going to become a burden to keep track of who is taxable by the IRS and who is not. Are all those FFXI players from Japan going to be subject to the IRS? They shouldn't be. If other countries jump on this bandwagon, will I as an American citizen end up paying foreign taxes to any extent? How will the gaming servers keep track of it all? What if I do in-game transactions with a game character belonging to someone in a different country, do international treaties or tarriffs come into play, and do I now have to fill out tax forms related to income from a foreign country? Or will it depend on the location of the game server, and how do I know where my server is located? Will the game company suffer the burden of sending out the new W2-V or 1099-V (for virtual income) forms?

Will it end with MMORPGs, or will it be required to have an internet connection to report any virtual winnings for otherwise "offline" games, even if they are single player and items are not transferrable at all, and must we all buy the printer accessory so it can pring out our IRS tax forms every time we end a gaming session?
Posted by amigabill (93 comments )
Reply Link Flag
Not if it's a Hobby
Bill Toner said: "Hey, if you're going to tax me on income, you better allow me to deduct expenses that allowed me to generate that income!"

the tax laws are different for professionals and for hobbyists. professionals get all those cool tax deductions (and the headaches calculating them, too!); hobbyists don't.

now, just because it's a game doesn't mean it might not be a profession. but it would have to be provable. quite a few years ago a gambler fought the irs and secured the ruling that, because he gambled as his sole livelyhood, he was a professional gambler and therefore allowed to make certain deductions and take advantage of certain self-employed benefits (such as paying BOTH HALVES of social security tax!!!). so, if there is someone who is truly making a living from his online gaming, there might be tax positions he can use to his advantage.

but, as i mention in another post, many (most?) states tax business assets, including intangible assets (think software that you don't even own!) at their current worth. so, someone holding onto a gazillion fantasy dollars that has a real-world worth of $100,000 might be in for a rude awakening. however, the irs wouldn't be his problem; rather his local tax agency would be.

mark d.
Posted by markdoiron (1138 comments )
Link Flag
"Why hasn't it happened already?"
Because there is no way they should or could tax items you obtain in a GAME. The though of this is simply ridiculous. The author of this article is clearly looking for attention and has no idea about this subject.

If you actually look at the eBay auctions, which is where the real money comes into play. They are not selling their virtual items. They are selling their services. These services are taxable just as any ebay auction is if the money you make is over a certain amount. So, why hasnt it happened yet? It has, you are just too ignorant about the subject matter to write a decent article.
Posted by jwhitt (2 comments )
Reply Link Flag
It has no value until
it is sold... period.
Posted by volterwd (466 comments )
Reply Link Flag
Story Misdirected
the irs isn't going to tax these types of fantasy properties. period. they don't do it. period.

however, make some real world coin and you'll have to pay taxes on the income. period. no new laws required. it's the law as written. period.

however, the author of the article totally misses the boat on the possibility of taxing these assets. that is, in some states/counties/cities, personal property is taxed. you don't have to sell it. the fact that it has worth is what generates the tax liability. and, if there is a business connection, then even more jurisdictions jump onto the "tax it" bandwagon. suggest that the author visit with a tax accountant and rewrite the article: there's a real tax liability, but he totally missed it.

mark d.
Posted by markdoiron (1138 comments )
Reply Link Flag
Property Tax!
Yeah, there is property tax, but it would have to exist within the state. The only proof it existed in the state would be if the server also resided in the same state. The server, and the company that own it have already paid taxes for that property.

I don't pay property taxes on a rented appartment or house. I don't own it, some other individual or business does and they pay the tax for it. The same thing would apply to the virtual property.
Posted by zaznet (1138 comments )
Link Flag
Real World Assets VS Digital Virtual Assets
So if you were to get caught selling drugs on the street, you would pay a fine and possibly go to JAIL. Well, what happens if you were the owner of DRUGS.COM and sold that domain, is that illegal? - try analyzing the difference now?
Posted by robbydobby (4 comments )
Reply Link Flag
Yo Dude!
Shhh, quite man! You are opening a can of worms that no one wants opened! The IRS gets involved with taxing virtual gaming goods, then that leads into POSSIBLE sales of virtual goods. It wont end until the government is taxing everything, and email begins to cost the receiver, personal Home Pages will be charged rent, etc.
Posted by Pachilles (2 comments )
Reply Link Flag
Brain washe
Stop of a second and think about whey we have taxes in the first
place....

Government justifies taxes by providing services and regulatory
agencies that enforces law and makes commerce possible. (At
least this is what it is SUPPOSE to do).

Government plays no part in fostering an enviroment that
promotes game play in these virtual worlds. Why should it be
allowed to tax?

Only those who have brain washed by the lame ass politicians
will agree that everything and anything should be taxable. These
are the same people that readily lube themselves everytime
they're asked the bend over.
Posted by (3 comments )
Reply Link Flag
Virtual Taxes?
If virtual goods are deemed taxable then paying with virtual dollars makes an equivalent amount of sense.
Posted by oconnmic (28 comments )
Reply Link Flag
immagine your congressman
joining a game to collect Uncle Sam's share!!!

:-&gt;
Posted by qazwiz (208 comments )
Link Flag
When they go broke...
OK, so I pay taxes for virtual paraphernalia. That means that I own such paraphernalia. Or is it merely "licensed"? In any case, I wonder what happens when and if the company that makes and hosts the game world on their servers goes out of business. Players will be left paying taxes for a bunch of files on their PC that will then be useless. Will these "assets" still be taxable when the game no longer exists (and let's face it, all games have a life span of about five to six years). Personally, I wouldn't waste my time or my money on "virtual assets". It's bad enough that a monthly fee has to be paid for these online games, now I have to pay for the game items too? Ridiculious.
Posted by Sentinel (199 comments )
Reply Link Flag
Virtual Goods are just that
The goods, according to all of the game companies Terms of Service I've read recently, belong to the game company not the player. What players are buying or selling in reality is time. The real question then would be, can the government tax a service one player provides for another over the internet when that service is paid for in real USD?
Posted by (2 comments )
Reply Link Flag
Neopets bypasses this
by freezing anyone who gives or recieves real money for virtual items

Personally I think any real money realized by such sales are already covered by taxes on income but there was talk of the trade/exchange sites(I do this you do that) being taxed on their credits which were usually called dollars or if called points it was stated you could buy points for so many real dollars

this created real value for the otherwise virtual credits and such value was being taxed

where here you don't have any value until it is actually sold on eBay (or where ever) makine this a lot of smoke and mirrors that we have to waste time on to be sure the liberals don't screw us again!
Posted by qazwiz (208 comments )
Reply Link Flag
Only possible in certain games
In most online games, Real Money Trade (RMT) goes against the user agreement and is therefore against the rules of the game. There are some exceptions to this like "Secondlife" where tons of people make a living off of this.

If RMT is against the user agreement then the IRS can't do anything but punish them or get the people/s to stop making money off of it.
Posted by bustaballs (6 comments )
Reply Link Flag
EULA are meaningless
It doesn't matter what terms a player is forced to agree to, any form of agreement between a citizen and a company is meaningless until a judge officially says a contact can be binding and upheld.

Companies are NOT government bodies. Their EULAs do NOT carry the weight of law (until a judge says they do.)
Posted by Richard G. (137 comments )
Link Flag
IRS Taxing Virtual assets ROFL!
Um, this is where big Government should keep it's mits off. First of all, most games explicitly say it is illegal to sell in game items for real money, but people do it anyway. If the IRS is going to do this, they would also have to apply it to companies holding bits of code that they parse out and sell to people who need that particular module for their program. People selling things on ebay are not taxed for the set of 2 lamps they have at home that are trying to sell on ebay and that's the way it should stay in order for Ebay and online games to stay in business. The IRS will have to decide if getting the taxable income from online game and auction site companies is worth losing if they try to tax the virtual "warehouses" players create. The best fix for this is to stop the real world sales of a virtual company's intellectual property rights by the players.
Posted by caskhyron (5 comments )
Reply Link Flag
Simple solution
This isn't a problem. The IRS or whoever your local tax people are have no right to tax anything inside the game world because the gameworld is outside their juristiction. While the servers that host the game world may be physically located in a specific country, the game world exists outside it as an autonomous entity. Since your Characters are citizens of the game world and not the real world, transactions within the game world can only be taxed by the local authority within the game world. Only transactions that move into the real world can be taxed in the real world. Technically with a real world transaction of virtual world materials you are acting as your character's agent. The property is owned by your character, not by you. This is an important distinction.
Posted by firebate (15 comments )
Reply Link Flag
Virtual Pets= License ?
When will it end? Go away government.
Posted by kieranmullen (1070 comments )
Reply Link Flag
 

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