IRS May Be Gearing Up To Send Tax Collectors Into Second Life

from the how-much-is-the-tax-on-a-magic-sword? dept

Wed, Jan 14th 2009 2:11pm — Mike Masnick

It wasn't difficult to predict that this day was coming -- especially with both China and Australia already experimenting with charging taxes on virtual goods and transactions in virtual worlds. However, Game Politics points us to the news that the US's "taxpayer advocate" (we have such a thing?) is now suggesting the IRS start taxing transactions in virtual worlds as well. While the initial suggestion is for the IRS to just issue "guidelines" for taxpayers, that's the start down the path to active taxation in those worlds. This could get troublesome fast -- as you could easily see scenarios where kids who thought they were just playing a game suddenly owe significant real world taxes, just because they've been successful in the game and accumulated "valuable" assets. It seems fairly pointless, and potentially troublesome, to do any kind of taxation on virtual transaction until such time as real dollars exchange hands.

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Filed Under: irs, second life, tax collections, taxes, virtual worlds

36 Comments

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Evil Mike, 14 Jan 2009 @ 2:29pm

Tax = Extortion
If you do not pay, you will be beaten. (There's a couple steps twixt A and B, paint your own picture.)
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Anonymous Coward, 14 Jan 2009 @ 2:40pm

"....potentially troublesome, to do any kind of taxation on virtual transaction until such time as real dollars exchange hands."

So you assume they will do something else just to piss you off ? or just to manufacture some outrage for your blog ?
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Brad, 14 Jan 2009 @ 2:54pm

I don't see how...
So maybe I'm missing a point, but I don't see how this is even remotely sensible.

So I spend a lot of time building up experience points and finding treasures on WoW or whatever, and then someone comes along and says "Because you might SOMEDAY sell those, we're going to levy a tax against you for them now."? How do they even assess the value of it? Are we going to see a whole slew of "digital appraisers" show up to tell me that my +4 Axe of Might is now valued at $1200, and that I therefore owe $65 in taxes on it? The concept seems ridiculous.

If they're sending tax collectors into Second Life, it should only be at the point (as Mike mentioned) where actual money changes hands. If they want to nail Linden (or anyone) for accepting payment for digital goods that's one thing. But arguing that I owe some kind of federal tax on the CREATION of a thing, rather than the sale of it, is absurd.

What if I make a really nice table in my garage? Should I be taxed prior to selling it? What if I never sell it? Why should I pay taxes on it? That's not what taxes are for. Taxes are what you pay for the kind of infrastructure that allows you to conduct a transaction without fear that the other party will screw you. No transaction? No tax.
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Anonymous Coward, 14 Jan 2009 @ 2:55pm

Re:
Please make sense Anonymous Coward #1. Your post makes none.
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Matt Bennett (profile), 14 Jan 2009 @ 2:55pm

I don't understand why they just don't tax until funds are "withdrawn" from such a system. Much like a house or assets, you haven't made actual profit until to cash out. I think it's quite clear that profits from such systems would be taxable, it's just that they're not actually profits until they're withdrawn.

I wouldn't worry about it, in the end.
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Rob (profile), 14 Jan 2009 @ 3:02pm

For a lot of things they wouldn't even be able to collect from players. For instance, in World of Warcraft a player owns NONE of his virtual goods, characters, equipment, gold, memories, friends, etc. because Blizzard specifically states in the EULA and the ToU that they retain ownership of everything.
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Justin, 14 Jan 2009 @ 3:09pm

Imaginary money
Does this mean that I will have to report and claim the Cars and Money I won on Need for Speed?

I understand that if I put $50 in to the game and in a month cash out with $100 that I would owe some tax because I made real money that the IRS can use. But how is the IRS going to use an imaginary currency to pay for anything. I don't think that people will take government contract that pay millions or billions of Linden Dollars.
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David T, 14 Jan 2009 @ 3:11pm

Re: Ownership of Goods
Rob hits it on the head. Officially, no one "owns" virtual goods. Most MMOs don't even acknowledge an item as a "good," but rather as part of their service. If a government taxes virtual goods, clear ownership and rights of transfer must be established. It's pretty silly.

(Is it ethical for the government to collect taxes on technically illegal sales?)

On the flip side, I've sold three World of Warcraft and two Eve Online accounts with a combined profit of about $2500 dollars. Before eBay shut down the sale of virtual items, it was big business.

I agree with Mike; tax items when the sale is made, not in-game.
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lavi d (profile), 14 Jan 2009 @ 3:15pm

Three Words
Titanic. Budget. Deficits.
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Phillip, 14 Jan 2009 @ 3:20pm

I'll pay the taxes on my virtual items with virtual money, how about that?
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Anonymous Coward, 14 Jan 2009 @ 3:21pm

Re: Re: Ownership of Goods
(Is it ethical for the government to collect taxes on technically illegal sales?)
Bootleggers and Mafiosos are often nailed on tax evasion charges. The fact that the money may be the result of illegal activities is irrelevant; if it's in the possession of an individual and not reported as income, they're screwed.
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Supplu Guy, 14 Jan 2009 @ 3:26pm

H.F.S.
Holy. Fucking. Shit.

The IRS wants to tax people for "virtual" goods and "virtual" money? Please tell me I am really missing the point. Please tell me that I am too stupid to understand the real meaning of this story. As I said once before... Can the feds scream RICO for running the "Mobsters" application on My Space??
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tim, 14 Jan 2009 @ 3:50pm

"I understand that if I put $50 in to the game and in a month cash out with $100 that I would owe some tax because I made real money that the IRS can use"

Is this even how it should work? I live in Australia, so I dont have the best knowledge of your taxes and IRS, but I thought the whole point of taxes was to cover government costs in maintaining infrastructure etc. for example, taxes on cars and oil etc to cover the cost of maintaining the nation's roads.

What is it they need to maintain in this case? the internet services you are using are maintained through the monthly payments you make your isp... what else is there?
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TomK, 14 Jan 2009 @ 4:02pm

Fixed:

This could get troublesome fast as [people] who thought they were just [living in a free and open society] suddenly owe significant real world taxes, just because they've been successful in the [at life and in their careers] and accumulated "valuable" assets
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Jack Sombra, 14 Jan 2009 @ 4:20pm

As you said it was not difficult to predict, especially in regards to second life with its "official exchange rates" and to be honest, if I step out of my ingrained hatred of tax's and the tax man I cannot blame them and end up wondering what took them so long.

Now other games, like WoW, SWG,EQ so forth, are a totally different kettle of fish as most of them do not have that official financial game world to real world translation, quite the opposite actually, the publishers prohibit such transactions and to varying degrees try to stop it

And as a few people mentioned selling game accounts, hate to inform you, you most likely already owe taxes on such transactions
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Anonymous Coward, 14 Jan 2009 @ 4:38pm

Real money does change hands in the dark-places-of-the-net regarding these games, where virtual goods are sold for physical money.
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Anonymous Coward, 14 Jan 2009 @ 4:43pm

that doesn't make sense unless there charging in virtual money.

next think you know they'll want to charge you money when you dream you made money.
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Overcast, 14 Jan 2009 @ 4:44pm

Why don't they just collect 'virtual tax' within Second Life, some people never exchange the lindens for real cash - so how can they put a blanket consideration like that?

Some real money flows - but there's positively a portion that was never 'real money'. You can start an account free, get a small portion of lindens and assuming one was resourceful enough, they could make quite a bit - heck even if they just create objects or whatever in there. Lots of ways to make 'virtual' money, some people like the challenge of doing just that.

I wonder..... they they also collect taxes on money won in Golf Games at country clubs? Somehow; I doubt it.
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Anonymous Coward, 14 Jan 2009 @ 4:48pm

Re:
Tim: This is what taxes SHOULD be for, however in America (rapidly becoming a socialist state through the loss of value placed on Freedom) they are used more for the support of the lower class, the willingly unemployed, and those without the necessary work ethic to drive them to succeed. We do not have a 7.6% and rising unemployment rate here only due to our recent recession, but also due to the 'entitlement generations' who have operated as if they were owed a good paying job and not expected to do hard or unpleasant work. Many jobs have been 'lost' to illegal immigrants because Americans will not do them and illegal immigrants will. This leads to enormous government deficits while the citizenry is subsidized into continual decline... and therefore more tax revenues are needed and found. The problem is the shrinking middle class is forced to subsidize the rapidly growing lower class while the separation from wealthy to middle class grows (because wealth beget more wealth as has always been the case). Taxing the wealthy more does not fix the issue either, because the wealthy stay wealthy while more and more of the middle is lost to the lower class in a continual decline, and more tax revenues are needed every day. See where that's headed? To taxing everything while most of the society does not pay any taxes because they have been taxed into poverty.
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jaf, 14 Jan 2009 @ 5:48pm

Virtual Check
Just mail them a virtual check drawn on a virtual bank....or your Lehman Brothers account...
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Anonymous Coward, 14 Jan 2009 @ 6:35pm

Re: Re:
Anonymous Coward #19 -> blah blah blah ... it's all the fault of lazy people ... blah blah ... taxing the rich does not help ... blah blah

What about the rich criminal class who are responsible for the major cockup in which we all find ourselves.
http://www.flickr.com/photos/stoller/2907411559/
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Thomas, 14 Jan 2009 @ 9:30pm

Virtual Tax Collectors
Can I slay the tax collector and recover all the loot that it has collected? Or maybe offer tax collector protection to area shop keepers for some token of their appreciation.
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shaman, 15 Jan 2009 @ 1:54am

Virtual No Brainer
I keep my lindens in a virtual offshore bank account already ... same as in the meatspace world ...
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Killer_Tofu (profile), 15 Jan 2009 @ 6:02am

Re:
That is precisely the only case I can imagine they can do this for. Second Life offers a direct and maintained exchange rate between their in game money and US Dollars. You can exchange your virtual money for real life money at any point. I can only see them charging tax at that precise moment when you get real US Dollars. If it stays virtual, they have no real way to tax you. Linden set themselves up for this a long time ago. None of the other MMOs could be subject to this unless they set up a virtual currency to real money exchange rate. It just wouldn't make any sense. Although, not making sense I don't think would preclude the IRS from trying ...
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TDR, 15 Jan 2009 @ 6:15am

The first tax collector to step into an online rpg will probably be hit by half a dozen fireballs and hacked by twenty different swords at once.
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Anonymous Coward, 15 Jan 2009 @ 6:25am

Re:
The article seems to think they want to tax you for in-game 'possessions,' the way you have real-world property taxes. So, yes, it DOES sound like they want to do something other than applying tax when "real dollars exchange hands." If I trade an in-game item for in-game currency, I shouldn't owe real-world money to the government. If I sell an in-game item for real-world money, then it might be reasonable to apply an appropriate sales tax. Maybe.
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Anonymous Coward, 15 Jan 2009 @ 6:31am

Re: Imaginary money
I have serious issues with the implication that you owe taxes simply because the IRS "can use" it.

Explain to my why I owe taxes, what benefit I've recieved that I need to contribute money towards, what service I made use of that requires upkeep, and then we call talk about what taxes I owe.

In the case of MMOs, I make use of the ISP's cables (which I pay for) and the Game's servers (which I also pay for), so why is the government reaching into my pocket?
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Anonymous Coward, 15 Jan 2009 @ 6:32am

That's it !!!
I am not playing monopoly any more !
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JustMe, 15 Jan 2009 @ 7:51am

It works both ways
If they are taxing profits then you get to deduct legitimate expenses - such as your Internet connection, the monthly game fees, your time(!), etc. If they go down this path I could see one outcome where you actually reduce your IRS bill at the end of the year.
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nasch, 15 Jan 2009 @ 8:53am

Re: Re: Imaginary money
It's income, right? Or maybe capital gains? Generally if you gain money, the IRS will seek to tax it. Perhaps you have a serious problem with the whole idea of income tax - some people do.
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nasch, 15 Jan 2009 @ 9:06am

Re: Re:
Myth: A Huge Chunk of My Tax Dollars Supports Welfare Recipients

Fact: Welfare Costs 1 Percent of the Federal Budget

Widespread misperception about the extent of welfare exacerbate the problems of poverty. The actual cost of welfare programs-about 1 percent of the federal budget and 2 percent of state budgets (McLaughlin, 1997)-is proportionally less than generally believed. During the 104th Congress, more than 93 percent of the budget reductions in welfare entitlements came from programs for low-income people (Center on Budget and Policy Priorities, 1996). Ironically, middle-class and wealthy Americans also receive "welfare" in the form of tax deductions for home mortgages, corporate and farm subsidies, capital gains tax limits, Social Security, Medicare, and a multitude of other tax benefits. Yet these types of assistance carry no stigma and are rarely considered "welfare" (Goodgame, 1993). Anti-welfare sentiment appears to be related to attitudes about class and widely shared and socially sanctioned stereotypes about the poor. Racism also fuels negative attitudes toward welfare programs (Quadagno, 1994).

http://www.apa.org/pi/wpo/myths.html

If you have any evidence for your other primary claim, that the middle class is sliding into poverty, I'd be interested to see it.
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nasch, 15 Jan 2009 @ 9:08am

Re:
As long as I can claim a loss when I dream I'm broke. ;-)
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PixelPusher220, 15 Jan 2009 @ 10:13am

Re:
Just one caveat. You don't *own* a leased car either, but here in VA, they nicely pass on the taxes to the person leasing the vehicle.

So it's quite easy for Blizzard to *own* property but still have you pay the tax on it.
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Anonymous Coward, 15 Jan 2009 @ 11:20am

Re:
Right. Tax that.
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Anonymous Coward, 15 Jan 2009 @ 11:25am

Re: Virtual No Brainer
If you keep you're meatspace money in a virtual offshore account, you're in trouble...
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Gary Walker, 15 Jan 2009 @ 2:35pm

Re: Re: Ownership of Goods
In the good old USA, the IRS most assuredly taxes profits made on the sale of illegal goods and services. Make money as a crack dealer, you should report the profits to the IRS and pay taxes on it.

The law is carefully written that your filing of profits on illegal activity will not result in criminal prosecution.

This is how they finally took down Al Capone -- tax evasion.
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