MMOs, lewt, and taxes on NPR

I heard this interesting little tidbit this morning. They start talking about a gold farmer’s paying taxes on the money he’s made selling items in what I figure is WoW. Then they talk about the tax implications of bartering and how, since MMO items now have value in the real world, rare drops you get probably have tax implications as the equivalent of lottery winnings.

http://www.npr.org/templates/story/story.php?storyId=5199966

And then at the end they talk about how game revenues (hardware, software, accessories) have just last year surpassed movie [size=1]box office[/size] revenues. And they list some of the big games this year. And don’t mention WoW by name. At least Pokemon got name dropped, right?

Given how the makers of the MMO games are always very clear on the “everything in game is owned by us,” I’m not sure that an item you get in-game can really be considered “income.”

If the IRS steps up and says “No, that’s income, and we’re taxing it” then it’d have some pretty wacky ramifications - would the company then not be able to take away in-game items from characters, because it’d be stealing their property?

It sounds like this segment was just silliness. I figure an MMO object is not income until you get cold hard cash from it, and the legality of doing so is still questionable. So I don’t think my dwarven Hunter is gonna need to keep track of his receipts quite yet.

Our legal system is crumbling under the weight of Technology, and it’s only going to get worse.

Chris Woods

The law is domed?

Well Chris, the good news is that things will get better eventually. The bad news is that your recent application to the Optomists Club has been denied.

[QUOTE=Hawkeye Fierce]Given how the makers of the MMO games are always very clear on the “everything in game is owned by us,” I’m not sure that an item you get in-game can really be considered “income.”

If the IRS steps up and says “No, that’s income, and we’re taxing it” then it’d have some pretty wacky ramifications - would the company then not be able to take away in-game items from characters, because it’d be stealing their property?
QUOTE]

Even better, imagine the lawsuits over bind on pickup items as infringing upon the sale rights of property holders.

My god, maybe it’ll be made into a Ewe Boll movie!

So should I wait for Blizzard to send me a 1099 before I file my taxes?

This is all about nothing.

When you buy a stock, do you get taxed? No.

When that stock rises in value, do you get taxed? No.

When you sell the stock, do you get taxed? Yes.

So look at your MMO susbscription as an investment. You gain gold, but it is unrealized gain. Only when YOU SELL IT is it taxable.

The rest is just flapping lips. Lawyers are good at that.

Usual IANAL and IANAA disclaimer. Surely the drops would only become taxable when real life money is involved? Kind of like if I grow potatoes in my garden and eat them myself or give them to friends and family I’m fine, but if I start selling them the money becomes taxable.

Perhaps the taxman will succeed in closing down the farmers better than the MMO companies have managed.

But you’re taxed if you win a new car. That’s what the guy in the interview was using as his basis for taxable phat lewts. Of course, he said he wasn’t going to be the one to take it to the IRS and find out for sure.

Also taxed when you inherit an estate.

Does anyone know the logic behind taxing lotteries/gifts/etc? I mean, is it just to stop people from sheltering money in a different country or something?

Chris Woods

Because they can? It’s the same idea as property tax - in essence, if you live somewhere there’s property taxes, you don’t own your land. You’re renting it from the government.

If I were in charge of the IRS I would do this:

  1. Require MMO operators to support in-game tax returns in in-game currency and track total money made from loot/sales by players over the course of a fiscal year.

  2. US players have to file an annual in-game tax return payable in in-game currency

  3. The IRS collects the in-game currency and resells for US dollars on the world market

  4. US sales of in-game currency out of game other than by the DoT is now illegal

But then it’s Friday afternoon and I’m evil. For ha-has:

*) Alts can be claimed as dependents, allowing you to write off your twinking losses.
*) Top tax rate of 80%. Watch all the progressive members of hardcore raiding guilds start rethinking the concept of flat-taxes.

The winning slant is flawed. I would think it would be much easier to compare gold in an MMO as an equity…or potatoes, rather than a sweapstakes or lottery.

There is no story here. It would not be taxed unless you sold it.

EDIT: more comments

It’s already covered anyway when you sell it as other income. If you sell the magical uber sword, or 5000 gold, you are supposed to report that if the sale price is a certain value.

I agree this is unlikely to happen with the traditional MMOs like WoW and EQ, but what about Project Entropia? The whole game is designed around the idea of converting real world money into game currency and back. That’s got to be taxable.

Your example supports the other side. The IRS taxes your winnings when you cash out, they don’t take a cut of your chips before you leave.