Paying Real life taxes on virtual transactions

AIeee… government economists are starting to study virtual transactions and the proceeds they generate. At some pt, you could start to see the real life proceeds generated by selling gold, weapons or characters taxed like a capital gains transaction.

Interesting, opening article on virtual economies, transactions and taxes.
I’ve stopped playing MMOs but I’m totally fascinated by the economies of these games and the efforts to stem inflation in them.

Doesn’t seem much different than paying taxes on the buying and selling of foreign currencies for a profit.

It’s still a form of capital gains after all.

How soon 'til they start charging taxes on drops?

Capital=assets or money.

I’d like to understand how a person running a character in WoW is getting a capital gain from gold in WoW. The government cannot assume that the person is going to violate the WoW terms of use by selling gold, therefore there cannot be an assumption of a capital gain, therefore there is nothing to tax.

Now if you have information otherwise, I’d really like to know it, thanks.


I don’t really understand how any of the stuff in WoW (I don’t play Second Life so can’t comment there) could be seen as a capital gain. I can understand the theory that if you sell an item or character or account, you’ve provided a service and have to pay taxes on the income. But capital gains? Nothing in WoW appreciates in value, as far as I know. Unless they are looking at it as “You paid $50 + $15 per month for your account, and now your account is worth $2000,” but even there, it’s worth more money because you sank your own time and effort into it. It’s like charging an artist capital gains because a portrait is worth more than a blank canvas and set of paints.

Since you can’t legally sell the account, it’s not worth anything from the government’s point of view.


Capital gains is probably the wrong paradigm. But, with an open market, there’s the possibility of unrealized income based on your in-game loot.

I’m still waiting to hear about the divorce decree that orders Blizzard or SOE to transfer community property in game items to the soon-to-be-ex.

Two different things. When my husband and I divorced, we had to separate the intellectual property that we had licensed, as well as the physical assets.

Licensed intellectual property still doesn’t represent unrealized income though, because legally you can’t transfer the license. We bought the license under California community property laws, therefore the intellectual property was owned by the community of the two of us, therefore there was no ‘transfer’.


I think you are confusing capital gains tax with income tax.

Capital Gains tax is paid when an asset is sold for a profit. You sell a million gold for $100,000 and now you’re paying the taxman on the profit. You let it sit on the server and you pay nothing.

The title of this thread is misleading to an extent - the tax would not be paid on a virtual transaction but on a very real financial transaction with very real monetary profit. The question of what is being sold does not enter into it other than that the sold item is an asset (and a capital asset is quite literally anything defined to be a capital asset in the Internal Revenue Code).

The real issue at hand is how they determine the basis value you start with. Stocks provide a siimple example - the basis is how much you bought the stock for, so the profit is just the difference between what you paid and what you sell it at. The concept of earning gold through time investment instead of through a single financial transaction makes determining the basis very difficult in the case of online assets. One might argue that the subscription fee paid could constitute your “investment” and that any profit beyond recouping that investment would be taxable as a capital gain.

You can’t legally sell marijuana or cocaine either. However you still have to pay income tax on any income derived from the sale of illegal substances because it’s still income.

The government is a big entity with a lot of departments. Tax code doesn’t give two shits about legality, the only color it sees is the color of money changing hands.

That in a sense is a different issue. If the government can prove that you are selling something for income, it can tax that income. What it can’t do is assume you are selling something for income when that sale is illegal.

In WoW terms, if you are caught selling gold for income, that income is taxable. Gold obtained in the game cannot be taxed as gold obtained in the game because you can’t legally sell it. Which is what I thought the original discussion was about…taxing virtual gold.

Edit-if Blizz allowed you to sell the gold, then the gold would be considered an asset, then the capital gains issue would make sense.

The capital gains issue makes sense if the virtual items are considered assets and the tax is applied on the amount of profit at the point of sale.

This basically follows simple capital gains rules. It all comes down to whether ingame money/items constitute income or capital assets. It’s a difficult argument to try and make them anything more than assets - you have to sell or barter them to obtain real money, and there isn’t a recognized bank out there which will do a currency exchange with a Sword of a Thousand Truths.

The way I like to think about it is the craftsmen model. Lets say I on the weekends use my spare time to make wood carvings. Some of these wood carvings I sell to people. Had I just kept all carvings in a room in my house on display or given them as gifts to friends and family, no one would think I owe taxes on them. However, once I start selling them they become income, and income is taxed under income tax.

Is this the legal way to think about it? Considering how convuluted the tax code seems to me, I don’t know. But its the only way that makes sense to me.

The difference is, in-game assets aren’t actual assets, because–to the extent that they can be “owned” at all–they are owned by the company that runs the game. It’s in the TOS. So selling in-game gold is technically not a legal sale (if indeed it is a sale at all), and not subject to taxation.

The way to lawyer around this is probably to bill it as a service, rather than a sale. As in, the gold belongs to Blizzard, so you can’t sell it, but you can offer to perform a service (transferring some of the gold that Blizzard owns but that your character has to someone else’s character) for some zennys. But if that makes it taxable, that also makes it legal to do, officially.

Greatatlantic: Right. That’s how it seems to me, as well. I don’t see how it could be called a capital gain because even if you consider a virtual asset (like your Sword of a Thousand Truths) a real, taxable thing, nobody knows what the initial value of the asset was. I may sell my Sword of a Thousand Truths for $100 on eBay, but if that Sword was worth $200 when I got it, that’s a capital loss, right? Who knows what it was worth when I acquired it (assuming I get it in game, rather than buying it from IGE or whatever)?

But I can definitely see them coming after the income if you sold the sword. Then again, I assume you could deduct legitimate business expenses like the cost of the game and sub, the cost of your ISP connection, depreciation of your computer, etc., to the extent they are used for your business. Seems like a huge mess. But in either case – whether it’s potentially considered a capital gain or income – there would be no tax until there’s some real-world transaction, so most of us wouldn’t have to worry about it anyway. “Congrats on that rare drop, please send us $5 for the taxes” doesn’t seem like it would ever happen.

The point, which I mentioned earlier, is that profit made from illegal sales IS taxable. Saying that making profit off of something that “is technically not a legal sale” is not subject to taxation is simply false.

Ownership is the crux of the matter as to whether or not these virtual assets really are assets at all. Blizzard would say that it’s all just a bunch of bits on their server so it’s all theirs, but by that definition most of the assets in this country are stored as a bunch of bits on a server somewhere, yet there is legal precedent that those assets are owned by individuals. This issue has not been completely settled within the court system yet.

Anyways, the easiest way for them to tax virtual assets is to do it when money changes hand. Who gives a shit what a Sword of a Thousand Truths is worth, but if I make $1000 selling it just slap the tax down on the amount of the sale.

If I was walking through a park and found a precious gem in a riverbed, then sold it for $2000 it’d be considered purely as income and would be taxed as such. It wouldn’t really matter what the gem was worth, just that money changed hands.

I just chalked any mention of WoW as shitty journalism. The writer is obviously mistaken about the (illicit) selling of items/gold/accounts. Perhaps its become a tasty tax treat because of the sheer number of WoW subscribers.

Why is everyone talking about this as if gold-sellers are doing something illegal? The EULA that prohibits selling gold in WoW is a civil contract, between Blizzard and the player. The Government has no real role in it, other than providing a venue (civil court) where disputes can be resolved.

Violating your contract with Blizzard may expose you to account termination, and perhaps even to a civil judgment, but it cannot expose you to criminal prosecution.

This may seem a nit-picking point, but I think it’s helpful in showing why the Government doesn’t really care where you got your income, as long as it gets a cut. Taxing players who convert virtual assets into real-world money is perfectly sensible, and would have no impact on players who choose not to sell their phat lewtz.

Maybe because “illegal” doesn’t only mean “stuff you can go to prison for.”

And you still get taxed even if it is for selling “stuff you can go to prison for.” The legality of the sales is a completely moot point here.

Remember the golden rule: Death, Taxes, (everything else in some such order).