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Tuesday, December 05, 2006
Taxing virtual property
A couple of years ago Professor Edward Castronova published a paper in which he calculated the GDP of Norrath, the virtual world on which Everquest is played. This calculation was done by looking at how many levels the average EQ player made per year, and how much virtual wealth in platinum pieces he earned. Castronova then calculated what a level was worth from the EBay sales price of EQ characters, and also looked at what the EQ platinum piece was worth, from different virtual currency sellers websites. He ended up with a GDP per person of over $2,000, which is as much as the GDP of Namibia.
I never liked that calculation. From an economist's point of view the calculation is flawed, because the Norrathian platinum piece is not a freely traded currency. The cost of this currency on EBay or from some gold farmer is not an exchange rate, but contains a relatively high transaction cost, and a risk premium for the seller, because he might get his account banned. Look at it that way: if you buy a decorative sea shell from Tonga for $10, you can't get the GDP of Tonga by multiplying $10 with the number of sea shells on the Tongan beaches. Calculating the value of a level is even worse, because there is no way to trade levels, you can only sell your whole account (a problem that is mentioned in the paper).
But of course if you believe that by playing a MMORPG somebody is earning a virtual currency which has a real world value, the inevitable consequence is that this constitutes a taxable income. And the crazy thing is that people are discussing that question on a big symposium, called the State of Play, organized by the folks from Terra Nova.
So lets assume in 2006 you leveled up 4 characters to 60 and made 10,000 gold. I looked at EBay, and it seems a level 60 character sells for around $200. The 10,000 gold would sell for around $500. So the IRS would state that you earned $1,300 of taxable income in World of Warcraft this year, even if you didn't sell your characters or gold. Because for the purpose of taxes, it doesn't matter whether you earned dollars, or something with a dollar value. And it doesn't matter that you spent the gold on epic mounts and items from the auction house, as long as you earned the gold in the first place it is taxable income. Pretty crazy, isn't it? You might end up paying more taxes on WoW than monthly subscription fees.
Fortunately there isn't much chance of that actually happening. The guys from Terra Nova are weird, and are taking their idea of humanity living in virtual worlds in the future too far. If the tax man would knock on your door today, you'd just show him the part of the WoW EULA where it states that all characters and items in game belong to Blizzard, not to the players. So, theoretically again, if anyone was liable for taxes on virtual earnings, it would be Blizzard. And I'd love to see their faces if the IRS comes and states that due to 7 million players each earning virtual property of $1,000, Blizzard has to pay taxes on $7 billion. :)
While taxing virtual property is far out, I'm pretty sure that if somebody sells WoW gold for dollars, that income already is taxable. This is independant of the consideration whether a virtual item is actually worth anything. If you sell Tarot card readings, which most people would consider worthless, you still have to pay taxes on whatever you earn from that. Now as World of Warcraft gold farmers already operate in shady territory I have my doubts that they are paying those taxes. That could lead to some sort of Al Capone moment, where the authorities are unable to charge somebody for the actual crime, but can still put him into prison for tax evasion.
- posted by Tobold @ 8:44 AM Permanent Link
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In Second life Linden Labs actually support and underpin the exchange of Lindens for Dollars (the Lindex Currency Exchange) so the argument for taxation of virtual earnings is much stronger.
As long as Blizzard stick to the line that they own all the virtual assets in WOW I think players are safe enough however.
As long as Blizzard stick to the line that they own all the virtual assets in WOW I think players are safe enough however.
# posted by 
: 5/12/06 12:40
: 5/12/06 12:40
Haha, I like that "Al Capone" scene. :) But it's different to bring in a famous mobster than a sweatshop of farmers. And as far as I know, there's no single mobster farmer boss who is consolidating power by ganking all of the other mobster farmer heads.
"The guys from Terra Nova are weird,"
Had a nice laugh over that. There does seem to be a bit of pseudo intellectualism over there.
Had a nice laugh over that. There does seem to be a bit of pseudo intellectualism over there.
# posted by : 5/12/06 18:59
: 5/12/06 18:59
You're scaring us more than you think, Tobold.
Someone actually did advocate taxing virtual wealth, and it was recent and it was someone with a serious degree. I wish I could remember who and where off the top of my head.
They won't leave us alone until we take their children away in dumptrucks.
Someone actually did advocate taxing virtual wealth, and it was recent and it was someone with a serious degree. I wish I could remember who and where off the top of my head.
They won't leave us alone until we take their children away in dumptrucks.
If we're being taxed on our virtual property, then all of the expenses we've incurred in accruing that virtual property should also be considered.
How much did your computer cost? How much time do you spend on that computer playing WoW? How much time do you spend NOT playing WoW? There's your ratio to calculate how much of the cost of your machine can be written off as Depreciation against your "virtual profits".
Let's look at your broadband internet connection. Again, how many hours do you play WoW? How many hours do you use your Broadband connection NOT playing WoW. Same principle as above.
If we're going to be charged a tax on our virtual profits, the IRS must let us write off any expenses we've incurred in earning that profit.
Of course WoW's EULA may work equally well (if not better). You don't owe a cent on your virtual property and profits because nothing in-game belongs to you, it all belongs to Blizzard.
How much did your computer cost? How much time do you spend on that computer playing WoW? How much time do you spend NOT playing WoW? There's your ratio to calculate how much of the cost of your machine can be written off as Depreciation against your "virtual profits".
Let's look at your broadband internet connection. Again, how many hours do you play WoW? How many hours do you use your Broadband connection NOT playing WoW. Same principle as above.
If we're going to be charged a tax on our virtual profits, the IRS must let us write off any expenses we've incurred in earning that profit.
Of course WoW's EULA may work equally well (if not better). You don't owe a cent on your virtual property and profits because nothing in-game belongs to you, it all belongs to Blizzard.
# posted by : 6/12/06 00:12
: 6/12/06 00:12
"The guys from Terra Nova are weird"
Well, some are speculative, some are over-enthusiastic, some are more conservative in their outlooks.
But as a trained lawyer and economist, I can tell you that I'm certain they're absolutely right that the IRS/Inland revenue etc will already be aware of this issue and that, when the costs of collection are sufficiently outweighed by the potential income, then it will happen.
I think that it is likely (in the foreseeable future) to be the case that the tax liability only crystallises when the profit is realised (ie when an exchange for real goods or currency is carried out). But you are already liable for that. Right now. Ludus is no defence for taxation purposes.
The only question is whether you could be taxed on purely virtual assets on which a gain is not realised. That depends largely on the EULA of the world: do I own or have a substantial benefit from those assets? If so . So SL will be first for the cut, if it ever really gets to the levels of turnover that it currently pretends that it has.
Collection would be incredibly easy. Unlike a cash transaction, every movement of goods in a virtual world is tracked, audited and measured.
Well, some are speculative, some are over-enthusiastic, some are more conservative in their outlooks.
But as a trained lawyer and economist, I can tell you that I'm certain they're absolutely right that the IRS/Inland revenue etc will already be aware of this issue and that, when the costs of collection are sufficiently outweighed by the potential income, then it will happen.
I think that it is likely (in the foreseeable future) to be the case that the tax liability only crystallises when the profit is realised (ie when an exchange for real goods or currency is carried out). But you are already liable for that. Right now. Ludus is no defence for taxation purposes.
The only question is whether you could be taxed on purely virtual assets on which a gain is not realised. That depends largely on the EULA of the world: do I own or have a substantial benefit from those assets? If so . So SL will be first for the cut, if it ever really gets to the levels of turnover that it currently pretends that it has.
Collection would be incredibly easy. Unlike a cash transaction, every movement of goods in a virtual world is tracked, audited and measured.
# posted by : 6/12/06 13:07
: 6/12/06 13:07
The only question is whether you could be taxed on purely virtual assets on which a gain is not realised.
How much is a gold piece worth when it is *not* sold for dollars? The gold piece is only worth something when somebody wants to buy it. A game where you become liable for taxes just by playing will obviously be less popular, and when nobody is playing any more, the gold is worthless as well.
Taxes on non-sold gold will never happen, because as soon as the legislation is out, all games with tradeable currency will either shut down, or make the currency untradeable, thus not liable for taxes any more.
How much is a gold piece worth when it is *not* sold for dollars? The gold piece is only worth something when somebody wants to buy it. A game where you become liable for taxes just by playing will obviously be less popular, and when nobody is playing any more, the gold is worthless as well.
Taxes on non-sold gold will never happen, because as soon as the legislation is out, all games with tradeable currency will either shut down, or make the currency untradeable, thus not liable for taxes any more.
You're quite right, of course, that a gold piece is only worth the market value. If I become liable to tax at 40% on it, then I'd suggest that I will increase my prices by marginally more than 40% (to cover effort) and still sell. If some people can't be bothered to sell now that there are taxation implications, then hey! I get a smaller pool of sellers and my margin on sales goes up yet further! In that case gold farmers, like drug barons, should send thank-you letters to the government for price support ;)
As to the current situation, I bet you five-to-one that Anshe Chung already covers her virtual ass and files tax returns on her SL business.
The possibilities are, in the medium term, unignorable. Take an example of someone who works at a nice, geeky games company. As part of their Christmas goody-bag, all the employees get 1000 gold for their toons in their big-selling MMO title. So long as an exchange exists for such goods (ie do IGN and others make a markety in it?) then that is verry soon going to be absolutely, cast-iron taxable. No need for primary legislation here in the UK: a simple IRxx advisory would do the job.
As to the current situation, I bet you five-to-one that Anshe Chung already covers her virtual ass and files tax returns on her SL business.
The possibilities are, in the medium term, unignorable. Take an example of someone who works at a nice, geeky games company. As part of their Christmas goody-bag, all the employees get 1000 gold for their toons in their big-selling MMO title. So long as an exchange exists for such goods (ie do IGN and others make a markety in it?) then that is verry soon going to be absolutely, cast-iron taxable. No need for primary legislation here in the UK: a simple IRxx advisory would do the job.
# posted by : 6/12/06 15:23
: 6/12/06 15:23
The Terra Nova guys aren't pseudo-intellectuals....they're actual full-bore intellectuals. Which does, in fact, make them sort of weird. :)
(I'm not one of them by the way, just someone who reads Terra Nova regularly).
They're all profs and academics who are doing what academics do: analyzing and over-analyzing something looking for new trends, and new ways of thinking about things. I think the stuff they hash out over there is worthwhile, because immersive worlds and MMOing have only just begun.
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(I'm not one of them by the way, just someone who reads Terra Nova regularly).
They're all profs and academics who are doing what academics do: analyzing and over-analyzing something looking for new trends, and new ways of thinking about things. I think the stuff they hash out over there is worthwhile, because immersive worlds and MMOing have only just begun.
# posted by : 6/12/06 22:11
: 6/12/06 22:11<< Home
