Tobold's Blog
Sunday, August 14, 2011
At the borders of legal justice

Bernie Maddoff is in jail for the next 150 years. He misled investors with a Ponzi scheme, a scam in which you promise people a high return on investment, which you pay not with any real business, but with the money new investors give you. In real life, this is fraud, and if you are caught you will go to jail for it. In a game, for example if I offer you a dodgy deal for a street in Monopoly counting on the fact that you are bad with numbers, this is part of the game and I won't go to jail for it. It's just play money. But what of situations that are in between?

The big EVE news this week was about the biggest scam ever, a Ponzi scheme netting the fraudsters 1 trillion ISK. Now we can cite the monopoly example and consider that just play money. But ISK aren't just play money, they can be converted into real money. Depending on the exchange rate the 1 trillion ISK is worth between $38,000 and $52,000 of real money. A previous case of fraud in EVE was reported as somebody stealing ISK, who exchanged it for real money, and "used the cash to put down a deposit on a house and to pay medical bills". If you can pay your real world bills with it, it isn't play money any more.

From EVE to the EQII Station Exchange to the Diablo III real money auction house, the link between virtual items and real world dollar value is getting stronger all the time. And at some point the legal protection has to kick in. Running a ponzi scheme in a foreign currency won't protect you from the law, so why should it protect you if that currency is a virtual one? If money stopped to be in the jurisdiction of the real world as soon as you transformed it into virtual currency, we would have created a legal way to launder money. I do not think real world governments are going to agree.
I was wondering what would stop players from running this sort of scheme in any game that lets you exchange gold between players (eg. wow). All I can really think of it that it's a lot of work, although the one server model of EVE also makes it that much easier to reach everyone.
I only despised RMT because it brings the real world into games and never really thought about the legal issues. But the way you explain it makes complete sense.

On the one hand it is good when games drive the goldseller and hacker scum away. But on the other hand I don't want to end up one day, having to pay taxes for ingame transactions or hire lawyers to setup trade contracts.
Thanks for bringing up an interesting topic.

I'm no expert and I'm sure others will correct me, but it seems to me that there is still a dividing line here. Regardless of whether ISK can be converted into real money or not, it is still nothing like a "real" currency. The difference is not so much in the physicality of it all – dollars are in many ways just as "virtual" as ISK and besides, it is just as illegal to defraud someone of coupons as of their money.

Instead, I think this is a matter of the venue. These things happen in a "event space" where things like fraud happen and form part of "the game". That doesn't mean that individual players want it to happen to them, just that participation by itself means implied consent to what might happen.

There are no hard and fast rules here, of course. In a typical ice hockey game you will see the players assaulting each other in ways that would be distinctly criminal on the street, but even though the "victim" probably doesn't want to be hit over the head, the "perpetrator" will nonetheless play on, safe in the assumption that he will not be charged with a crime. Conversely, if a tennis player after a near miss drops his racket, jumps across the net and batters his opponent I think it would not at all be surprising if the prosecutors brought charges.

Note, also, that in the hockey example hitting people is very much against the rules of the game, it is just that the state's criminal system recognises that people participating in that event space from the state's point of view have a right and an obligation to be there with other expectations.

Translated to an MMO setting, I think this means that you will have different results depending on the setting. In EVE, winning a trillion credits by fraud may not at all be criminal whereas doing exactly the same thing in, say, Hello Kitty Online may mean you end up spending quality time with some of your country's finest.

Anyway, sorry if I'm rambling. Interesting topic!
But even if we assume that fraud is "part of the game" in EVE, the fact remains that somebody walked out of that game with fifty thousand real dollars. If we say that it isn't fraud, then we need to conclude that the player "won" that money within the rules of the game. At which point in time gambling laws kick in.
My hope is that some of the publicity around this teaches people how to avoid this type of fraud iRL.
That's certainly a possibility, Tobold, although there are three factors that may work against it.

1. Your nation's criminal system is still entirely separate from the in-game world. You may not go to prison for punching a guy in the face, but neither will you "win" the game for doing it (unless you're in the NHL! :P)

2. The legal systems in many countries have always had a very nervous relationship with game winnings. I hear that poker is a respectable game nowadays, but it used to be that the legal system didn't touch poker winnings. You weren't taxed on them, but neither could you collect a poker debt through the courts. Put another way, there is a type of income that's considered to be "below" the legal system. That same reasoning might apply to the EVE fraudsters (and those defrauded), although it seems a bit unlikely.

3. The tax authorities are a completely different set of bureaucrats than the judges. Like someone pointed out the other day, taxing MMO winnings would also open up the possibility of tax deductions for hardware purchases and in-game losses, which may yield undesirable results (from a taxman's perspective!). So tax authorities and prosecutors might want to stay away both, but for entirely different reasons.

Again, though, I'm not saying this won't happen. It depends on the event space it happens in, and many other things. Certainly, when people start walking away from a game with cash sufficient to pay houses and medical bills, it is bound to arouse the curiosity of the taxman. Not least because otherwise the other side of the spectrum will step in and use it for money-laundering etc (now that's an interesting thought – drug money laundering through the DIII AH!)
But even if we assume that fraud is "part of the game" in EVE, the fact remains that somebody walked out of that game with fifty thousand real dollars. If we say that it isn't fraud, then we need to conclude that the player "won" that money within the rules of the game.
Which money? The ISK or the dollars? I wonder whether fraud would be a more applicable term than gambling. After all, those billions of ISK or the character with the Twin Blades of Azzinoth might not be there by the time you get around to logging into the game.
Now what will be interesting is when someone does this in Diablo 3.
How does taxation on big sums of money transfered between seller/buyer on Ebay work? Do you have to report that when filing for taxes? (Not rethorical questions, I actually want to know.)
EBay says yes, you do!
Stabs: Yes, I was thinking that myself.
From what I understand, players still need to declare their real money winnings from games such as Diablo 3. While you can certainly deduct some of your "costs" in making that money, for many people it won't make sense.

Don't quote me on this, I know close to nothing about taxes, but in the US it seems that you can deduct expenses incurred on a hobby up to a maximum of 2% your Adjusted Gross Income but not exceeding the earnings from that hobby. Also, you need to do an itemized deduction on your tax form to be able to deduct those expenses.

In other words, if you make $1000 a year from selling items in D3, you can deduct up to $1000 in expenses such as a new computer, electricity and so on.

Someone correct me if I'm wrong.

Although this is a "virtual" way of making money, I'd be wary of trying to dodge taxes. The IRS is one of the things that scares the living crap out of me.
I think the big point would be that CCP still owns that ISK, regardless of whose in-game wallet it's in.

Now... turning the in-game asset into real-world currency stands separate from the win or loss of (temporary) possession of that in-game asset.

The fact that someone is willing to pay real-world cash for (temporary) possesion of that in-game asset doesn't change that fundamental fact...
Oscar's point about taxation wrt considering real profit from in-game activity is really interesting, and may result (eventually) in new law. If gaming is handled under gambling law, then for tax purposes your losses can be claimed against your winnings. If gaming falls under business law then capital expenditures (a new computer, your Internet connection, the game itself) could be deducted. People who operate personal businesses like Amway or ACN can write off some portion of things like new cars, it seems reasonable that a person who makes a profit playing EVE or D3 could write off their expenses as well. It will be really interesting to see how this new legal ground gets settled.
I found this to be a funny post by Bashiok on the D3 forums:

It's all rather unnecessary for discussion. We've spent a very long time working with our legal departments around the globe researching regional laws and regulations, if not obtaining government approvals. We announced the feature because we know it to be sound from a legal perspective. If any local or country-specific laws do become an issue we'll of course be sure to let people in those regions know.

We're not going to comment any further on legal speculation on what's potentially ok or not, we're simply not qualified to do so. Our legal departments have done their homework, we'll leave that to them.

It had to do with whether D3 was considered "gambling," but I wonder if their legal department advised them to include tax forums in the back of the instruction manual.
Wouldn't EVE be an excellent way to money launder?
It's all in the game. I could see fraud charges resulting from, say, hacking peoples account for gold. I don't think you should face charges for scamming people in a game where you are supposed to scam people.
But ISK aren't just play money, they can be converted into real money.

Hang on, that's not really correct. You can use ISK to buy something which has a real money value (a month's subscription to EVE). But the only way you can convert ISK into real money is to sell it on the black market to a goldseller, which is in complete violation of EVE's T&Cs. This is really the same as every other MMO's in-game currency. Yes, you can sort of "convert" it to real money, but only via an unsanctioned trade.

It's certainly a different situation to the planned Diablo 3 auction house, for instance. There, you can sell game gold on the RMT auction house, and then cash out your money. So there is a very genuine conversion between gold and dollars - and it will be interesting to watch the exchange rate fluctuations!
What I REALLY want to see is someone with the stones to actually start using virtual currencies for traditional money-laundering.

I would be very confident that it's already happening, but that it's being kept quiet by both law enforcement and gaming companies purely to avoid opening pandora's legal briefs, unleashing a jurisdictional shitstorm of epic proportions.

In my experience legal departments and external lawyers alike stay as far away from tax advice as humanly possible, except except when they are very specifically asked to provide it. And when they have finally been compelled to do so, they make very sure to limit that advice to the person who asked for it.

So the boring bet rests with Blizzard saying nothing other than "you may have to pay taxes on money you get through the AH". Although I'd love to have a custom Blizzard tax return form!
In other words, if you make $1000 a year from selling items in D3, you can deduct up to $1000 in expenses such as a new computer, electricity and so on.

Even more importantly you generally cannot deduct the full amounts. You have to specify how much of the expense is personal and how much is a business expense. So if you do not use the computer exclusively for D3 playing, you might only be able to deduct 10% of the cost. You would have the same problem with electricity where only a small fraction of your bill would be deductible.
On the deductability of expenses playing games for money, in the US you can use these expenses to offset income from a hobby. However, you can't write off expenses in excess of income unless you qualify as a business. There's a list of things that qualify you as being a business, but more or less the simple advice is "if you're not a business, don't pretend you are because it's an obvious way to cheat on taxes and you probably will get caught."

Oh yeah and you can't can't withdraw money from Eve. You can only use isk to buy monocles and game subscriptions.
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