IRS reports to Congress: Virtual worlds/MMOGs have always been taxable
Filed under: Economy, News items, Second Life, Politics, Legal, Virtual worlds
Section 7803(c)(2)(B)(ii) of the Internal Revenue Code requires the National Taxpayer Advocate to submit a report to Congress each year and in it, among other things, to identify at least 20 of the most serious problems encountered by taxpayers and to make administrative and legislative recommendations to mitigate those problems. Thus, the statute requires that the report focus on problems and areas in need of improvement.
Of the 20 "most serious problems encountered by taxpayers", number 13 is The IRS Should Proactively Address Emerging Issues Such as Those Arising From "Virtual Worlds".
For the impatient, who just want the sound-bite, it boils down to the position that the existing US Tax Code already covers much of what takes place in virtual environments, with respect to assets, virtual currencies and transactions. Indeed most of the Code already deals with many things that are no less virtual and no more corporeal than are virtual environments. The only real issue the IRS seems to have with it is a lack of information on the part of the taxpayer about if, when and how to report and pay their taxes relating to virtual environment activities, and the lack of any uniform positional advice.
Granted there are some basic errors in some of the Advocate's research data, Linden Lab's name is gotten wrong about as often as it is gotten right, and some of the business initiatives listed as taking place in Second Life are things that never got past the initial press-release stages (announced, but vaporware, essentially). Nonetheless, overall it is a good treatment of the topic.
Primarily if virtual goods/land and/or virtual currencies can be exchanged for some other taxable medium, then they themselves are taxable (whether or not the operator of the virtual environment or MMOG actually permits that exchange as a part of their terms-of-service).
Many countries (such as Australia and the USA) can and do tax barter transactions (the exchange of one type of goods and/or services for another type), but usually no reporting of such transactions is required if they are assessable in value at less than one dollar.
In some cases, however, many sub-threshold transactions may take place, or a non-corporeal item may appreciate significantly in value (virtual land, for example, or shares in a company, or simply the steady accumulation of game-currency that could be exchanged for US dollars). In those cases, Capital Gains Tax kicks in, and the difference in value of corporeal and incorporeal assets are assessed over a period of time, and tax is applied to the difference.
If you're a US citizen, all of that is supposed to be reported on your good friend, Form 1040, Schedule D and may be subject to Tax Withholding and Estimate Tax, per Publication 505.
Didn't know that? Well, that's the basic problem that the Advocate's report to Congress seeks to address.
The winner of this year's inaugural Linden Prize will be subject to taxation on the prize amount, under the existing US Tax Code.
The core problem that the Advocate outlines is that taxpayers aren't fully aware of their obligations to report assorted virtual earnings and assets, how to do so, and if or when to do so. The Advocate suggests that some activities should simply be made exempt from assessment and collection (presently they are not any more exempt than they would be in the atomic world) simply to improve overall taxpayer compliance.
Additionally, the National Taxpayer Advocate recommends that the IRS:
- Work with the Office of Chief Counsel and the Treasury Department to issue guidance addressing how taxpayers should report economic activities in virtual worlds (or at least ask the Office of Chief Counsel to put it on the priority guidance plan) along with other emerging issues; and
- Invite the Taxpayer Advocate Service to appoint a representative to the E-Business and Emerging Issues policy group.
In short, if you're running a business in a virtual world, or making real profits from MMOG game characters and items, all of that is presently -- and indeed always has been -- taxable under the US Tax Code. The Advocate's report may spur initiatives that will remove some of these activities from assessment and collection ... eventually.
By all means check out MSP#13 in the National Taxpayer Advocate's report. Your member for Congress has likely already read it.
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Reader Comments (Page 1 of 2)
JP said on 10:36AM 1-13-2009
This argument is so dumb.
They aren't going to tax your "sword of the uberpants". It's REAL money items.
Gold sellers? Taxed.
Gold Buyers? Taxed.
Accounts sold? Taxed.
Sell the gear you get for real money? Taxed.
Pay a sub (which are taxed in some cases) and play the game using the in-game economy, and no real money trades hands? NOT TAXED.
So, if you only play for fun, then no you won't be taxed. If you use the "virtual world" to produce or purchace in-game items (that are not for sale directly from the developers) you will be taxed. It makes perfect fucking sence.
It's the purchase and selling of goods for actual money... the goverment gets ther piece. Welcome to every other form of income ever. It's no different.
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Tateru Nino said on 10:50AM 1-13-2009
You're thinking about income tax, which is only one of the overall class of capital taxes that are assessed and collected. Most of the other forms of capital taxes don't deal with money at all. Shares in a company are taxable, some cars, some furniture, your house, your yacht, your Tang Dynasty vase, and so on - even if you never convert them to cash.
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Jeni said on 1:11PM 1-13-2009
If you make real world money off of virtual items, you should be taxed. This IRS document does not cover virtual assests....just virtual assets that you buy with RL money.
This covers any item in a place like SL (since there is a US dollar value for Linden whatevers) and in a microtransaction enviroment where there is a conversion rate for real vs virtual money. It does NOT cover items that have no RL value...such as items in World of Warcraft...because you do not pay cash for those items.
Subscriptions to Wow, Character transfers...those things however, things you pay cash for, definately can be taxed.
JP said on 11:09AM 1-13-2009
Yes, but those are all real items, and their real money vlaue increases, and they also add real equity to your over-all fortune.
Somone that plays for fun could only have their sub taxed (which some do) b/c everything that happens in-game does not do any of the previous.
UNLESS you are making money through it. In which case you should be taxed.
It's very black-n-white, and the gaming community is trying to paint it another color.
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Jinintaanik said on 11:12AM 1-13-2009
I would love to see a gold farming group be brought up on charges of tax evasion. :)
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Tateru Nino said on 11:14AM 1-13-2009
You should take a good read through the report and read what *they* said. We've just summarized it here. There's no substitute for the IRS in their own words.
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Kerech said on 11:28AM 1-13-2009
Considering the IRS report is well over 300 pages... I doubt I'll be reading it any time soon.
So if I buy gold from a gold farmer, then I lose that gold in a PvP fight... can I claim a theft loss on my taxes? :)
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Tateru Nino said on 11:32AM 1-13-2009
The relevant section is only 14 pages long, and quite on-target. And no you can't in most circumstances (they actually do cover such capital loss situations).
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Gwyneth Llewelyn said on 11:45AM 1-13-2009
I actually find it amusing that people so often claim that they're immune from getting taxed by governments when they engage in *any* kind of economy ;)
Then again, I guess it's a cultural thingy. I'm used to get taxed for everything that I consider having value for *myself*. On the other hand, *expenses* made in SL on behalf of myself (as a freelancer) or my company for a project, are most certainly liable to be placed as "costs" on my balance sheet, thus reducing the amount of income taxes ;)
So, sure, I might we liable to pay VAT on buying L$ on the LindeX, but I can then claim I used those L$ to make purchases to deploy some project of mine and reduce the overall income taxes that way ;)
It works both ways, not just towards the Government's coffers ;)
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Kerech said on 11:52AM 1-13-2009
I am an accountant. I fully understand that if these virtual items/gold are sold for real-world money, that transaction is taxable.
However, to say that winning 50 virtual silver pieces from a virtual slot machine in a virtual world is a taxable event that must be disclosed on a 1099 is absolutely ludicrous!
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Erbo Evans said on 12:06PM 1-13-2009
I'm not concerned...I've poured so much money into the SL economy over the past 2 years that any little bits of money I *did* earn (selling music changers, DJ tips, etc.) are basically "lost in the noise." Of course, I don't have "receipts" to prove any of this...
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Jorane said on 1:29PM 1-13-2009
Interesting report. It looks like that in this case, the IRS's ability to tax is derived from the fact that virtual goods CAN be exchanged for something of real value. Like it or not, a real-world value has been placed on on stuff we only ever find in-game, whether its gold, weapons, armor, or the like. People are willing to pay real money for those things, thus they now have *real* value.
So, when something that inherently possesses *real* value is exchanged for something else that possesses *real* value (whether you're buying gold or you're playing the auction house in WOW), you're essentially conducting a taxable transaction. The fact that I'm paying you 10 gold for a stack of Frostweave cloth is irrelevant - I'm trading something with real value (gold - worth $$) for something else with real value (Frostweave cloth - worth 10 gold), and thus, could possibly be a taxable barter transaction.
I realize how ridiculous that sounds, and I'm scoffing at the possibility of Blizzard ever sending me a 1099-B on all the "income" I made from my auction house dealings. However, as it stands now, the law is ambiguous at best, and at worst, already does require taxation of transactions we conduct in-game.
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Dedric Mauriac said on 1:49PM 1-13-2009
There are many questions concerning this though. I spend/lose a lot of money each month with my in-world business. Can I consider that as a capitol loss? How do i differentiate L$ received from people outside of my country? Do I get taxed how much L$ I sell, or do I get taxed on how much US$ I pull out of SL? I often sell L$ to help pay towards my tier. Would I be taxed on the sale of L$, or just if I pull US$ out from those sales into my "real" bank account. What if I buy 100 US$ of lindens, then sell the lindens, and then get the US$ transferred back. It's all "my money" rite? Can I claim children in SL as my dependents (j/k).
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Sahoni Tigerpaw said on 1:52PM 1-13-2009
Gwyneth Llewelyn, well said! Thank you :)
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Alan said on 2:02PM 1-13-2009
I read through those 14 pages in that report and I get the feeling that this more or less is an attempt to get Congress to spend some time to clarify the rules regarding virtual world transactions and to a lesser extent, whether most of them are even taxable at all. It has been a growing source of anxiety for anyone like us that participate in any Virtual World or online game and they are saying the rules regarding this area need to be put on paper so that we as taxpayers can make sense of it, and if need be, have the IRS set up a system to monitor online transactions of significance.
I have a feeling that if they do put a tax on something like WoW gold, it could easily be rectified by giving the IRS its own WoW account that has a character on every US server that automatically receives a small amount of gold every time a character performs a taxable action. Then the US government would realize how completely pointless taxing in game virtual transactions is, and maybe begin to understand the stance of game companies against gold sellers. That or the US government would become the single largest gold seller in the world...
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Tateru Nino said on 7:21PM 1-13-2009
Pretty much. This report after all is written by the advocates for the US Taxpayers. Thus, they favor sense and simplicity. They'd *like* to get Congress to rule out a lot of the arduous or daft applications of the code.
Makes me wonder if everyone's congressional rep got through the 14 pages.
jpo said on 3:20PM 1-13-2009
Heh....I'm not worried about this at all.
All my characters are so freekin' poor the IRS is going to owe them a refund.
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Jeni said on 4:24PM 1-13-2009
Yanno, this could be a real slam against gold sellers in games like WoW where the developer tries to crack down on in game items having real value (unlike Second Life...where the company even has an exchange rate for US dollars and, in their mission statement, has a dual purpose of being a social gathering place and a virtual marketplace). Gold sellers would be commiting fraud, rather than simply violating a TOS.
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JP said on 4:39PM 1-13-2009
I'd love to see Gold Sellers hit the hardest. It'd be nice if they ended up having close shop and some of that padded "11 million subs" crap would stop.
Yo Brewster said on 12:55AM 1-14-2009
Although it might be against a TOS, legally there is nothing wrong with selling gold as long as you declare your income. I'm sure most "gold" sellers have been declaring their income for years...