Why the IRS won't invade Azeroth
by Mike Schramm 
Dec 29th 2006 at 10:47AM
The Weekly Standard is the latest media publication to take up the flag on an interesting but so far theoretical subject: the idea of placing taxes on goods bought and sold in online universes, including our own World of Warcraft. Their latest issue has a look at the markets, both virtual and real, appearing around online games, and they claim the markets are "much bigger than you might expect."They quote both CNET and Wired on studies of the interaction between real and virtual dollars inside games like Project Entropia and Second Life, and come up with what seems like a pretty inflated figure to me: $880 million to $1 billion annually in the market for virtual goods. That, they say, is a big target for the IRS to go after. They end on a recent summit, at which an economist apparently claimed he was striving to determine "what is a taxable event in a virtual world."
Interesting article, even though it does get a little bit too overspeculative at the end. For those of you who want it, my analysis is after the break.
[ Thanks, Vince! ]
So what is a taxable event in a virtual world? In short: Right now, nothing. The problem with taxing online economies is that you have to actually determine the value of what's being traded, and at this point, nothing in online games is really worth anything because it all goes away when the server turns off. Now, you may say everything is worth what people are willing to pay for it, and that's true, but what the Weekly Standard suggests-- that earning 1,000 gold ingame will get you an IRS form to fill out-- simply won't happen as long as that money stays virtual.
The question will be: what happens when that asset is sold in a real-world economy? If you are able to sell your Robe of Insight for a real-world amount of money, it's feasible the IRS would want a piece of that action and create taxes accordingly. But at this point, that's just not happening on a mass level in the World of Warcraft (in practice, gold selling happens, but Blizzard considers it cheating, and the IRS can't tax something that's not supposed to exist).
In a world like Second Life or Project Entropia, when you're constantly exchanging real-life money for in-game objects, the idea of taxation on in-game assets (or at least the real-world safe of them) is much more likely, whenever the IRS gets around to it (it's not like they don't have enough to deal with already). But don't expect the IRS to invade Azeroth anytime soon. WoW is run on a virtual economy, and for the forseeable future, it will stay that way.
Filed under: Items, Analysis / Opinion, Blizzard, News items, Economy
Reader Comments (Page 1 of 1)
Trudie Dec 29th 2006 11:21AM
Now I don't know much about economics, but I just had the thought.... wouldn't one complication come in when you consider the nationalities of the people playing these games and which countries they have to answer to tax-wise? I play with Canadians and Australians in WoW. If the IRS ever got ahold of WoW, how would these "virtual taxes" apply to non-Americans? I can't really see how they could.
Acariquara Dec 29th 2006 12:11PM
Point is, they can't tax what is free - or, theoretically, they could tax 110% of nothing and it would still be nothing.
Gold *is* free in Azeroth, apart from your monthly $15 which is already taxed anyway...
BTW I would not like to see this page without Adblock - too many keywords.
Avonturier Dec 29th 2006 12:15PM
Trudy, taxes would only apply when virtual goods are sold for real money and I suppose the one selling the goods will have to pay taxes to the government of the country they live in.
It is just like income tax.
Although it's in the EULA that you can't sell the gold for real money, I don't think the taxing agency would care. If you make your money by selling virtual gold you have an income and if you have an income they can tax it.
Zequel Dec 29th 2006 12:38PM
Avonturier's right. This issue is fairly simple. If you sell either virtual gear or rocks from your backyard, you're receiving income and all income is taxable unless specifically excluded from the law PERIOD. Its simple, doesn't matter the nationality of the buyer either. Their tax obligation is their problem. In-game transactions are simply playing a game.
Always leave it to the media to over-hype numbers. An example is when they say a disruption to buisness cost X # in losses. This number includes Joe wh didn't fill up his gas tank the day he couldn't get to the gas station or Sue who couldn't buy a book online because they couldn't access the site. What happens the day after?? Joe fills his gas tank, spending exactly the same amount. Sue buys the book at the same website. No loss. Even *if* Sue decides not to buy the book, she saves the money and its a net wash. No real loss overall. This is why I never believe money estimates in media. They're never intelligent estimates.
Krianna Dec 29th 2006 12:49PM
Avonturier-- I think where the servers are located would have something to do with the taxes, as well, but you're correct about the income thing. That is how they got Capone, after all-- he had HUGE income he hadn't reported. *grin*
spek Dec 29th 2006 1:40PM
I do agree its a virtual economy and I do agree with virtual and real economy wont mix up at least for now in wow, but in game we have taxes, when you use the auction house and sell something, you can check it on the report you receive in mail with the money.
I think it’s a fix percentage of the difference on the item value for the game with the amount you paid for having your item in auction, so you never earn the total amount you asked for that item, based on the difference sometimes you earn more sometimes you earn less, for instance enchanting materials doesn’t worth anything to a vendor but there’s a huge demand in auction house, since it doesn’t worth anything for game when you try to sell it in auction the game doesn’t demand lots of money, but some enchanting materials worth a lot for gamers and they could be sold for good amounts of gold, in the end when you receive the mail from auction with the money you realise you have been fairly taxed by auction house when you do a fairly business.
Psyrenity Dec 29th 2006 2:33PM
We don't actually own any thing in the game not even the name of our toons. Yes we obtain gold by killing mobs, completing quests, selling ingame items, but we never truely posses these things. Buy purching vertual gold all we are purchasing is time. The time it would have taking us to aquire it in game, not an actual item. But in the end it is all Blizzard's stuff. I can see how the could tax the hell out of games like Entropia, but I heard that those type of games have bigger issues like preventing money laundering.
Rayze Dec 29th 2006 3:20PM
Screw the IRS. Money hungry pricks messed with Willie Nelson!!
Vince Dec 29th 2006 3:52PM
You guys should really read the article. The point that income gained by selling virtual goods for Dollars is taxable by the IRS is a given.
The article goes further to saying ANY economic gain by a player would be considered income to the IRS and thus taxable. So the Dollar value of any gold or items you obtain in WoW, *regardless if you turn them into Dollars* would be taxable income based upon the current Dollar-to-gold exchange rate.
There's actually a precedent for this from the barter clubs in the 70's that were setup to exchange goods & services without using Dollars as currency in order to avoid taxes. The IRS ruled that the income activity was still taxable.
The fact that the IRS & congress is looking into this makes it a scary and very real possibility.
Wake Dec 29th 2006 9:14PM
The important thing to remember about a virtual economy like the one in World of Warcraft is that the about of currency in circulation is not constant. Real economies work on the basis that there is a set ammount of currency reprensenting a set ammount of valuable goods (gold/silver). The ratio is maintained by controlling the about of liquid currency in circulation.
Now, in WoW, everytime you kill a mob that drops money, currency has just been introduced currency into circulation. If that mob drops loot that you sell to a vendor, the same thing happens. If you buy something from a vendor or pay for repairs or skills, then currency is removed from circulation. There is no outside regulation, and as such, no way to control the ratio of worth of the currency. We just think that their is a certain work due to the aution house, the main time when money actually exchanges hands (aside from person-to-person trades).
The entire system has no real basis, so taxation is a pretty sticky area. On a new server with a low population, a few gold may be a big, but on a old server, there are billions out there... How does one regulate something that is by design unregulated?
Saylah Dec 30th 2006 2:57PM
One would think that they are collecting enough taxes from the corporations producing the games, without trying to find a way to tax in game value/currency. Companies that are selling gold or services should be taxed as they are a business. However, nothing that a player does, other than actually selling and item for real money should be taxable. The in-game value of items, including gold is too circumstantial as another commenter pointed it out. It depends on the server and the availability of that item on that server.
But whatever. Let them start taxing players for perceived value of anything and watch them tank an industry, and because of greed lose the corporate tax dollars as games fail and fold. There is no way in hell, I'd play a game that might subject me to taxes and certainly wouldn't pay for any children accounts.
Thomas Dec 31st 2006 8:10AM
I can see the IRS taxing people making real money off a game like 2nd Life...but WoW? Unlikely.