Taxing the Video Game Economy

January 10, 2006

Do treasures traded in internet video games count as taxable income? The question is not as absurd as it seems according to a whimsical piece in the new issue of Legal Affairs.

Multiplayer online games—including the ever-popular EverQuest, which boasts 450,000 players worldwide—allow players to advance in the game by trading things like magic spells and bizarre weapons. But players quickly realized they could advance more quickly by offering other players cash for valuable items.

Using online sellers like eBay, a real-world economy paralleling the game’s economy has developed in recent years, resulting in real—and presumably taxable—income for players.

But if cash income from eBay trades is taxable, what about barter income from virtual trades with real economic value? From the Legal Affairs piece:

[IRS] Publication 525 would appear to contain every conceivable form of income known to accounting. To read it once is to realize that you know nothing about income. Here you’ll find a description of gains, ill-gotten and otherwise, so irregular that they can be taxed only according to that form of guesswork known as fair market value… (“If you steal property, you must report its fair market value in your income in the year you steal it unless in the same year, you return it to its rightful owner”)…

The rules make clear the IRS’s fundamental point: Goods taken in trade or won at play are taxable the moment they fall into somebody’s hands, even if they are not sold for money…

What about the assets I bartered for or won in the game but never sold in the real world, the suits of armor stashed here and there with their easily established fair market value? …

[W]ith virtual goods from Internet games being traded every day for actual money on eBay, wouldn’t … [this] mean that trades occurring exclusively in a game are taxable? I set out for my local tax office in South Bend, Ind., to find out…

Arriving near the end of the workday, I took a chair until my number was called, and then approached the help desk, where a tax official named John Knight looked up at me with a mix of weariness and curiosity. I took a deep breath and proceeded to describe my business and the economy that sustained it…

“O.K., so I got a fake jewel that’s worth 80 million points, gives me all kinds of invincibility,” said Knight, striving doggedly to nail down what I was talking about. “But I got two of them, or don’t want to play [anymore]. And I can go on eBay and sell my jewel to some other character?”

“Uh, yeah,” I confirmed.

Knight considered the facts and offered a nonbinding opinion: “That’s so weird.”

Read the full piece here.

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