Raph’s Website » The taxman doth not cometh aftereth all

The taxman doth not cometh aftereth all

October 18th, 2006 (Visited 4718 times) Tags:

This is a document that perhaps should get framed, just because it’s a landmark for it to exist at all. I speak of a Congressional press release about taxing virtual worlds (PDF) that actually responds to some of the MMORPG sites, including perhaps THIS one, about the issue of taxation in virtual worlds. It’s damn short, but an excerpt is after the fold anyway:

“There is a concern that the IRS might step forward with regulations that start taxing transactions that occur within virtual economies. This, I believe, would be a mistake,” Chairman Jim Saxton said today.

That would be “Chairman of the Joint Economic Committee of the Congress of the United States.”

Based on existing law, if an individual generates cash income in U.S. dollars from transactions in virtual economies, the question may arise whether a tax is due on that real-world income. However, if the transaction takes place entirely within a virtual economy, then it seems there is no taxable event. Such distinctions should be addressed and resolved in a common-sense manner.

Clearly, virtual economies represent an area where technology has outpaced the law. The goal of the forthcoming JEC study is to help lawmakers understand the issues involved and head off any premature attempt to impose a tax on virtual economies.

To me, the longer-term question is when Congress will take up the issue that technology in this case may have outpaced the notion of countries. It’s not hard to imagine a virtual economy that exists within multiple national jurisdictions at once, via peer to peer or distributed server tech, for example. When you cash out, then what? What if it’s used purely to transfer money?

You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.

Metafilter | Community Weblog wrote on October 21st, 2006 at 7:13 pm:

As virtual worlds economic activity and populations grow, the importance of Real Money Trade comes to the fore. When does fraud inside game worlds become illegal? when do earnings from online worlds become taxable? [discussion], and what happens when real day traders get interested? [more inside] posted by MetaMonkey at 9:13 AM PST – 21 comments

Faith wrote on October 19th, 2006 at 4:04 am:

[...] Comments [...]

raccaldin36: Virtual Citizenship wrote on October 19th, 2006 at 9:12 pm:

[...] Michael (raccaldin36) wrote,@ 2006-10-19 13:32:00 Virtual Citizenship Michael Chui said on October 19th, 2006 at 1:32 pm: Steven, there’s a difference between that which is true now, and that which could happen in the future. It makes no sense for me to say I’m a citizen of Earth, right now, but in the future, it might be an extraordinarily significant statement.Thought experiment on that tangent: I don’t know the particulars of how foreign residents are seen in most countries, but I know it’s possible for non-citizens to reside in most countries. Using similar law, we could renounce citizenship to our country of residence and theoretically become citizens of a virtual world that has no affiliation to a single country. That brings up the question of how deportation would work… but I think you could work around that by just tossing them in jail. =PIt’s an idea.http://www.raphkoster.com/2006/10/18/the-taxman-doth-not-cometh-aftereth-all/#comment-31248(Post a new comment) [...]

MMODump.com » Virtual Economies wrote on October 21st, 2006 at 11:46 am:

[...] Economies Virtual Economies: “As virtual worlds economic activity and populations grow, the importance of Real MoneyTrade comes to the fore. When does fraud inside game worlds become illegal? when do earnings from online worlds become taxable? [discussion], and what happens when real day traders get interested? [more inside]” [...]

RLMMO :: View topic - WHAT THE F@#K? Congress to look at taxing virtual assets wrote on November 1st, 2006 at 8:38 pm:

[...] The taxman doth not cometh aftereth all From Raph’s blog. It looks like the chairman of the Joint Economic Committee of the Congress of the United States (bureaucrates just love long titles) thinks that it would not be wise to tax virtual economies. At least not until they understand them further. [...]

acmtalk said on October 18th, 2006 at 9:08 pm:

hummm I don’t know, I am one That have a vision of and online World, not controlled by governaments, this whole Tax thing… Ok, so lets say They do that, What happens if a game is hosted in another country? Don’t they Tax the company that develops the games allready? I find it really hard to work, But off course They want a piece of the “cake” too.

Brew said on October 18th, 2006 at 10:58 pm:

well, an online world that exists beyond the bounderies of borders, tariffs, and tax law STINKS of illegal transactions, money laundering, tax evasion, and terrorist actions. Just the cash flow in/out of the country disregarding tariffs could cause major problems with the valuation of cash.

What it’s clear that they are saying (to me) is that they are not going to consider taxing online virtual economies – but they are investigating the possibilities, the legality and the fiscal responsibility of tracking/taxing/limiting real world transactions resulting from virtual economies.

Michael Chui said on October 18th, 2006 at 11:16 pm:

Your Olde English is horrid, Raph. Aftereth?

To me, the longer-term question is when Congress will take up the issue that technology in this case may have outpaced the notion of countries.

Being a diehard proponent of a single (peaceably) unified world government, I can’t wait. There was some debate in Terra Nova, probably over a year ago, about how to dodge jurisdiction by a government and set up servers sovereignly. I wonder if anyone else recalls it.

Steven "PlayNoEvil" Davis said on October 19th, 2006 at 2:56 am:

Sorry to take the contrarian tack, but of course government’s are going to tax this stuff.

Also, can we please stop pretending that there is a legal entity called a “virtual world”? These are online services run by corporations (a state construct) all of which are headquartered in a country (sometimes several) with servers in some country (sometimes several). The players all are citizens and accessing the service from a real place on Earth. Just because there are not easy tools to track these transactions automatically (today), you, and the corporations involved are legally obliged to pay taxes. Even a true peer-to-peer system would be taxed.

People and companies may play national jurisdiction games, but at the end of the day, on Earth for the foreseeable future, someone owns you for taxation purposes.

Same with law enforcement and anything else that matters. If the FBI serves a supoena to Linden Lab or Blizzard, I don’t expect a long argument about being a “virtual world” and beyond national jurisdiction.

David (Tal) said on October 19th, 2006 at 4:22 am:

While I as a player would object to the taxation of transactions within a virtual economy, I absolutely support the taxation of real-world income resulting from the sale of virtual assets, items, or avatars. I realize other people may disagree with me here, but I’ve always been disgusted by the illegitimate RMT that goes on in most games (old can of worms, I know). If those transactions carry tax liability, then it serves as a deterrent. Maybe not an amazingly effective one, but a deterrent all the same.

At the same time I feel that if you’re playing a game for the purpose of making real world money, you’re basically gambling – and gambling laws should then apply to that game.

Maybe I’m being a little bit of an idealist here, but I feel like one’s standing within a virtual world should be unaffected by one’s level of financial success in the real world, and vice versa. I know it’s not nearly as black and white as that in some cases, and it won’t be long before we start seeing VW’s become the alternate golf course for business deals I think, but I think that the two should be separate. I say this because I believe that if you let real world social standing or financial wealth start to have an effect on a virtual world, then you start to lose the level playing field that is part of the attraction for people playing the VWs anyway. I know many, many people that play who go paycheck to paycheck, and the game world is the greater portion of their monthly entertainment budget. In the game/VW, they can be rich and powerful, unlike in the real world. They can do it because people with more RL money don’t really have all that much of an advantage over them.

Like I said – old can of worms. Old argument even. And I know a lot of people disagree with me and even more people think of it as a potential viable means of maintaining a fun game/VW. But anyway, that’s why I think I would support the taxation of RMT in games/VWs.

Relmstein said on October 19th, 2006 at 5:44 am:

What happens when the government starts finding out how hard it is to track down Real Money Transfers for virtual goods? I just hope they don’t decide to tax every virtual world subscriber as a result. If they do then I can easily see developers limiting future virtual world economies in an attempt to avoid taxation.

Dotswarlock said on October 19th, 2006 at 8:15 am:

Eventually the profit of real life money made from the exchange of virtual items or services could be taxed but tracking it will be a nightmare. After all does the 15 year old boy that’s doing the lawn for everyone on the street declare his revenue? I seriously doubt it

Oh a thought while I’m at it: I will be curious of the day when the estimated value of a virtual world would be higher then that of a small country, hehe. Won’t that feel weird? Something that does not exist being worth so much?

Raph said on October 19th, 2006 at 8:34 am:

Verily, thine eye for parody doth fail thee.

They are right now. But it’s actually easy to conceptualize a collaborative group of individual citizens of different nations running, say, an OpenCroquet-style peer to peer system, or a “multiserver” single world system where each and every server is not only in a different nation from that of any of the citizens, but where the data is swapped from nation to nation periodically. Then what? There’s no single owner; the data does not reside in any given nation all the time, but only some of the time… people evade taxes all the time using data that stays put in one country, much less data that hops around.

moo said on October 19th, 2006 at 11:09 am:

You don’t seem to be disputing that players who convert virtual assets into real-money profit are subject to taxes on that profit in at least one jurisdiction (which is the only sensible interpretation today). All you’re saying here is its not enforceable.

StGabe said on October 19th, 2006 at 11:27 am:

I have this picture now of a mafioso laundering money in some virtual world economy and later liquidating virtual gold to buy a new black sedan.

Steven "PlayNoEvil" Davis said on October 19th, 2006 at 12:00 pm:

You hit it on the nose, Raph, its tax evasion… a crime. You are responsible for reporting your income, even if a third party entity doesn’t.

This doesn’t mean that a virtual world has any objective, legal existence. The web may be spread everywhere in the world, and it certainly meets all of your specifications for a virtual world, but the entities that use it have legal status of some sort somewhere.

Michael Chui said on October 19th, 2006 at 12:32 pm:

Steven, there’s a difference between that which is true now, and that which could happen in the future. It makes no sense for me to say I’m a citizen of Earth, right now, but in the future, it might be an extraordinarily significant statement.

Thought experiment on that tangent: I don’t know the particulars of how foreign residents are seen in most countries, but I know it’s possible for non-citizens to reside in most countries. Using similar law, we could renounce citizenship to our country of residence and theoretically become citizens of a virtual world that has no affiliation to a single country. That brings up the question of how deportation would work… but I think you could work around that by just tossing them in jail. =P

It’s an idea.

Rik said on October 19th, 2006 at 12:55 pm:

Also, can we please stop pretending that there is a legal entity called a “virtual world”?

Well, without that pretense, there is no issue. I didn’t get a Plus Seven Sword of Dragonslaying, I got some ones and zeroes stored on a hard drive that I’m renting access to.

Allen Sligar said on October 19th, 2006 at 2:18 pm:

First off d like to officially recant any accusations about members of congress avatar choices, (*ya know just in case*) they all obviously choose very heroic looking, respectable avatars.

Its quite obvious that the gaming industry is a huge target for taxation and VW are part of that target, especially whereas the gaming industry itself fails the test of defending itself against the violence in video games fanatics and now has the APA on its case.

The only thing a badly thought out taxation policy will do is drive down profits, drive gamers off any kind of trackable grid into more grey market activity, and force games (read job, revenue, taxes, infrastructure, investment) to go elsewhere, and piss everyone off in general. The policy makers need to understand this subject as well as possible by bringing in industry stakeholders and consumers.

Gamers are notoriously sensative to price fluctuation, its the same demographic that now demands its content for free (ala Myspace and YouTube). If Congress crafts faulty legislation around game taxation they’ll drive games to be made and monetized in a manner that avoids those policies, rather than captures revenue.

Further thinking of the taxation in standard IRS “taxable events” forumlas will be difficult, since avoiding a conversion of virtual property and transactions requires minimal effort and a few intermediaries to stay off grid and in the grey markets.

Available options:

Flat tax basis
(tax the game, cost likely passed on to consumers, which means gamers will choose free game models)

Require Tansparency
(Player account balances/transactions somehow tracked and reported (also a good mechanisim for game companies to catch RMT if the regulatory framework requires the tracking) but this is intrusive)

Tax on Currency in Circulation
(Government taxes the currency in total circulation, but this gets into valuation issues, (FEDRAL RESERVE ratchets up the dollar to GP valuation for DungeonWelp Online, inflation imminent!) circulation issues)
This also puts the burden on the game companies, who are experiancing higher production costs, not good

Taxation on a “Taxable Event”
This requires online land barons, millionaires, and gold farmers to self report. What happens when that online persona is in fact a 15 year old Daton Ohio kid, it only takes a few insidence reportable in the media where Junior ruined his and his parents lives by becomming rich in an online game and failing to report it causing hardship, to generate a backlash, so now video games can cause violence and get you jailed for tax evasion? Wow….Im thinking thats not going to spin to well with those who purchase and pay for the bandwidth (parents).

The fact of the matter is the economy changed, it trancended what was once a solidly understood mechanisim. Taxing a VW is like taxing a garage sale, but worse, its a garage sale with nothing actually for sale, the items are virtual, they are non-atomized
goods that aquire value only in referance to the VW’s community placing value on them.

Congress should avoid this whole subject for another 10 years actually, except for security and money laundering related issues (easily resolved actually) because this is the area where innovation is going to flow from, its the area that allows news feeds, web browsing, shopping and watching YouTube in a VW will be comming from. The creators and users of this space dont even quite understand the ramifacations of this space yet, and the government stifling it through regulation and taxation will only cause it to be created in places outside thier juristiction.

Brew said on October 19th, 2006 at 3:12 pm:

i’d love to see some industry side facts on this – but I highly doubt the 15 year old making money in Dayton is the norm. More commonly, the average joe consumer is shelling cash out to IGE who is taking in huge profits with minimal overhead due to using offshore asian RMT farmers who work for little more than a bowl of rice a day..

Wow, excuse my negative borderline racist attitude there. That came off harsh. But I’m not taking it back.

Tess said on October 20th, 2006 at 12:35 pm:

I’m pretty impressed that they appear to be taking a measured approach to this, instead of flying off the handle and doing something stupid. It’s so rare and marvelous.

Almagill said on October 20th, 2006 at 12:35 pm:

Interesting to see this make the News here in the UK.
Channel4 News – Taxing Second Life

While the US legislature seems to be taking the view that once virtual transactions cross over into real currency then that’s when the taxman should get interested, I rather worry that our, uhm, reactionary leader is more prone to try grabbing virtual assets if he can be persuaded there’s any way of doing it.

/me wanders off humming “That’s one for you, nineteen for me… “

Allen Sligar said on October 20th, 2006 at 1:27 pm:

Or one for you and 900 million for me….
http://news.bbc.co.uk/2/hi/business/5151916.stm