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Why the IRS won't invade Azeroth

Mike Schramm

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.

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