In the US, the basic theory for the IRS is that all income is taxable. Clearly, the first big questions is 'what is income?' The answer is 'pretty much everything,' even the fair market value of bartering. The most notable exception for our purposes is those items which appreciate in value. That appreciation is not income until it is realized, and the income is the amount earned over the 'basis,' which is generally the original purchase price. I know this is a little cerebral, so I'll try to illustrate it with an example.
Let's say I buy a pack of baseball cards. The pack was $2.00, and there were 20 cards in the pack, so each card was $0.10. One of those cards happened to be a rookie card for a player who goes on to the hall of fame, and the card trades on the market for $100 sometime in the future. While I hold the card, I've earned no income, but if I sell it for $110 in 2042, then my 'income' is the sale price minus the 'basis,' or $109.90 in this case. Of course, there is only income when the value goes up.
Let's take another example. Let's say I own copies of Chrono Trigger, Earthbound, and Shaq-Fu for the SNES, all of which were purchased new back at the release date for $60 plus 10% sales tax. Let's say that, despite hanging on to them for years now, I've decided to sell all three of them on eBay. Chrono Trigger sells for $100 with $10 in eBay fees, Earthbound goes for $175 with $15 in eBay fees, and Shaq-Fu sells for a whopping $1 with $0.50 in eBay fees. On the first sale, the income would likely be $24, the second would be $94, and the third would be...? Zero! Exactly. See, it's not so complicated. (I say it's a "likely" value because eBay fees should be deductable and I don't expect the basis of these items needs to be adjusted.)
So how does this apply to MMOs? This is the subject of some debate, and actually applies differently to different game models. If you play Second Life, then any business you run in the game is likely treated like a real world business. Any game costs would be costs of doing business, and any income would be reportable. As for when that income becomes reportable in the SL model, there are two schools of thought. The more common position is that income from SL is only counted once you 'cash out' Lindens for real currency. The alternative theory is that once you earn a Linden, you've earned cash (similar to the concept that once you receive a check, you've earned cash). To date, the issue hasn't been resolved.
The more complex examination is the more traditional model followed by games like World of Warcraft. Generally speaking, the cash out rule is the basis for income in those games. That is, nothing in the game is income until you 'cash out' by selling the item for real money on, for example, eBay or some such site. The simple reasoning for this is that the items, even gold, don't have any sort of easily identifiable value from an official source until they're actually sold. What simplifies the analysis is that most scholars would consider the sale of a virtual good to be the sale of a service, specifically the time taken to acquire the item in question.
It remains to be seen how the government will choose to actually address this form of income. It is possible that the sale of virtual goods will be considered the sale of goods, which could make determining basis in these items exceedingly complex (as a formula based on time and the cost of the subscription) or simple but inaccurate (setting basis at zero for all virtual items, which then ignores all functions of time and subscription cost). However, with the amounts of money that are changing hands for virtual items, I wouldn't expect the US government to take the 'don't tax the internet' position they've held on sales tax when it comes to income from virtual worlds for much longer.
Mark Methenitis is the Editor in Chief of the Law of the Game blog, which discusses legal issues in video games. Mr. Methenitis is also a licensed attorney in the state of Texas with The Vernon Law Group, PLLC and a member of the Texas Bar Assoc., American Bar Assoc., and the International Game Developers Assoc. Opinions expressed in this column are his own. Reach him at: lawofthegame [AAT] gmail [DAWT] com.
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