US considers taxing earnings from online games

Sunday, October 22, 2006

With online gaming in persistent worlds becoming more prevalent, a US congressional committee has begun to look into the tax implications of these booming online economies. Games such as World of Warcraft and Second Life have large player driven economic systems in which – either following the rules or against them – real world currencies are exchanged for in-game currencies. With the GDP of some of these economies rivaling that of some small countries, the US government is wondering if it is missing out on a potential source of tax revenue: or as some gamers might put it, the IRS is asking “You buy gold?”.

In cases where exchange of a real world currency for in-game currency is permitted by the rules of the game, some of these online games such as Second Life require that players report any income generated by these means to his or her government. In most on-line games however, a black market exists where players buy and sell in-game currencies in direct violation of the game’s rules; situations involving black markets are notoriously hard to tax.

Compounding the issue of currency exchange is the existence of in-game assets. In the real world if someone wins a luxury vehicle, he or she is expected to pay a capital gains tax on his or her winnings. If a 40 person “raid” in World of Warcraft gets a rare “drop,” worth up to thousands of dollars if sold illegally, should they be required to pay a capital gains tax?

Even if the issue of capital gains is ignored, there is still the matter of sales tax. In many of these games, non-player characters and players alike sell items to one another. If sales tax is to be applied, at what rate should it be charged and to what State does it go? Questions such as these have just recently been answered in much less hazy situations such as online versions of brick and mortar establishments.

Dan Miller, senior economist for the Joint Economic Committee had this to say on the issue, “I found that talking about this issue with some of the other economists on the committee, they are not really familiar with what a virtual economy is. The idea of Second Life or World of Warcraft or some of these other synthetic universes, they have trouble wrapping their head around it. So there’s an educational hurdle to overcome here.”

The preliminary findings of the committee state that virtual economies deserve clarification of existing tax laws, not new taxes.