Congressman: No Tax on MMO Transactions

October 20, 2006 -
 An influential member of Congress thinks it "would be a mistake" for the IRS to tax virtual economies within games like Second Life or World of Warcraft.

As reported by Adam Pasick, Reuters' man within Second Life (we love that "Second Life" dateline, by the way...), Rep. Jim Saxton (R-NJ) confirms that the Joint Economic Committee, which he chairs, is looking into the tax ramifications of virtual economies.

Saxton released a statement this week which read, in part:
“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."

“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."



"...if the transaction takes place entirely within a virtual economy, then it seems there is no taxable event."



That seems like good news for people who trade within the MMO space, but does it have similar implications for, say, Microsoft's micro-transactions on Xbox Live? Will major corporations be spared tax liability on those profits?




Comments

Everyone is trying to explain to each other what the tax is really about, so that made me thought of something, any tax on MMORPG gold would be a bad idea, why because most gamers might believe it will automatically mean taxing their virtual gold they obtained legally or they might be convinced this by the new tax's opponents, once that happens, like I said, it will face massive resistance.

Well thank God this man doesn't want the tax, I can just imagine a long hard court battle, a massive protest or riot in D.C. or some other kind of resistance from gamers if Congress tried to pull this.

I hope they don’t tax virtual transactions simply due to my nature of being a smartass (which increases my liklihood of being jailed). I would gladly send the IRS a check made out in the form of ISK or Gil.

So would I not just because I like to be a wise ass, I play an MMORPG which bans trading their gold for real money, nevertheless people do anyway, so if the IRS wants to tax me on my gold I'll send them a check in gold since I can't convert it to cash without potentially losing my entire acoount (and all its money), this will also mean that the IRS won't be able to convert the gold into money since the makers of the MMORPG (which is based in the UK) will undoubtedly be keeping an eye on them.

I think what they're saying is a transaction that takes place inside the game (i.e. buying a Sword of Spiffiness +2 for gold coins in WoW) should not be taxed, but if you take that Sword of Spiffiness +2 and sell it on Ebay for $35 that should be taxed as it represents real world income.

Microsoft is making real world income by selling those games on XBL, so that should be taxed and current laws agree with that.

Charging sales tax for genuine currency spent makes some sense, but trying to charge for something like World of Warcraft makes abotu as much sense as trying to charge property tax to monopoly players.

I hope they don't tax virtual transactions simply due to my nature of being a smartass (which increases my liklihood of being jailed). I would gladly send the IRS a check made out in the form of ISK or Gil.

great now the government is trying to tax my virtual income. Before you know it the government will be in our games as much as real life. By that I mean voting, politicians, blah blah blah. I play games to escape realism not an extension of it.

The government is putting stupid pills in the water again, and I think their drinking it now

Why would you want to tax things that don't exist anyway?

^ Gee, I dunno. I mean, who really wants free money?

Seriously, though, if they really did want to take a serious look at considering this, can you imagine the money they'd have to put into it putting people in charge of managing virtual-to-real money conversions for every game out there and then monitoring every transaction taking place in the game?

^
I'm sure it would generate quite a few jobs there :p

Taxing virtual money really doesn't make sense. I can understand taxing transactions in real life, but taxing our free time? Doesn't make any sense at all.

Aren't XBox Live Marketplace's microtransaction already taxed, when you buy the MS Points or whatever it is you need to exchange within said Marketplace?

@DrkMatter

In a way, they are. But that's because Marketplace points are purchased with actual moolah. They aren't a seperate form of currency in a virtual market like in MMOs, merely a medium of exchange from real-life currency.
From the Wikipedia article:
Depending on the registered country or address of an account, the purchase of Microsoft Points may be taxed. The following list includes (but is not limited to) regions which must pay value added tax or luxury tax in accordance with local government regulations:

Austria
Canada
Germany
New York, USA

Taxing on World of Warcraft assets would never be legal because from a legal standpoint, gold buying and selling is againg WoW's TOS and EULA. Therefore, from a legal perspective, WoW gold is worthless and serves only to mark one's place within the game.

The government may as well attempt to tax someone's Monopoly money.

I don't think microtransactions will ever have a sales tax, as just about everything (there may be some sites I haven't seen) ever bought on any website ever is tax-free for the consumer.

As long as it keeps up the way it currently is, that'd be good for the consumer. Glad to see some politicians are still making some sense.

No EULA to the best of my knowledge has ever been tested in Court. It does not carry the force of law. It's a contract, but how enforceable in Courts it is, remains to be seen.

No one is talking about taxing the gold you got from doing the Crashing the Wickerman Festival Quest last night. We are talking about taxing Gold Farmers. THIS IS A GOOD THING! It eats into their profits, and helps to discourage the practice.

http://www.wcradio.com/forums/index.php?showforum=42

Great that we have at least one smart congressman.

Nicholas:

The majority of goldfarming operations are set up outside the US. I haven't imported in awhile, but last I checked whenever I bought something from Lik-Sang, there was no tax on it. Same deal here, unfortunately.

"No one is talking about taxing the gold you got from doing the Crashing the Wickerman Festival Quest last night. "


Ummm . . . . . That's exactly what they were talking about.

I quote from the article:

"There is a concern that the IRS might step forward with regulations that start taxing transactions that occur within [emphasis added] virtual economies. This, I believe, would be a mistake."

So you might be off base a smidge - this article doesn't really talk about either EULA's or virtual money/real money transactions.

~~All Knowledge is Worth Having~~

@Grahmar:

Unfortunately, he looks like he's less than a year away from turning into a fossil fuel.

this leaves the guy with a WTF?

Some of us already have to pay for the damn game so we can enjoy it some more, and I seriously DOUBT any of us want to throw more money away just because the gov't wants to tax it.
And what about the overseas people that play the game? Then they'd be charged for playing the game in a country they don't freakin live in! Oh, I'm sure that would go over real well.

The idea sucks so much IMO, and is seriously just trying to reach for money, especially from the several million people who play these games regularly.

The legality of the transaction, the actual value of the item in question, is irrelvent to the IRS. If I sold a breath of fresh air to someone for a million dollars the IRS would want their cut of that million. The IRS states it the best:

http://www.irs.gov/individuals/article/0,,id=140253,00.html

The problem with taxing something that doesn't exist is that it has no value until it's sold for real currency and that is something that Rep. Saxton recognizes. Same thing with any item in the real world. They can't tax you for growing tomatoes until you sell them to your neighbors. If you just consume them, no tax. Despite the claim that tech is growing faster than the law, it really isn't in this case.

There's so many things wrong with this, I don't know where to begin. It's massively unfair to players like me, who are just playing a game and would be taxed for doing just that.
Boffo brought up one of my main points. If the government put a 10% tax on the official value of my character, it'd come to a whopping $0.00. This could be a problem for Everquest, though, as there is an official channel you can use to buy gold.
Furthermore, I'm not sure the government could legally force Blizzard to divulge character information to them. Not to mention that monitoring all that would be a heavy strain on their already burdened servers (Anyone remember a time when your characters at the selection screen were all naked (with undergarments, of course) to avoid the strain of looking up their armor?)
In the end, taxing someone who was just playing the game is analgous to this. I buy a canvas and paint (and pay taxes on them). I make a terrific painting that's worth $1,000,000. I hang it on my wall, and the government taxes me for it.

This is not about taxing virtual money acquired through gameplay to buy virtual items acquired through gameplay. This is about taxing the same of virtual property acquired through gameplay using real money.

I think it may become necessary to do so, simply because of the legal implications. Need a boost in your campaign fund, but don't want to call it a contribution? I'll give it to you in the virtual world. Want to collect drug money, but have a credible story of where that money came from? Virtual selling covers it. Want to make a large business transaction but avoid taxes? Cover it in an online transaction of virtual goods!

There should be some thought into findind the right balance. It should be an income tax rather than a sales tax - the taxation should be placed on the seller and not the buyer.

The first paragraph of the previous post should have read:

This is not about taxing virtual money acquired through gameplay. This is about the taxing of real money used to purchase virtual property.

(My apologies, for some reason I completely overlooked the confusing wording before I sent it.)

taxing transactions in a game? Are they serious? Whats next, taxing weapons i buy in Counter-Strike or something. Quickly! pack away all the air you can before they tax that too!

Those transactions are already taxable as income. If you sold your drugs and told the IRS it was from the sale of ingame currency they would still take their cut from it. The IRS doesn't care from where you got your income, just that they get their percentages.

http://money.cnn.com/2006/08/23/pf/taxes/online_taxes/index.htm?postvers...

What is being taxed here is anything bought with real U.S. dollars, not anything bought with fictional game money. There are communities of people who buy and sell in-game objects using real-world money. Should they avoid federal taxes, even though they are still making financial transactions using U.S. currency?

Is the U.S. Goverment so greedy for money. They tax incomes, propety, and sales. Is there nothing the won't do to nicle and dime us. OOHHHH wait..... the IRS is a bank that is what banks do get due/fees ecept that they are called taxes.

@Zanzer

You, like Nicholas, weren't paying attention. Read the article and the statement:

"A virtual economy is defined as the universe of transactions that occur WITHIN an online community, such as Second Life or World of Warcraft. These transactions include the sale of goods and services and take place ENTIRELY WITHIN virtual economies;"
[emphasis mine]

If someone puts a sword, character, or gold on e-bay or uses paypal to transfer real currency, then by -their own- definition that transaction did not occur inside a "virtual economy", but out in the normal internet economy that is already taxed under existing laws.

Thank you, Brer. I was geting tired of repeating myself.

Look people, the points you bring up about real/virtual transactions are all interesting. Perhaps take them to the GP forums for debate? Read first. Comment second.

But this article is NOT about them. In fact, we can applaud this guy's comments. He seems to have a good sense about virtual games, saying: "Clearly, virtual economies represent an area where technology has outpaced the law." That sentence alone shows remarkable insight for one of his generation. (NOT all of an older generation, just the out-of-touch, vocal part)

~~All Knowledge is Worth Having~~

For the legal background on EULAs

EULAs have gone to court many times:

http://cyber.law.harvard.edu/ilaw/Contract/vault.htm
http://cyber.law.harvard.edu/metaschool/fisher/contract/cases/step.htm
http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?court=7th&navby=case&no...
http://www.eff.org/IP/Emulation/Blizzard_v_bnetd/20050901_decision.pdf

In most jurisdictions most of the provisions have been struck down as unenforceable. A few courts have upheld EULAs as valid contracts. In the most extreme cases (Virginia and Maryland) they even passed the excreable UCITA (Uniform Computer Information Transactions Act). However, these cases mostly had to do with the question of whether you're buying a good or buying a license, right of first-sale, fair use, etc. As for TOS cases, I'm looking...

I keep losing this link. I meant to post it last time as well.

http://news.yahoo.com/s/nm/20061016/lf_nm/life_secondlife_tax_feature_dc_1

The dispute is in game worlds where game dollars translate into real dollars and a player can opt to "cash out". Should holding onto investment property in this case be taxed?

ok so... can someone explain this for me? Because the message I'm getting is that they wanted to make you pay real money based on your income in an MMO...
---You are likely to be eaten by a Grue.

I'm a bit confused. How do they intend taxes anything on the internet? Be it Microsofts micro-transactions or idiots selling gold on ebay. The U.S Doesn't own the internet. How could we possibly even attempt to tax internet transactions. Seeing how people all over the will are purchasing these micro-transactions, items, etc.

Here is the breakdown in the US, the rest of you have to consult internet know-it-alls in your own country:

Ingame item for Ingame currency = No Tax
Ingame item for Real world cash = Income Tax

What some are confused about, even some in Congress it would appear, is if the first should be taxable and are under the mistaken belief that because it's on the internet or computers it is something new. It's not. Until the IRS takes people for passing GO and collecting 200 bucks, the standard of not charging people for game currency will remain.

I'm glad I won't have to change my vendors on SL now. I mean, really, I've made all my gold online, and I spend it on online stuff. Plus, how much tax were they wanting for my L$450 aircraft? 5% or something? If they make me file income tax reports for Lindens I earn on SL, I'm gunna have to start keeping a LOT better record of who's buying what.

The bottom line that many gold-buying defenders miss is simply this:

All assets within the WoW universe belong to Blizzard. All the gold you have, all the inventory agreements you have, everything. This is why Blizz can cancel your account for any reason, and even if you had 10,000 gold and were completely dressed in epic armor, you'd have no legal recourse.

That said, when you "possess" gold in-game, it is ONLY to mark your progress in game, much like Monopoly money.

When someone buys or sells gold, they are merely paying money to "move their marker", not for any sort of tangible asset.

Therefore, it can never be taxed because:

1. LEGALLY, it has NO real world value.
2. It all belongs to Blizzard anyway.

[...] No MMO tax. [good] [...]

It's not that anyone missed it, it is that your points are moot. When real money changes hands in the outside world, such as in a sale of WoW currency, someone now has income and will have to pay taxes on that income if they fall under the jurisidiction of the IRS. Gold sales done by folks in the US are already taxed as income and failing to report it will get you into trouble if you are ever audited. SOE will charge a sales tax on game items sold in the places they have charge sales tax.

http://stationexchange.station.sony.com/faq.vm#SalesTaxCharge

Once a game transaction meets the real world, there is already a real world tax for it. This notion they can't tax it, or aren't taxing it, or that the tech has outpaced the law is to ignore the facts.

The ability to tax ingame sales for ingame currency is the impossible feat because there is no taxable event taking place. Once they finally get around to thinking about it past the soundbite stage, this tax threat will quietly fade away.

If I were to sell you the Golden Gate bride for a million dollars I'd have to pay taxes on that million. Of course, not paying taxes on it wouldn't be the only crime I would be guilty of, but to claim that because people don't own or possess the item being traded is to misunderstand what the IRS does. If you gain money from any source, it is income and they want it and they really don't care if it's legally obtained or not.

Well, then, my points aren't really moot, it's just that to even consider this possibility to be a "tax on MMO gold" is disingenuous in the first place.

I quite agree gold sellers could and should get nailed for income tax evasion, among other crimes (such as theft, which it's commonly called when you sell off someone else's property for money)

Of course if this discussion is followed up long enough between WoW (and other MMOs that ban gold selling) and the government, you might see some action taken. It's really hard to legally file taxes on something you're not supposed to be selling in the first place.

That's how they nailed Capone.

I wonder if the mmo makers can put this to their advantage. If they can convince the gov that they own all the properties. Maybe they can sue the sites that are trading their propertiy for real money.

Gathered from SOE.
SOE states it is only charging a sales tax on the listing fee (service) in certain areas of the US where it is required. So a transaction of $100 is only a $10 listing fee (service). The service is being taxed.

What throws me is Rep. Jim Saxton (R-NJ), chairman of the Joint Economic Committee, said that under current law, if a transaction takes place solely within a virtual world there is no “taxable event.”

Why is SOE collecting a sales tax if it is virtual world?

There's a fundamental problem with an all-around tax on virtual goods. Although an outside sales tax is entirely possible, a tax on in-game goods themselves as has been mentioned before is entirely impossible (and crazy from a legal standpoint). Why, exactly?

Well, it's fact and legal practice that a stolen good is taxable. If I steal a neighbor's car, I (ideally) owe tax on it.

However, taxing in game goods themselves is like taxing me while my neighbor still has his car... It's still not mine to be taxed.

[...] GamePolitics.com raises an interesting question: That seems like good news for people who trade within the MMO space, but does it have similar implications for, say, Microsoft’s micro-transactions on Xbox Live? Will major corporations be spared tax liability on those profits? [...]
 
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