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 Are Virtual Assets Taxable?

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Date posted: 21/01/2006

Two years back, Julian Dibbell set his ?play money? challenge. As he himself wrote:

"On April 15, 2004, I will truthfully report to the IRS that my primary source of income is the sale of imaginary goods, and that I earn more from it, on a monthly basis, than I have ever earned as a professional writer."

He lost the challenge, with his income as a professional writer for the year coming up a few thousand dollars more than his income from ?imaginary goods?. However, the precedent was demonstrated to all ? and that was in the virtual world Ultima Online alone.

Two years on, and Dibbell?s latest foray into the subject is setting the communities on fire again. Legal Affairs, a periodical magazine, have published a new article by this author which poses a very tricky subject: Should online game players' assets - the weapons, characters, clothing and such - they've accumulated but not yet sold for physical-world cash be taxable by the IRS?

"If you haven't misspent hours battling an Arctic Ogre Lord near an Ice Dungeon or been equally profligate spending time reading the published works of the Internal Revenue Service," Dibbell's essay begins, "you probably haven't wondered whether the United States government will someday tax your virtual winnings from games played over the Internet. The real question is: Why hasn't it happened already?"




It is a very valid question, especially since, with the ever-continuing growth of such sales, and the increasing number of virtual worlds either supporting it, or engaging in through ebay, hundreds of millions of dollars US worth of goods are being exchanged.

The problem with the American IRS getting involved, more than the financial losses, is that a large majority of online game players do not actually live in America. That means giving tax money to a foreign government, no matter where in the world you live, or where your server is located.

The other matters of the question are more pressing to most however: Are virtual goods that are frequently bartered and exchanged in the virtual environment recognisable as taxable possessions before they are sold for physical-world money?

If they are, then it opens up a whole new can of worms for property rights.

"From the standpoint of economic theory...there's no fundamental distinction between selling euros and buying magic wands," said Ted Castronova, an expert on virtual economies and an associate professor of telecommunications at the University of Indiana at Bloomington. "They carry value with them. If you're going to tax exchanges in the real world, you've got to tax exchanges in the virtual world, in economic theory."

The problem, said Castronova, is that it's not about economics.

"It's about common sense," he said. "Common sense says that when people are playing a game of Monopoly, you don't tax (the properties they buy and sell)."

Dibbell isn't so sure. He said that while the IRS has ruled that some forms of goods with inherent value--such as then St. Louis Cardinals star Mark McGwire's record-breaking home run ball from 1998--are not taxable assets until they are sold, that may not always be true.

"As the RMT (real money trading) markets get bigger and more normalized, how long are the tax agencies of the world going to forebear?" Dibbell asked. "At a certain point, it will be less crazy-looking to everybody and therefore more palatable, and there will be more money involved."

No one knows the exact worth of the virtual assets of the millions of online game players. But with estimates for the sales of such goods going as high as $880 million a year, the unconverted assets are surely worth similar amounts. Thus, the government's share, if the government were ever to lay its claim, would be substantial.

See the full Story via external site: news.com.com



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