Taxing Ingame Economies

[Venkman]

Not that I always just want to cross-post from other places, but this article at TerraNova is worth talking about.

Basically, it's a question about whether ingame transacations (not RMTing) are taxable within the game world. Logistics aside, I like this comment from one of the respondents:

The first major case will go something like this: some creative tax accountant will discover a way to take a million dollars in cash from the Mafia or the Cali cartel, launder it through platinum pieces or Godly Armor of the Whale or whatever, and end up giving it to someone else in a way that is not, according to the accountant, taxable. (Buy platinum on Ebay, hand platinum to other character, sell platinum on Ebay. Not subject to the gift tax because virtual platinum has no value, right?) The IRS will disagree, saying that just because you waved your hands or cycled the money through Everquest, it's still taxable. They'll go to court, the judge will see through the accountant's sham, the IRS will win the case, and the decision will be TRUMPETED EVERYWHERE like so:

"GREEDY TAXMAN GOES AFTER VIRTUAL GOODS"

Now, that directly links ingame taxation to RMTing, which is the first mistake I made when commenting on it (I misread the article). But there is a tie there that is possible, and therefore, a way the IRS will sit up and take notice.

It was just a matter of time anyway. The bigger these games become, the more they're talked about. The more they're talked about, the more the IRS takes notice. If there's a method to tax it, they will. I'd hate to be a developer who had to write the code to tax each transaction, compare the total worth of collected tax currency with the daily average value of that currency in real world dollars, and then send it off to the IRS quarterly like a good little business.

I'd just go the AC2 route and remove currency, making everything a straight barter. It would suck, people would cry, and the world as we know it would end. Or something.

[Paelos]

Speaking as an accountant, there are already much better laws to screw with laundering mass sums of money than dealing with internet games. Not to mention that there is no such thing as "creative accounting" around gifts the way it would work in games. It's just a matter of making it so complicated that nobody would notice, and it goes under the radar. It's simply a dodge, and you don't need an accounting degree for that.

[Venkman]

Actually, I didn't take that quote to mean this is the best or first way to tax ingame economies. I took it as simply the first method by which the IRS takes serious notice. What they do thereafter to tax games is entirely separate. This is simply a hypothesis (not my own) on one way they can start.

[cevik]

Actually, I didn't take that quote to mean this is the best or first way to tax ingame economies. I took it as simply the first method by which the IRS takes serious notice. What they do thereafter to tax games is entirely separate. This is simply a hypothesis (not my own) on one way they can start.

The post is flawed in it's logic.  If you are selling things on ebay, you can be taxed.  If you buy plat, trade plat, sell plat, you'll get a tax statement from ebay that said "you had X amount of income from selling items on ebay this year", you get taxed, and the IRS is happy.  You can't launder money that way.

At least that is what ebay told me when I sold a couple of synths this year.  I haven't gotten the statement from ebay about my income, but I assume it's incoming.. :)

EDIT:  Bad Mods, inviting investigations is not good juju.

[Gutboy Barrelhouse]

Perhaps the IRS is not the government agency you should be worried about.

[Johny Cee]

Also as an accountant:

Electronic money transfers leave a nice, neat trail.  It doesn't matter what you call it,  the IRS will get you on either Income, Capital Gains,  or Gift Tax.  If the IRS goes looking,  they'll find a trail of money going into/leaving the account of a reputable bank.  And, as incoming income,  you'll either get hit as Ordinary Income or Capital Gains.  You will not have any basis to take against the Cap Gains,  and you'll need legitimate business expenses to take against Ordinary Income.

Generally, the way the IRS will work: 

Go in,  call all deposits in a bank account revenues,  leave the burden of proof on the taxpayer.  The taxpayer is then responsible for tracking down sufficent documentation and evidence to call it either an income or non-income amount.  Or the client is left with the prospect of litigation,  which tends to get pricey very quickly.

The best way to launder money will forever remain cash businesses.  Cold, hard cash leaves a much smaller trail: you only have to docter receipts/invoices,  not bank records.  And it's perfectly liquid.

Ebay, Paypal, and other online brokers/arbiters will roll over to the first big push the IRS or a state Department of Revenue makes,  and give up the clients.  It's not worth fighting it.

And you DO NOT want to fuck around too much with transfers between domestic and foreign bank accounts.  The Fed is getting very serious about out of country money.  The fine for failing to report out of country funds (Form TDF 80-22.1, for Corps at least) is now a minimum of $10,000. 

That's just failing to report it.  They really fuck you if you're engaged in screwy transactions.  They start labeling it as Foreign dividends and hitting it with taxes and penalties for the divident,  then start mucking around on your Income Tax returns.

[Johny Cee]

For clarification:

Nearly all individuals,  and most small businesses (less than $5 million in gross receipts generally),  are cash method taxpayers.

Basically,  this means you don't have to recognize a transaction unless it hits cash.  Exceptions include taxable fringe benefits (long-term disability, living arrangements, expense plans, etc.... gets complicated) for individuals.

The IRS won't give a shit if Joe Catass is trading virtual goods around.  It's not until he starts receiving cash and 1099's from Ebay that they'll come in to wet their beak.

Really,  I don't think that the market and taxation of virtual goods will vary significantly from the way Collectables (baseball cards, curios, what have you) are handled now.

There may be some issues with Estate planning.

Joe Catass dies.  He has $10,000 (valued at market using IGE/ebay/what have you) in virtual assets.  His estate tries to claim the value on their return,  to get the step-up in basis and therefore giving his heirs basis in the virtual assest when Joe passes away.

/shrug......  Maybe not.

[cevik]

At least that is what ebay told me when I sold a couple of kiddie porn mags this year.  I haven't gotten the statement from ebay about my income, but I assume it's incoming.. :)

Nice edit.  I'm proud of whoever did that one.  Unless there is a filter to change synth into kiddie porn, which I would find the history of such a beast interesting indeed.

EDIT:  No filter.

[Swede]

haha.. if a gain is taxable, is a loss deductable?..P

[Roac]

haha.. if a gain is taxable, is a loss deductable?..P

Often not.  There are some details in the laws, but losses like that are usually defined as "hobbies" by the IRS.  Seriously.

[Swede]

Ahh. Here in Sweden they tried (or propsed at least) to make online poker winnings taxable, but kinda dropped it when they realised they had to make losses deductable as well...)

[Johny Cee]

haha.. if a gain is taxable, is a loss deductable?..P

Often not.  There are some details in the laws, but losses like that are usually defined as "hobbies" by the IRS.  Seriously.

If it's not a trade or business you're actively engaged in,  then no deduction for you.

Gambling losses are deductible to the extent of winnings.  Yes, you need backup for these deductions.

[HaemishM]

You act like IGE/Yantis isn't using MMOG's to do this kind of laundering already.

[Strazos]

One of the big Yantis guys was in my EQ guild for a time....total douchebag. My rogue was pretty poor, and he was trying to justify the purchase of new boots to me, because I would get some VERY minimal stat increases. I don't think he could comprehend that I didn't have thousands upon thousands of plat to wantonly burn through.

[Mesozoic]

Saw this and thought it worth posting.