RMT set to bring taxes to online gaming

[Venkman]

You say that with such authority, but these terms are hardly set.
I'd say microtranscation are sub-set of first-party RMT like Pirates and that distinct from online auctions for third-party RMT like ebay.
RMT being the umbrella category that includes anytime real money interacts with the virtual game beyond excluding a subscription fee.

Micro-transactions are used to fund the development and continuation of the game, usually at the exclusion of subscription fees (though with the inclusion of ingame advertising). As a business, it is a legitimate source of income, various line items reporting up into a matrix of taxable statements. This money is already taxed as part of doing business.

RMTing is just between players, using real world money to conduct an ingame transaction. Unless the company takes a cut (like SOE's trade-enabled servers), the company doesn't see any money. It's more akin to reselling goods. All money is between the two parties making the transfer, and as such, it's only their money that's taxable.

[Venkman]

Update from our buddy Zonk, about Congress to Revisit Virtual Goods Taxation

Key quote (which is about 2/3 of the total article anyway)

Dan Miller, a senior economist with the Congress' Joint Economic Committee, told CNET News.com on Friday that he expects the committee to issue its report during the upcoming Congressional recess next month.

What that report will say is unknown, as the committee has kept entirely quiet about its thoughts.

However, it's clear that something will happen.

"Given growth rates of 10 to 15 percent a month, the question is when, not if, Congress and IRS start paying attention to these issues," Miller, who is a fan of virtual worlds and economies, told CNET News.com in December. "So it is incumbent on us to set the terms and the debate so we have a shaped tax policy toward virtual worlds and virtual economies in a favorable way."

[Merusk]

It's going to go badly for games. I guarantee it! And everything I've ever guaranteed has fallen to ashes, so here's hoping the curse holds true!

[CharlieMopps]

Well, there's several issues here...
1. If the IRS doesnt tax them, they could become a tax shelter. You could simply buy up realestate in UO or Gold in EQ2 untill you had $100,000 worth and then claim it as a loss. The IRS wouldnt be able to touch it. Then you could resell it 10 years later... Tax free.
2. Currently Virtual markets are extreamly unstable... thats why people dont do #1 yet... But that could change
3. A disreputable software company could easilly exploit their users... What if the Gold-4-sale websites were actually supplied by SOE? What if its SOE selling us our gold and not Chinese bot farmers like we always thought? That sort of thing holds legal and moral implications I cant even comprehend.

[Venkman]

With taxation comes heftier accountability requirements on the part of game developers. As mentioned a the recent Virtual Games Summit, it'd require game companies to start acting more like banks. That's fine for Korea, where everything is so integrated. But it'll be tougher here because game companies usually just write off the secondary market as aberrant behavior. Sorta hard to keep doing that in the face of it benig an estimated 2 billion dollar industry, but there it is.

[Yegolev]

Seems like everyone takes the gaming industry more seriously than the people that work in it.

[Numtini]

I still don't take any of this seriously and I suspect the real people pushing for the taxation thing are the "virtual property" activists aka people who want to be allowed to cheat as a right.

One of the things to think about is we always here that it would be too much trouble to track everyone cheating and ban them. Well, if game companies were required to monitor in game transactions to the level required for taxation, that would require enough infrastructure to make finding and banning RMT quite easy anyway. Probably it would just put most games out of business because of the expense. Or they'd just eliminated trading.

[tkinnun0]

Or they'd eliminate time/money requirements to obtaining virtual goods. Oh well, one can dream.

[Sogrinaugh]

http://news.com.com/IRS+taxation+of+online+game+virtual+assets+inevitable/2100-1043_3-6140298.html?tag=st.num
http://www.gamespot.com/news/6162654.html
http://www.gucomics.com/archives/view.php?cdate=20061205

Though I'm an Internet Eternity Late on this, I thought I'd bring up this topic.  Basically, some experts are predicting that taxation of owning virtual items is an inevitability.  The implications are interesting, to say the least.  Personally, I'd just like to string up RMT traders by their gonads for requiring me to hire a tax consultant because I play MMORPGs.  Then again, I've been wanting to string up RMT traders by various painful parts of their anatomy for years just for dragging real life commercialism into my fantasy world.

Sympathize 100%.

Will taxation of virtual goods be doable even when players don't own them?  I.E. if all RMT transactions are against the terms of use (illegal? breach of contract?), and if the company is aggressively trying to eliminate RMT traders for such, will transactions between traders in-game and/or the AH still be taxable?  What about killing mobs and getting phat lewt?  Every time a rare/epic item drops and someone wins it, they have to claim a % of its worth on their income tax?  A % of all gold farmed?

If the company owns your characters and all items and basically all "stuff", then what the fuck are we doing?  Leasing?  Why do we have to pay taxes on other people shit?  Or will the goverment remove possession from the company and grant it to the people so that they can tax this shit?  If said company won't take this shit, will i have to move to Korea to play this shit?

Not that i expect you to answer this shit... :(

[CmdrSlack]

If you cash out via RMT, you'd get taxed.  Any other taxes people are talking about are chicken little scenarios.

[funcro]

If you cash out via RMT, you'd get taxed.  Any other taxes people are talking about are chicken little scenarios.

What about alternative minimum tax?  I know some people who got bitch-slapped by AMT back in the late 90s specifically because they didn't cash out.  They exercised stock options but held the stock (I didn't say they were smart people), and then woke up one morning to find the stock worthless, but the IRS still wanting tax from profit they never realized by buying the stock at a discount.

Could something like that happen with virtual goods?  I honestly don't understand enough about AMT to say.

[cmlancas]

Is anyone looking past the obvious taxation here?

If the government is taxing the 1,000,000 platinum changing hands in Game_01, what happens when Cheating_Gamer_06 dupes platinum? Does that make him/her a felon since he/she is in a roundabout way defrauding the government? If things like this pass, I can easily forsee laws that could possibly make it truly illegal to "cheat" in an MMORPG where goods of value change hands. Hell, that guy who was suing Linden Labs over breach of contract could easily have been arrested under laws that follow this logic.

Perhaps CmdrSlack or someone with a bit more law knowledge than I might explain where I think I am going with this thought a little better.

[Strazos]

Also, roundabout counterfeiting. 

[cmlancas]

Also, roundabout counterfeiting. 

The list goes on. I'm really interested in what people have to say about this.

[Strazos]

I support the general idea of taxation, as I have no interaction with the RMT market.

[Johny Cee]

Taxation of virtual goods isn't going to happen, because virtual goods are already adequately covered under the present tax code.

1. As Slack said,  any time you cash out it's a taxable transaction.  Sell 500 gold for $50 bucks,  you have either a Short Term or Long Term Capital Gain equal to the dollar value you sold the gold for, since your virtual good has no basis.

2.  A customer buys Sword of Uberness from SOE for $50,  this is Ordinary Income to Sony of $50.

3.  First problem issue:  A company starts a service where you can use WoW gold to purchase physical items,  like books or music.  Likely,  this will fall under the rules set up for the various organizations that used coupons/certificates/other arbitrary items as a currency in an attempt to get around using cash and therefore not be a taxable transaction.

In those cases,  the company is required to give a 1099 or other form listing the approximate dollar value of the purchased item and pick the item up as income. (Little fuzzy on this,  since it's been awhile since I looked at this issue.  Fairly certain thats the correct treatment).

As an example:  If you win a car in a raffle or on a gameshow,  you're given a 1099 for the value of the property.

_______________________________________________

Other things mentioned:

Tax Shelter --  You can't use UO gold as a tax shelter,  because: 
1.  You have to sell or write off as worthless the investment (have an economic transaction), giving up all future rights to the purchased property

2.  You are limited to taking a deduction to the amount of basis you have in an investment/shelter.  That is,  you can only take a tax deduction up to the amount you invested in the property.

3.  There are specific rules as to what is considered an investment.  In general, collectibles (which most MMOs would probably fall under) are extremely difficult to take a loss for.  The other option is it's treated like gambling losses,  in which case at best you get an itemized miscellaneous deduction up to the amount of winnings.

4.  The transactions have to have an economic purpose,  and not solely be for the purpose of avoiding tax liability.  The IRS usually just issues an "estimate" of tax liability (read:  sends a nasty-gram making up a huge tax liability,  and sits back and waits for the taxpayer to contact them).

______________________________________________


Just about the only way I see a tax deduction arising is something like Magic,  where it is a Pro Players profession (file a Schedule C, recognize income on the Sched C, and it's their primary occupation).  If their card collection is stolen,  they could probably get a deduction for it.  Unless they've been writing off money spent on cards all along as a Sched C deduction. 

(Don't laugh....  Magic Pro players at an elite level can make a fair amount of money.  The top couple of all time Pro Tour winners are over the $500,000 mark.)

[CmdrSlack]

Seems to me that virtual currency in games like WoW or EQ2 or LoTRO is not the same thing as a stock option. They seem similar -- neither is worth shit unless you cash in. However, with the exception of SL and Project Entropia (and I guess to some extent EQ2), the virtual currency and goods aren't intended to be cashed in. That's why we have this "illegal" (the use of illegal in that context makes me throw up a bit in my mouth, but whatevs) third-party RMT industry.

I'm no tax lawyer, so maybe I'm wrong on that, but they seem functionally different to me.

I guess we'll find out in a month or two, but I highly doubt that there'll be any recommendations from Capitol Hill that involve giving real-world value to the virtual stuff found in various games. It just seems like the least possible option. All talk of duping = big time legal trouble sounds rather silly because of this. IMO, taxing the people who cash out (as well as the income of the RMT corps) would go a long way towards solving the problem. Hell, make it all subject to state sales taxes too. There's no need to make all of the virtual stuff the same as real stuff unless you really want to monetize these spaces in a big way. Then duping may be a big deal, but do you really want the government that involved in games?

Besides, I can think of a few existing legal theories that would allow companies to sue dupers if they thought they could get blood from a turnip.

ETA -- Also, the above post is chock full of goodness.

[Johny Cee]

Seems to me that virtual currency in games like WoW or EQ2 or LoTRO is not the same thing as a stock option. They seem similar -- neither is worth shit unless you cash in. However, with the exception of SL and Project Entropia (and I guess to some extent EQ2), the virtual currency and goods aren't intended to be cashed in. That's why we have this "illegal" (the use of illegal in that context makes me throw up a bit in my mouth, but whatevs) third-party RMT industry.

I'm no tax lawyer, so maybe I'm wrong on that, but they seem functionally different to me.

I guess we'll find out in a month or two, but I highly doubt that there'll be any recommendations from Capitol Hill that involve giving real-world value to the virtual stuff found in various games. It just seems like the least possible option. All talk of duping = big time legal trouble sounds rather silly because of this. IMO, taxing the people who cash out (as well as the income of the RMT corps) would go a long way towards solving the problem. Hell, make it all subject to state sales taxes too. There's no need to make all of the virtual stuff the same as real stuff unless you really want to monetize these spaces in a big way. Then duping may be a big deal, but do you really want the government that involved in games?

Besides, I can think of a few existing legal theories that would allow companies to sue dupers if they thought they could get blood from a turnip.

Individuals are on the cash basis, so when they cash out they get taxed.  And these transactions ARE already subject to state sales tax,  just like if you buy items over ebay/internet store/catalog you're supposed to report the purchases and pay in your sales tax.  Right now, most states aren't pushing the issue.

In New York the last few years,  they've added a line for sales tax on purchases to the income tax form.  If you buy items subject to Sales & Use tax,  and aren't taxed,  you should be reporting and paying in your sales tax on the tax return.

[Trippy]

South Korea is now taxing RMTs:

http://www.next-gen.biz/index.php?option=com_content&task=view&id=6223&Itemid=2

[Numtini]

I think this idea that you will be taxed by the IRS on gold pieces earned is a Frankenstein monster of gamers looking to add publicity to gaming, gamers who think if its taxable the game companies can't ban it, and internet libertarians who want another thing to bash the IRS over. Oh and a healthy dose of the same "journalists" who write stories about Second Life.

About the only thing I can see an issue over is clarification about whether or not this is pure income or a capital gain. But if you cash out, you have received income, and its taxable. If you don't cash out, there's no income. That's how other hobbies with far more real cash value work, why would this be any different?

[Johny Cee]

South Korea is now taxing RMTs:

http://www.next-gen.biz/index.php?option=com_content&task=view&id=6223&Itemid=2

I read the first two paragraphs.

VAT is the equivalent of Sales & Use Tax in the United States, NOT Income Tax.  The IRS has nothing to do with Sales Tax, as this is a state tax issue (at least until the Unified sales tax stuff gets hammered out).

RMT transactions should be (to my knowledge) subject to Sales Tax.  The difference from this article:

Korea is now requiring the "larger" RMT companies to automatically withhold/charge VAT on purchases.  Think about you local store...  they withhold sales tax,  and then are required to remit the tax to appropriate state gov.

In the US,  this has no relevance.  We refuse to force internet retailers and catalog companies to withhold sales tax.  Why start with RMTs,  which are a small fraction of online retailers total volume?

This leads back to what I was stating earlier:  You are already subject to Sales & Use Tax on Internet purchases.  You should be remitting your money (with the appropriate form) to the state government.  Yes,  I realize not alot of people do this now,  but it is growing.

[Trippy]

Except that's it's being handled by the NTS which the article equats to our IRS and it's not a pure sales tax cause only income above a certain amount is taxed.

[sinij]

Can I take a deduction for losing income in an MMORPG then?

I should be able to write-off most of my income to expenses incurred due to wiping in 5 mans.

[shiznitz]

If you can be taxed on a sale of your character, then you can expense your monthly fee against that. And the software. And your "office."  The IRS cannot just up and say "you sold something and you owe tax." When I sell my car to someone else, I don't get taxed (by the IRS, anyway. Sales tax can apply.) The IRS does not go after casual Ebayers, but they do expect those who use Ebay as a storefront to pay tax as a operating company. If you make a living from RMT, then the IRS is going to come after you eventually but if you sell 100 WoW gold every few months and you have a real job, then the IRS opens an unnecessary can of worms coming after those RMT "earnings" since you will have the right to claim costs against it.

[Stephen Zepp]

If you can be taxed on a sale of your character, then you can expense your monthly fee against that. And the software. And your "office."  The IRS cannot just up and say "you sold something and you owe tax." When I sell my car to someone else, I don't get taxed (by the IRS, anyway. Sales tax can apply.) The IRS does not go after casual Ebayers, but they do expect those who use Ebay as a storefront to pay tax as a operating company. If you make a living from RMT, then the IRS is going to come after you eventually but if you sell 100 WoW gold every few months and you have a real job, then the IRS opens an unnecessary can of worms coming after those RMT "earnings" since you will have the right to claim costs against it.

I'm not an expert in any way, but as far as I am aware you can't directly deduct expenses for a hobby against earnings you make from that hobby. Similar to the "professional vs hobby gambling" issues, but they do in fact have at least some ability to take without allowing you to deduct.

You finance guys jump in any time now!

[Numtini]

The IRS does not go after casual Ebayers

Just because they don't come after you doesn't mean that it's not income subject to tax. It just means that you're getting away with cheating.

Also, the reason you don't owe tax when you sell your car is because almost universally you are selling it for less than your purchased it for. There's an exemption for a personal use capital item, so you can't claim the loss. But if you, for example, bought a spiffy new Mustang in 1965 for $3400 and you sold it today for oh $25,000 you would owe on a capital gain.

[Johny Cee]

The IRS does not go after casual Ebayers

Just because they don't come after you doesn't mean that it's not income subject to tax. It just means that you're getting away with cheating.

Also, the reason you don't owe tax when you sell your car is because almost universally you are selling it for less than your purchased it for. There's an exemption for a personal use capital item, so you can't claim the loss. But if you, for example, bought a spiffy new Mustang in 1965 for $3400 and you sold it today for oh $25,000 you would owe on a capital gain.

Numtini is correct, to my knowledge.

[Johny Cee]

Except that's it's being handled by the NTS which the article equats to our IRS

Most Sales Tax/VAT agencies in most countries are organized nationally (or internationally, with the EU?  unsure).  The US is strange because Sales Tax is handled at the state level.

The author equates the NTS VAT department with the IRS,  but it really should be compared to the various state Sales Tax authorities,  which are usually subsections of the Departments of Revenue or Finance,  which handle state income taxes as well.

and it's not a pure sales tax cause only income above a certain amount is taxed.

No.  Unless Korea is radically different,  all transactions are taxable.  It's just that,  over certain amounts of gross receipts/sales,  the seller is required to charge and withhold the VAT/Sales Tax on the transaction and pay it in to the appropriate authority. 

Example:  You have a yard sale, or you regularly sell a goods as a hobby business.  If your sales are under a certain limitation,  the burden of paying the sales tax is on the customer.  If you go over the limitations,  or are carrying out a "profession",  then you should be required to charge and withhold sales tax from the customer at the time of purchase.  THE SALES TAX IS DUE WHETHER YOU HAVE TO WITHHOLD IT OR NOT.  It's just that most people don't bother to pay,  and most taxing agencies don't bother to chase.

This is further complicated in the US since you aren't required to withhold sales tax on transactions when you don't have nexus (a business location) within a state.  That's why LL Bean, for instance,  doesn't charge sales tax on catalog sales except to residents of a state where they have a location.

[Tebonas]

In the EU its nationally as well. Not important, just so that you can be sure! 

[Merusk]

In the EU its nationally as well. Not important, just so that you can be sure! 

That would be the 'state' level equivalent in the US the when talking about the EU. Which makes sense when looking at the history of the US and the EU.

[shiznitz]

The IRS does not go after casual Ebayers

Just because they don't come after you doesn't mean that it's not income subject to tax. It just means that you're getting away with cheating.

Also, the reason you don't owe tax when you sell your car is because almost universally you are selling it for less than your purchased it for. There's an exemption for a personal use capital item, so you can't claim the loss. But if you, for example, bought a spiffy new Mustang in 1965 for $3400 and you sold it today for oh $25,000 you would owe on a capital gain.

Numtini is correct, to my knowledge.

He is correct, but there is a cost to earning in game gold, i.e. the subscription fee. As far as the hobby vs profession test, it's all about whether you are doing it to make money or not. That is the test the IRS applies. That is not something that comes from a form, but from an interview with an IRS investigator. If your "hobby" makes you money every year, then you are probably going to get dinged.

Num's comment about just getting away with it is accurate, yes, but the IRS cannot go after everyone making a buck at the margin so hobbyists can make some money on the side without worrying about a crackdown. You ret their attention when 1) you deduct expenses or 2) it is your only source of income.

[Endie]

The IRS does not go after casual Ebayers

Just because they don't come after you doesn't mean that it's not income subject to tax. It just means that you're getting away with cheating.

Also, the reason you don't owe tax when you sell your car is because almost universally you are selling it for less than your purchased it for. There's an exemption for a personal use capital item, so you can't claim the loss. But if you, for example, bought a spiffy new Mustang in 1965 for $3400 and you sold it today for oh $25,000 you would owe on a capital gain.

Do you not have a capital gains allowance?  If I bought a car for £3400 and sold it 32 years later for £25,000 in the UK I would owe nothing.  There is complexity with some rebasing of prices and the change in overnighting of prices in about 1989 or so, but basically my annual capital gains tax allowances would cover me for that gain over that period of time.*

*The part of my law degree I hated most and was worst at was taxation, and this is not even close to being good legal or accounting advice

[Johny Cee]

The IRS does not go after casual Ebayers

Just because they don't come after you doesn't mean that it's not income subject to tax. It just means that you're getting away with cheating.

Also, the reason you don't owe tax when you sell your car is because almost universally you are selling it for less than your purchased it for. There's an exemption for a personal use capital item, so you can't claim the loss. But if you, for example, bought a spiffy new Mustang in 1965 for $3400 and you sold it today for oh $25,000 you would owe on a capital gain.

Do you not have a capital gains allowance?  If I bought a car for £3400 and sold it 32 years later for £25,000 in the UK I would owe nothing.  There is complexity with some rebasing of prices and the change in overnighting of prices in about 1989 or so, but basically my annual capital gains tax allowances would cover me for that gain over that period of time.*

*The part of my law degree I hated most and was worst at was taxation, and this is not even close to being good legal or accounting advice

Nope.  Just basis at historical cost.

There is an exclusion on capital gain from the sale of a personal residence.

[CmdrSlack]

Nope.  Just basis at historical cost.

There is an exclusion on capital gain from the sale of a personal residence.

Heh, "But my castle in UO is my personal residence!"

That'd rule.  Too bad nobody plays UO anymore.

[WindupAtheist]

Generic "I BEG TO DIFFAR!" interjection!