Dungeons, Dragons, and Taxes
LAST, JONATHAN V.
Dungeons, Dragons, and Taxes The IRS is eyeing your hard-earned virtual gold. by Jonathan V. Last In the beginning, there was the MUD. The first Multi User Dungeon, Richard Bartle and Roy...
...In 2004, Julian Dibbell wrote a piece in Legal Affairs detailing his attempt to make the sale of imaginary goods his primary source of income...
...All of which has created a fat target for a very brick-and-mortar institution: the Internal Revenue Service...
...A 1982 law made enforcement of the ruling easier by requiring clubs to provide the IRS with information about every transaction...
...ties of that world (trading, fighting, questing...
...There are, of course, good reasons for the government to be interested in virtual economies...
...Very big, but it exists at different levels...
...Miller's committee began examining virtual gaming economies last October and is expected to issue a report early in 2007...
...Unlike MUD1, which required expensive terminals hidden away in university computer labs, connected to gigantic main-frame computers, EverQuest could be played by almost anyone with a home computer and a modem...
...They used a marker called "trade dollars...
...In any event, Dibbell went up the chain of command at the IRS looking for a ruling on whether or not he owed taxes on the whole of his virtual economic activity, and not simply his eBay gains...
...Second Life's unit of currency, the "Linden dollar," for instance, trades at a rate of about 300 Lindens to the greenback...
...If you go to eBay or any number of other websites you can find people selling virtual belongings or even avatars for smaller, but still significant, sums...
...Not yet ready to set precedent, the IRS declined to give an answer...
...That's the high end of the virtual market...
...A text-based computer adventure game, much like the board game Dungeons & Dragons, the MUD allowed players at remote terminals to interact and play in the game's nearly 400-room virtual world—acquiring swords with which to slay dragons, and the like...
...Mind you, these aren't simply kids playing a game for fun—they are speculators hoping to get rich from the virtual economy...
...Virtual real estate— land, castles, buildings—is, as a rule, more expensive...
...After his mammoth purchase, Jacobs told the tech website CNET, "I've seen the potential of it all, and I've gone through it, and I learned my lesson, and my lesson was that I can't afford not to do this...
...Today, the government has finally turned its attention to the matter...
...The IRS has been strict on the concept of barter...
...Paraphrasing the IRS's bible on "Taxable and Nontaxable Income," Dibbell noted that "goods taken in trade or won at play are taxable the moment they fall into somebody's hands, even if they are not sold for money...
...The first Multi User Dungeon, Richard Bartle and Roy Trubshaw's "MUD1," came online at the University of Essex in 1979...
...The guy that bought the Treasure Island recouped his investment in a year...
...In one year of playing Ultima Online he made $11,000 by selling Golden Runic Hammers, Britannian gold pieces, and other pretend items on eBay...
...Also unlike MUD1, which hosted just dozens or scores of players at a time, EverQuest quickly accumulated nearly half a million players, each of whom paid an initial price for the purchase of the software and then a monthly fee of $12.95 for the privilege of slaying orcs, dragons, and other beasties in the virtual world while getting to interact with hordes of likeminded players...
...In 1998, the game design firm Verant Interactive created EverQuest, which it dubbed the first "Massively Multi-player Online Role-Playing Game" or MMORPG...
...There are people who make their living by speculating in virtual goods...
...MMORPGs have internal economies where virtual currency allows players to buy virtual goods...
...It's too valuable...
...Most of the games descend from the same swords-and-sorcery lineage as the original MUD1, the most successful being World of Warcraft—a property owned by Vivendi-Universal—which in November crossed the threshold of 7.5 million players worldwide...
...Think of it as a virtual pawn shop...
...Jacobs was probably influenced by the success of a Second Life player known as Anshe Chung, whose virtual land and currency holdings are estimated to be in the neighborhood of $1 million...
...As computers—and networks— spread and became vastly more powerful and pervasive, the idea of the MUD expanded and evolved...
...Players— or "residents," as they're referred to in the Second Life lexicon—go to work, hang out with friends, purchase houses...
...These Britannian gold pieces can then be exchanged at shops in the game for special items—better weapons, better armor, mystical creatures—and between players within the games...
...Later that year Jon Jacobs paid $100,000—remember, we are talking about real, U.S...
...In Ultima Online, for instance, players win Bri-tannian gold pieces by completing quests, slaying monsters, etc...
...The tax code is reasonably strict on such matters...
...Speaking on a "Tax and Finance" panel at a recent computer gaming symposium, Dan Miller, a senior economist on Congress's Joint Economic Committee, shed some light on the government's developing stance towards virtual gaming...
...Many players then hold real-world auctions, on websites such as eBay, to sell these virtual goods...
...This market is much bigger than you might expect...
...tax code provides that all income, "from whatever source derived," is taxable...
...But that was two years ago...
...I could not afford not to get the space resort...
...An avatar might cost several hundred or even a couple thousand dollars...
...It's nearly as interesting as it is unsettling...
...As Dibbell explained, "In a 1980 ruling, the [IRS] said that barter club transactions produced taxable income, even though no actual money changed hands...
...Second Life is the only MMORPG that gives actual property rights to players...
...Beneath the corporate economy is a smaller consumer economy...
...In 2005 the New York Times did a story on the phenomenon called "gold farming": There are companies in China, where labor is cheap, that pay people to sit in warehouses full of computers playing MMORPGs in order to accumulate virtual loot, which is then sold back to Western gamers...
...Meaning that "if two people were to exchange copies of books, one of which is worth $30 and the other worth $24, the person ending up with the more expensive volume would have acquired $6 of taxable income...
...The virtual currencies themselves have secondary markets...
...Take World of Warcraft: With 7.5 million subscribers paying about $15 a month each, that's a monthly cash gusher of $112.5 million...
...The net effect of which was to shut down the clubs...
...To put that in perspective, in 2006, all of the movies released by Universal together grossed about $800 million at the box office...
...Websites such as IGE.com or GameUSD.com buy and sell the pretend currencies for real dollars...
...Dibbell then went about trying to report this income to the IRS...
...The day may be approaching when, after killing an orc and slaying a dragon, you will get your 1,000 gold pieces—and a 1099 form...
...Each of these items had real market value, even if he had not realized it by selling them on the real market...
...And just as opportunistic Chinese companies have become interested in them, virtual game markets might in the future attract other unwelcome attention...
...So gamers take note...
...dollars— for a virtual space station in the same game...
...And while Miller said that the committee wouldn't "[seek] to impose a new tax on virtual economies," he said that the report would clarify "what is a taxable event in a virtual world...
...Congressional and IRS interest in this issue," he explained, "is simply a matter of time...
...So while Dibbell clearly understood that he owed taxes on the $11,000 he made from real-world auctions, what wasn't at all clear was whether the government would want a piece of the Britannian gold pieces he had won, Golden Runic Hammers he had purchased with them, and the other items which he had bartered, bought, or traded for during the year...
...It was a programming and gaming milestone...
...In early 2005, for instance, a man named David Storey paid $26,500 for a virtual "Treasure Island" in the game Project Entropia...
...In the 1970s, a small network of barter clubs arose that sought to exchange goods and services between members without giving the government a cut...
...But there are other, nonfantasy online role-playing games, most notably Second Life, which offers the chance to live a "normal" life in a virtual world modeled on the real world...
...A weapon could be as cheap as $50...
...An article on these MMORPG economies at CNET estimated that the market for virtual goods and currency might be in the range of $880 million annually...
...How big is the business of virtual gaming...
...A piece on the "Unreal Estate Boom" in Wired magazine profiled Bob Kib-linger, a former chemist for Procter & Gamble who quit his job to create the site UOTreasures.com, which buys the accounts and virtual assets of MMORPG players and then resells them at a profit...
...It is not hard to imagine them becoming appealing for criminal activities, such as money laundering...
...As Bryan Camp, a tax law professor at Texas Tech Law School, explained to Gamespot.com, Section 61 of the U.S...
...At the top level, multinational entertainment companies such as Vivendi-Universal and Sony (which now owns the EverQuest franchise) make hundreds of millions of dollars a year from these games...
...It was quite an adventure...
...Other estimates put the figure closer to $1 billion...
...Because a successful MMORPG franchise like EverQuest is a cash cow, many game developers have since gotten in on the action...
...From the outside, Ever-Quest couldn't have looked more different from MUD1: Instead of text, players saw a complicated, three-dimensional, graphic version of a virtual world, and they chose an avatar to represent themselves in the activiJonathan V. Last is online editor of The Weekly Standard...
...As Indiana University economist Ted Castronova points out, "From the standpoint of economic theory . . . there's no fundamental distinction between selling euros and buying magic wands...
Vol. 12 • January 2007 • No. 16
