[LINK] Tax on Virtual Worlds - not If, but When

Adam Todd link at todd.inoz.com
Tue Dec 5 08:14:28 AEDT 2006

With Virtual Worlds being a big thing creating virtual economies, words out 
in the USA that the IRS wants it's share of the pie.

But is a share of vapour worth anything?  And will Tax Losses in a virtual 
world be declarable against real profits in a real world?


Now is this where the expression "You can't have it both ways" takes a new 


NEW YORK--If you are a hard-core player of virtual worlds like World of 
Warcraft, Second Life, EverQuest or There, IRS form 1099 may someday soon 
take on a new meaning for you.

That's because game publishers may well in the not-too-distant future have 
to send the forms--which individuals receive when earning nonemployee 
income from companies or institutions--to virtual world players engaging in 
transactions for valuable items like Ultima Online castles, EverQuest 
weapons or Second Life currency, even when those players don't convert the 
assets into cash.

Most governments are only beginning to become aware of the 
economic activity in online games, but the games' rapid growth and the 
substantial value of the many virtual assets changing hands in them is 
almost certain to bring them into the popular consciousness.

"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," said Dan 
Miller, a senior economist with the Congress' Joint Economic Committee, who 
is also a fan of virtual worlds. "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."

Miller's comments came during a Saturday panel called "Tax and Finance" at 
State of Play/Terra Nova symposium, the fourth annual gathering at New York 
Law School of academics, lawyers and other scholars to talk about the 
legal, social and economic issues surrounding virtual worlds.
"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."
-- Dan Miller, senior economist

The panel was formed in the context of recent 
raised by author Julian Dibbel in his book Play Money and in an article he 
wrote earlier in Legal Affairs magazine--about whether the transfer of 
virtual assets, or players' acquisition of virtual loot by, for example, 
killing monsters, creates taxable events.

"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 article began, "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?"

And while <http://news.com.com/2061-10797_3-6126701.html>Miller's committee 
began examining these issues in October, his comments Saturday suggested 
there could be wider future congressional oversight and a revised IRS tax 
policy. That's in spite of the fact that Miller said his committee, and 
Congress in general, is not out to gouge virtual world players.

"The Joint Economic Committee is not seeking to impose a new tax on virtual 
economies," Miller said. "We have a very clear record of supporting lower 
taxes in free market."

Meanwhile, Miller's fellow panelists also weighed in Saturday on Dibbel's 
question, and came at it from several different perspectives.

First up was William LaPiana, a wills, trusts and estates professor at New 
York Law School. He approached the question by examining whether estate 
taxes would accrue on the transfer to an heir of a sizable collection of 
valuable virtual assets.

LaPiana said that there is little question that the transfer of such assets 
could be taxable, since it is property. However, he did say that the taxes 
would accrue only if the total value of the estate's assets, at the time of 
death, exceeded the limit set by the state in which the deceased had lived. 
In most cases, he said, that amount is $2 million, though some states, like 
New York and New Jersey, have lower limits.

There are not that many instances in which someone has that level of 
virtual assets, although the recent 
<http://news.com.com/2061-10797_3-6138519.html>reports that Second 
Life<http://news.com.com/2061-10797_3-6138519.html> land mogul Anshe Chung 
had amassed $1 million in virtual land and other holdings certainly suggest 
her heirs might have some interesting inheritance tax issues if she dies.

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