Future Now
The IFTF Blog
Tax implications of virtual goods trade
"In this month's Legal Affairs magazine, tech/culture critic Julian Dibbell examines the possible real-world tax implications of the trade in virtual treasures from massively-multiplayer online games like EverQuest and Ultima Online. Dibbell is the author of the 1999 book, My Tiny Life: Crime and Passion in a Virtual World. During the course of his investigation, Dibbell made $11,000 on eBay selling booty from Ultima Online. On April 15, 2004, he reported his profits to the IRS and paid taxes on it. Was that enough though? From the article:
What about the assets I bartered for or won in the game but never sold in the real world, the suits of armor stashed here and there with their easily established fair market value? What if I traded those assets for their value in Ultima Online's official currency, the Britannian gold piece, rather than for dollars? Wouldn't it be easy to establish their value in dollars nonetheless and, if I owed American taxes on the exchange, put a number on the deal that the IRS could grasp and love? And what about all the other MMO players out there—how long could the IRS be expected in good conscience to leave the resulting millions of dollars in wealth untouched?
You might think that I was letting my imagination run away with me—I certainly hoped I was. I thought that a glance at past IRS practices would assure me that the feds would never dream of taxing assets that had not been turned into money. I thought wrong.
The IRS has taxed barter transactions that are remarkably similar to the ones that online players engage in every day. In the late 1970s, for example, dozens of so-called barter clubs sprang up around the U.S., said Deborah Schenk, a tax professor at New York University School of Law. The clubs put out directories in which members listed themselves as providing accounting, window washing, or other types of services. Any member could buy those services with "trade dollars," a virtual currency like Britannian gold pieces, and a member could earn trade dollars by offering his own services. By 1980 these clubs were handling an estimated $200 million worth of transactions every year, and the IRS took notice. In a 1980 ruling, the agency said that barter club transactions produced taxable income, even though no actual money changed hands. A 1982 law made enforcement of the ruling easier by requiring the clubs to provide the IRS with information about every transaction.
Swapping a financial audit for a dental checkup seems different from trading a Runic Hammer for an Ethereal Mount, if only because audits and checkups are real. But what does "real" mean for tax purposes?