Thursday, April 19, 2007

Taxing Azeroth: Why WoW Players Shouldn't Fear Uncle Sam

1UP recently posted this article, which originally ran in Games for Windows magazine this month. Taxing virtual economies has been something I've looked into since 2005, and based on the current state of the World (of Warcraft), residents of Azeroth do not need to worry about the IRS auditing them because of the two Darkstone Claymores you found, or the Plated Abomination Ribcage you're wearing.

The article's basic premise is largely correct: Taxable income, as defined by the IRS, includes pretty much everything. This can include income from the sale of intangible property. However, even ignoring the ownership issues presented in the article, the present reality poses a more significant sticking point for the IRS. Specifically, the goods in Azeroth have no actual value. As most players remember, the eBay market for World of Warcraft goods ground to an absolute halt in the wake of a major crackdown. As a result, there is no longer an approximate exchange rate of World of Warcraft gold to US dollars, which further means that items have no value in US dollars, at least not one that is easily determined. Moreover, the market is essentially gone. The occasional friend gives friend $20 for a Spiteblade is not a frequent enough occurrence for the IRS to take notice or care about what is, all in all, now a negligible amount of income.

The closest allegory is a company dealing in its own intellectual property. For this example, let us say a company owns a trademark. Ordinarily, income from the sale of that trademark would be taxable, and changes in the value are reported in taxes (not as income, but the finer points of intellectual property valuation and taxation are a lengthy discussion). However, the company has a freely alienable piece of intellectual property. A player does not. The player is limited to trade their item in the constraints of the game for other property in the game.

This stands in stark contrast to the state of affairs in Second Life, which I will be addressing in an upcoming article. This also stands in contrast to the former state of affairs in the World, when eBay fueled a real world economy for virtual goods. There was a significant argument for taxing virtual goods when they were transferable for real money, and undoubtedly the volume of those transactions raised the eyebrows of at least a few agents of the IRS.

In any event, the likelihood of the IRS opening an Azeroth office seems remote at best, as there is no real world value for them to be taxing because of the basic lack of transferability for actual, taxable income. This will likely remain the case so long as Azeroth remains an economy independent of the US dollar. Should the situation begin to return to the eBay marketplace that dominated until just recently, or should a Second Life approach be taken in, say, World of Warcraft II or World of Starcraft, then the IRS may begin to pay new attention to the resale value of your Nerubian Slavemaker.


Kaziel said...

My question about this is, even with a steady economy created by eBay or other sources such as IGE and other RMT companies, it would seem to me that taxing something which can't be traded legally within the constraints of a system is somewhat unsensible.

Maybe the fact that it makes no sense to me doesn't make it illegal, but I've always imagined that RMTing in many MMOs is somewhat akin to using the Black Market. It's not like you can be taxed for buying things on the Black Market, but with it there comes an additional risk of legal action. This is somewhat similar to RMTing, in that you can get something outside the "legal" means, but risk losing your character.

Tal said...

I say, if they want to tax WoW income, that's fine... As long as the taxes they receive are paid in Azeroth gold. If they claim that there is real value for virtual commodities and money, let them figure out how to make the exchange.