To legions of devoted fans, online virtual games — both mainstream and adult — are more than just entertainment, they are quite literally an extension of the real world, but for the IRS, they are a potential source of taxation, said Dan Miller, an economist for the Joint Economic Committee, which advises Congress on taxation issues.
“It'll get to the point where the dollar value becomes so sizeable that the IRS would be almost negligent if it didn't at least look into the potential of taxing these worlds,” Miller said. “It's really just a matter of time before the IRS says, wait a minute.”
At present, players of online games incur tax liability only when they sell their virtual property in so-called “cash outs.” But Miller said the time could be ripe for the IRS to look at taxing profits kept inside the game.
According to IGPlace.com, which serves as a kind of marketplace for online players to trade and sell virtual property, the going rate for a piece of World of Warcraft gold is 18 cents.
Several years ago, economist Edward Castranova — using auction prices on IGPlace.com and eBay as empirical evidence — estimated that online gamers make more than $3 per hour playing online games.
Texas Tech tax law professor Bryan Camp said there is a strong argument in favor of taxation. Players who amass serious wealth could feasibly use their online holdings as collateral for banks loans, he said, even if the virtual property remains in the game world.
Indiana law professor Josh Fairfield said he wasn’t so sure the IRS would be keen to tax online games.
“I really don’t think they’ll ever tax pure game activity,” he said.
While games for the sake of entertainment should not raise the eyebrows of tax collector, Miller said the gamers themselves, who insist that the worlds they inhabit are “more than just games,” may end up making a strong argument on behalf of the IRS.
“And if it's not a game, if you're not playing it for entertainment, then what — it's for business, right?” he said. “You're in there because you want to be the next Bill Gates? That's what the IRS would think. The more they say that, that's like painting a big target on you.”
While Miller thinks the IRS could tax virtual games sooner than later, he was quick to point out that doing so could be a tremendous restraint on a growing industry.
“If we start slapping taxes on these worlds, we're going to inhibit the growth and development of these places, and other countries would simply pick up the slack,” he said.
RedLightCenter CEO Brian Schuster agreed with Miller, saying that it would be very shortsighted policy to tax online games.
"Immersive worlds are the next phase of the Internet," Schuster told XBIZ. "Taxing them would be devestating, and it would put the U.S. at a huge competitive disadvantage."
Schuster added that RedLightCenter, which is based in Canada, where there has been no talk of taxing online worlds, has put in place measures to insulate its members from tax liability.
"Our members will not get 1099 Forms," Schuster said. "We have intentionally stayed away from putting in place accounting systems that would make taxation possible."
Schuster said RedLightCenter, which launched earlier this year, will not have a robust virtual economy until later next year. But, he said, the company plans to fight efforts by authorities to tax the virtual world as it grows.
