Virtual Stupidity

The next time that you play a game of Monopoly, and the next time that you pass Go, thus collecting $200, you might want to set some of that $200 aside because there’s a possibility that the Internal Revenue Service (IRS) will ask you to send it to them.

If you think that I’m joking, consider a new report that was issued by the IRS entitled the National Taxpayer Advocate’s 2008 Annual Report to Congress (yes, the irony is that it’s called a “taxpayer advocate’s report” but after looking through it, it advocates the IRS and not the taxpayer). The report proclaims that a lack of regulation of “economies” in “virtual worlds” on the Internet is a “problem” for the IRS, and must be fixed. Two primary examples of these virtual worlds, as named by the IRS, are Second Life and World of Warcraft. Both of these computer-generated environments have “virtual economies” that are worth tapping, in the IRS’s view. (Scroll to page 213 of the report for the information on virtual world economies.)

According to World of Warcraft’s site, it “enables thousands of players from across the globe to come together online—undertaking grad quests and heroic exploits in a land of fantastic adventure.” These quests “provide material rewards, such as cash, potions, food, magic items, armor, and weapons.”

As for Second Life, its creators, Linden Labs, calls it “a 3-D virtual world created by its residents” which “supports millions of US dollars in monthly transactions” via Linden dollars, which “can be converted to US dollars at several thriving online Linden dollar exchanges.” In other words, the Linden dollar is kind of like a casino poker chip in which you can cash it in and get a real US dollar amount. It’s been reported that people have made significant amounts of real money off their Second Life transactions, included one millionaire.

At this point you might be thinking, “But Chase, if you can make real money off these virtual economies, they should be taxed.” There’s only one major problem with this argument: any real-life money that is made off these virtual economies is already taxed if it pushes a person’s real-life income into the bracket of taxable income. If they don’t make any real-life money, then there’s nothing to tax. This is where the IRS’s concern enters the world of stupidity.

If virtual money is converted to real-life money and then is taxed, there would be no reason for the IRS to even worry about the virtual aspect of the money, since any converted virtual money is already taken care of under current tax code in real-life, using real-life US dollars. That means that only one thing is possible: they’re pondering the idea of “regulating” virtual money. Yes, the fake money that is known as “Linden dollars” in Second Life and fake gold that can be found in World of Warcraft.

How in hell are you going to regulate and tax fake money?! And since the IRS would only be able to regulate and tax US citizens only, how are they going to do this? Will they scan the accounts of every SL and WoW user? Are they going to check every IP address to make sure that one person is in New York and the next person is in Ottawa?

Now, let’s consider the next step of fake money taxation: where and how do you send fake money? Moreover, what good comes from it? Do we get government services from this taxation? Does the IRS set up shop in Second Life along with the rest of the United States federal government to redistribute this “wealth”? Do they give out welfare checks to “unemployed” in-world residents and help to “build” virtual infrastructure?

Let’s use World of Warcraft, for example. Does the IRS plan on “taxing” portions of virtual gold, virtual potions, and virtual armor? Do WoW users have to send the IRS little bottles of virtual potion?

In Second Life, does a user have to send a percentage of their Linden dollar balance to an in-world IRS office or face punishment?

And what kind of punishment might a person face if they wouldn’t send their virtual money to a virtual IRS office? One person left the following comment on Ars Technica’s Website, which published the story about this asinine possibility:

If they wish to impose a tax on transactions in a vitural economy, then I will pay the tax in the currency of that economy, vitual dollars. If they choose to prosecute me, then they will have to do [it] in the vitural world and imprison my avatar.

This comment best illustrates the imbecilic mentality of the IRS.

If you’re still not convinced that the IRS would do something this ludicrous, I’ll offer a few quotes from the report in relation to virtual world economies:

• “Income, broadly defined, is subject to tax.” (“Earning” virtual money or gold would be a broadly defined income.)
• “[A] person is generally taxed immediately upon ‘all income from whatever source derived.’” (Notice the use of the word “whatever.”)
• “[A] person is generally subject to tax upon finding or earning money or treasure, winning a lottery, prize or award, stealing property, or trading one piece of property for another, potentially leading some to conclude that transactions involving virtual property are or should be subject to tax.” (This is clearly spelled out: virtual money, treasure, prizes, “stolen” property, or traded property can be taxed.)
• “The receipt of prizes, winnings, and barter exchange ‘trade credits’ are all subject to tax, information reporting, and withholding.” (In Second Life, you can win Linden dollars for things like trivia questions and costume contests. These are now potentially “taxable” winnings—even though they’re in fake dollars.)
  

With these said, the IRS does admit that taxing fake money and fake transactions would be “difficult.” They state:

• “Since the exchange rate at that time was about 265 to 266 Linden Dollars to the U.S. dollar, these statistics suggest that most transactions on Second Life are for less than $1 and would not be subject to information reporting, even if the IRS treated Second Life as a barter exchange. Thus, residents and the IRS might need to track and document millions of small transactions without the benefit of information reporting.”
• “A related and potentially more serious problem would be valuing each of the virtual transactions.”
• “[T]he value of a virtual currency on any given day could be very difficult for the IRS or a taxpayer to reconstruct years later in connection with an IRS audit.”
  

As I had said earlier, if the IRS were interested in real-life dollars only, I find it hard to believe that they’d even bother to write about virtual money or virtual transactions of any sort. If the virtual money were converted to real-life money, it would already be taxable under currently-existing tax laws. That’s what makes me think that the IRS is looking to embark on a pursuit of regulating something about which they know so little that they don’t even realize that it’s not even real at the outset.

Take note, Grand Theft Auto players: the next time that you enter a cheat code for more money, more health, more armor, or more ammunition, you might have to send some of it to the IRS.

References

Blizzard Entertainment. “World of Warcraft Guide.” 12 Jan. 2009.

Cheng, Jacqui. “The Taxman Cometh? IRS Urged to Tax Virtual Worlds, Economies.” Ars Technica. 12 Jan. 2009.

Linden Labs. “What is Second Life?” 12 Jan. 2009.

United States. Internal Revenue Service. National Taxpayer Advocate 2008 Annual Report to Congress. Vol. 1. Washington, D.C.: 31 Dec. 2008.

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