Taxing Times

Posted by Stropp on February 20, 2009

We all know how the government likes to get its greedy little mitts into our pockets and remove our hard earned moolah to spend on things like trillion dollar bailouts, pork barrels, and congressional office refits. It makes it hard sometimes just to make ends meet. Now, the punters are saying the governments of the world are eyeing our hard earned virtual dosh. How much harder would it be to afford that epic mount if a third of your gold earnings disappeared into the tax mans coffers?

I have to admit when I first started hearing about this I just figured it was all a poorly timed April Fools Day prank. Unfortunately it doesn’t look that way at all. There’s been a lot of talk over the last year that several governments including the EU and US are seriously looking at taxing virtual worlds, with a number of reports having been prepared.

So how likely is it that some time in the near future, every gold, plat, or isk that we earn in a game will have a taxable component? Will future tax forms have tables of exchange rates between gold pieces and dollars for the different worlds? Will Blizzard, SOE, and NCSoft become defacto tax collectors for the governments of the world?

Barring complete blindness and stupidity by our elected officials I’m going to go out on a limb and say that I don’t believe that governments will go this far in taxing games. — barring stupidity and blindness, maybe I should say it’s a certainty — There are a several things to consider, factors that might heavily influence our policy makers.

Deductions

First, and probably most importantly, nearly all governments — as far as I know — allow taxpayers to deduct expenses made in the process of earning incomes.

• It could be considered that everytime you spend in-game currency, you are doing it to improve your character. If that development is essential to making more virtual income then it will be deductible.
• The real world cost of a subscription, around $15, is essential to making virtual income. It will be deductable.
• If I make less gold in a year (converted to real world currency) than I spend in subscriptions or micro-transactions, I’ll make a real loss and end up paying less tax.
• Casual players tend to play less, make less gold, but pay the same in subscriptions. There are far more casual players than hardcore players. Casuals will end up with better tax refunds. The government will end up losing money.

Juridiction

This is a big issue. Who gets the cash?

• Does the country where the player resides get to collect the tax? Or does the country where the servers are housed get it?
• If the latter, will we see server farms set up in tax havens like the Cayman Islands?
• More importantly, if the Australian government — for example – decides to tax WoW gold and the US doesn’t, how do they know I actually play that game? Blizzard doesn’t have a presence in Oz, how will the ATO (Aust Tax Office) find out I play? How will they force Blizzard to tell them?
• A lot of nations have tax treaties that enable their citizens to relocate around the world and not get double taxed. It may be possible that parts of these treaties will have to be renegotiated. 

Logisitics

There are a number of other questions that make it difficult to tax in-game income.

• What happens when the game shuts down? Everything, all your in-game assets now have real world value. How does this sort of loss get handled at tax time?
• What happens if your account is hacked?
• Here’s a biggie. In the real world when someone defrauds you, it’s a crime, possibly punishable with prison time. What happens when someone cons you out of a lot of virtual currency, as has happened in Eve Online? Could that sort of fraud now attract criminal penalties?
• What if a game is designed to allow that sort of interaction as is the case with Eve and Darkfall?
• Game economies don’t work the same as the real world, money keeps getting pumped in often resulting in extreme inflation. How will this be taken into account?

Will Virtual Worlds Be Taxed?

I don’t think so. At least they won’t be taxed any time soon. There are too many questions to be answered first, and there will definitely be downsides for any government that does try to tax in-game currency. It won’t be the easy windfall that they’d like, and could end up costing them more than they expect. And there is potential for the new rules to go before the courts if the laws aren’t implemented properly.

What I think the government(s) should do is simply enforce the existing tax laws. The people who trade in virtual good and cash for real world money are getting that real world money in the real world where it forms part of their income and can be fairly — if you consider taxes fair – taxed.

That way the government gets their cut, and players can keep playing their games free from tortuous government interference.

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