Virtual Worlds May Be an Escape, But Maybe Not from Taxes

Don Tennant

One of the more fascinating dimensions of the blurring of our physical and online worlds is the emergence of virtual currency. What's fascinating is that the ramifications of it are so complex that no one seems to know how to deal with them.

 

In a post last week, CrowdFlower Gives Crowdsourcing a More Pleasant Scent, I wrote about a chat I had recently with CrowdFlower's founder and CEO, Lukas Biewald, and how that exchange rekindled my dampened interest in crowdsourcing. One of the topics we discussed was CrowdFlower's adoption of virtual currency as a means of paying its crowdsourcing worker pool. What makes that possible, Biewald said, is putting tasks inside online games:

We've experimented with different kinds of incentives, and we started putting jobs inside games like [the Facebook app] FarmVille. It's been a really effective way to get jobs done. Today we get more than half of our work done inside these games, where people are earning FarmVille seeds or YoVille YoCash. I think they're pretty bizarre, but people really love them, and they really care.

Paying people in virtual currency begs an obvious question: If a hired worker receives virtual currency as remuneration, is that income taxable? It's a question that the United States and every other country is going to have to address sooner or later, but so far it appears that not a single one has done so.

 

A couple of countries have begun to lay the groundwork to answer the question. South Korea's Supreme Court ruled earlier this year that virtual currency is the equivalent of real-world currency, but the tax implications of that remain unclear. China in 2008 imposed a 20 percent tax on profits gained on the sale of virtual currency, that didn't address the question of taxation on the sale of goods in an online game, or on income derived from work performed inside a game.

 

For his part, Biewald says he's just waiting to see how it all shakes out:

There's not much I can do except wait for government to catch up and set some policies. I think the game companies have a pretty strong interest in not getting taxed on this stuff. ... I bet if you talked to game companies, they would argue that this isn't real currency. I don't know-I think it's a really complicated, interesting issue. However government tries to regulate it, game companies will try to get around it. That said, we file 1099s for the workers who do work for us on [Amazon's crowdsourcing platform] Mechanical Turk, and it wouldn't be so bad for the business if we had to file 1099s for the people inside games that make over $600 in a virtual currency. Clearly there will be some cases that come down that set a precedent, but those cases haven't happened yet.

In the meantime, tax lawyers are having a field day speculating about how this will all pan out. G. Martin Bingisser, an attorney in New York, wrote in the Shidler Journal of Law, Commerce & Technology what a lot of other lawyers are saying: that we should be prepared for the IRS to come knocking on the virtual-world door:

Transactions involving virtual property used in MMORPGs [massively multiplayer online role-playing games] may, and often will, be subject to federal income taxation. When virtual property is sold for cash, the gain on the sale must be recognized for income tax purposes. Furthermore, with some exceptions for like-kind exchanges, trading virtual property is a taxable transaction. Finally, selling virtual property for virtual currency is also likely subject to federal income tax. While it is conceptually difficult to grasp how or why such transactions should be taxed, the fact that both virtual currency and property have real world fair market values makes it difficult to assert that no tax should be levied on virtual world transactions. However, the practicality of a tax and relatively small amount of economic activity in MMORPGs may lead the IRS to avoid taxing such transactions at this time. Either way, taxpayers should be aware of potential tax consequences of virtual world transactions. While the IRS has not publicly enforced tax on such transactions, it could do so in the future, especially if virtual economies continue to grow in size and exposure.

So that virtual world you enter during your downtime may be an escape, but it may not be an escape from taxes. What's your view? Should transactions in a virtual economy be taxed in the real world? And more to the point, should virtual currency earned for work performed within an online game be subject to income tax?



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