Monday, March 24, 2008

No taxation without (virtual) representation!

Last night my wife showed me that her character had earned 270,548,850 Infamy on the game City of Villains.  I am not sure how much Influence/Infamy she has on other game accounts, but I would not be surprised if she cracked a billion.  What this tells me is that if the IRS ever starts taxing the virtual economy, I am screwed.

The concept of taxing virtual assets is not a new one.  I like to think that the idea is so ludicrous that it will never come to pass.  Unfortunately, I have also learned to never say never, especially when there is a dollar to be made.

I know many of you will say if the virtual income never is transferred to real income that there is no reason for the IRS to get involved.  The real problem is that the IRS always wants to be involved when there is even the potential to make some income.

To put it another way, the IRS has already inserted itself into barter economy, where no money is being exchanged.  If I do computer work for someone I know who happens to be an automobile mechanic, and he replaces the transmission in my car in exchange, I have earned "income" equal to the cost of the transmission and need to report it to the IRS.

This is the gateway that the IRS wants to use to get into the virtual world.  While we are not earning actual money, we are earning something we could potentially barter for real goods and services.  Hence we should be taxed on it.

The problem is that this is idiotic.  No one would seriously consider taxing you on the money you made in Monopoly.  This is because at the end of the day the owner of the game takes all the 'money' back and puts the game in his closet.  The same is true with City of Heroes/Villains, simply on a longer timescale.  Someday NCSoft will close up shop and all of my wife's influence/infamy will disappear into the ether from whence it came.  Unfortunately, I have noticed a trend that the legal system seems to lose its mind as soon as the words "computer", "online", or "technology" are uttered. 

I should note that there is one game that probably should be the exception to this rule: Second Life.  The main reasons is because you can convert "Linden Dollars" to US Dollars, so making a profit in the game can be turned into a profit in the real world.  However, the solution here seems simple.  When you cash in your Linden Dollars for real US money, that is your earned income.  While it is virtual, there should be no attempt to tax it.  Much like you don't pay taxes on stocks until you cash out, you shouldn't have to pay on virtual investments until you are see a profit.  Especially because much like a company can go bankrupt and you would never see a dime, Second Life could disappear tomorrow, and those thousands of Linden Dollars you never converted could disappear with it.


Bronz said...

Well, with regards to Second Life, the IRS could always setup virtual shop and tax via Linden Dollars, and then convert over right?

I mean, if they really want to do it right why not start at the virtual.

Secondly, I have no idea how the IRS can tax "potential income" anyway. Yes, online currency can sell for realworld dollars, but at that moment you have made real income, which is taxable. But not before. If the IRS ever started taxing "potential", no one would start up another business since you could be taxed on what you "could" profit. It's just a simply idiotic idea.

Unknown said...

the other end of this is think of the silliness that would sprout up to protect said potential income. Virtual tax shelters, & other stupid ideas would drive any accountant batty right off.

& people would find other fun ways of dodging the issue... First Orthodox Church of Paragon City anyone?

But, in order to truely stick it to them, I say screw it. If they wanted to tax your CoH influence, I say pay them in Influence. watch the politicians heads explode when they get that payment

Bronz said...

I don't think we should be paying Influence to any politician.

If it was named Infamy, or Bribes, then that would work for sure.

But let's not give them more pull then they should have otherwise. :)