Fearless Money

“EverQuest’s annual GDP—the total wealth in goods and services an economy creates—is about $135 million, or around half the GDP of the Caribbean island nation of Dominica.”, according to economist Edward Castronova. Yet the IRS has apparently never heard about it, and doesn’t know how to go about taxing it?

Confused about what I am talking about? A quick backtrack might help. Everquest is a “MMORG”, a Massively Multiplayer Online Roleplaying Game. Basically, you pay about $10 a month to take the part of a hero (or a villain) in a shared world, where you interact with both monsters and with other players. There are several popular games, such as Everquest, Ultima Online, and most recently World of Warcraft. Many younger people (and some older people) spend hundreds of hours playing these games. I used to do so as well. In the course of the game, you get valuable in-game stuff, such as magical swords, potions, or gold. Other players will sometimes buy these things from your character. Sometimes, via EBay, they’ll play real-world money for your in-game stuff.

For an article on Legal Affairs magazine, one writer decided to find out the tax implications of these transactions.

JUNE 2003. I SET MYSELF THE FOLLOWING CHALLENGE, posting it on my web log for the world to see: “On April 15, 2004, I will truthfully report to the IRS that my primary source of income is the sale of imaginary goods—and that I earn more from it, on a monthly basis, than I have ever earned as a professional writer.”

In the course of this project, I made a total of $11,000 selling on eBay the items I won playing a game called Ultima Online, $3,900 of which was in the final, most profitable month. I reported my profit to the IRS, and I paid the requisite taxes. But after I did so, a troublesome set of questions continued to nag at me—for which even IRS publication 525, entitled “Taxable and Nontaxable Income,” couldn’t provide answers.

Interesting! He goes on to make it even more interesting.

What about the assets I bartered for or won in the game but never sold in the real world, the suits of armor stashed here and there with their easily established fair market value? What if I traded those assets for their value in Ultima Online’s official currency, the Britannian gold piece, rather than for dollars? Wouldn’t it be easy to establish their value in dollars nonetheless and, if I owed American taxes on the exchange, put a number on the deal that the IRS could grasp and love? And what about all the other MMO players out there—how long could the IRS be expected in good conscience to leave the resulting millions of dollars in wealth untouched?

After all, if there is a known, customary conversion rate between Everquest gold pieces and US dollars, wouldn’t a player owe the IRS for gold accumulated in-game, even if that gold was never converted? When I played Ultima Online (in between wives), I bought a million Ultima gold pieces on EBay for $30. That’s a small amount, but many players have several million gold pieces. It starts adding up to an actual, measurable income, even if never converted into real money.
When the author of the piece took his question to the IRS, he found it difficult to explain the context.

“O.K., so I got a fake jewel that’s worth 80 million points, gives me all kinds of invincibility,” said Knight, striving doggedly to nail down what I was talking about. “But I got two of them, or don’t want to play [anymore]. And I can go on eBay and sell my jewel to some other character?”

“Uh, yeah,” I confirmed.

Knight considered the facts and offered a nonbinding opinion: “That’s so weird.”

In the end, the IRS wanted $650 to render a binding opinion, since this would be the first time it has ever been formally decided.

And you thought they were already taxing everything under the sun?

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