Virtual Gold Could Draw Real Taxes

Imagine getting a tax form and a warning to report taxable income from the IRS every time you collected rent on your hotel-stuffed Boardwalk and Park Place. Only in a bad dream, you might think; but don't underestimate the U.S. tax code's potential for surrealism. While the IRS won't be taxing Monopoly cash anytime soon, another variety of play money--earned and spent by millions of online gamers each day--may not be so safe.

Sometime in the next few months, the Joint Economic Committee of Congress will publish the results of an ongoing investigation into the economies of World of Warcraft, Second Life, and other massively multiplayer online game spaces (MMOs). The report's number-one bullet point will address a question that the inhabitants of these spaces may soon wish had been left unasked: Do the tax laws of the real world apply to virtual-world transactions?

For most people unacquainted with MMOs, of course, it's a mystery how the question could be asked at all. If you're among the mystified, you are probably unaware of the key feature that distinguishes most virtual game currencies from Monopoly money: an exchange rate.

Real-Money Trades

At this writing, the Azerothian gold coin--the in-game currency used by World of Warcraft's 7.5 million players to buy and sell the game's magic armor, weaponry, and other items--trades on eBay at an unofficial rate of seven to the U.S. dollar. Though most game companies try to ban or discourage these free-wheeling out-of-game markets, Second Life actively encourages a real-world type of economy with an official market-driven rate of roughly 50 cents per 100 Linden dollars (Second Life's currency). But whether the game companies like it or not, where there's an MMO, there's a way for players to buy what they want in the game with real money.

And naturally, where there is a way to pay real money, there is a way to collect it. From the player who sells his WoW character on eBay for a quick $300 profit to the laid-off factory worker making $7000 per month selling Second-Life animations he creates that let game couples dance and assume other poses, virtual worlds have blurred the line between work and play almost past recognition. Successful entrepreneurs like Second Life real-estate magnate and real-life millionaire Anshe Chung are the pixel-perfect face of a fast-growing "real-money trade" that is estimated by Steve Salyer, former CEO of online game item and currency retailer IGE, at nearly $1 billion worldwide--every penny of it as taxable as any other industry's real-money revenues.