So virtually everywhere one goes on the Internet you see articles suggesting that soon the IRS will tax MMORPG goods. This seems to have all started with a legal affairs article (first link) about the subject which unfortunately seems to ignore much of the real complexity of the issue. However, regardless of what a long quest through tax regulations reveals about taxation for in game goods it should be pretty obvious that this simply isn’t going to happen.

Now no one disputes the fact that real world income you generate from your MMORPG actions must be taxed at some point, if you make your living by selling game items in eBay you don’t magically avoid taxes. The question is whether purely in game transactions are subject to taxation. The justification cited to say they are is that they have real world monetary value and thus just like transactions in a barter economy in game trades are fully taxable. However, this ignores an essential point, in game items aren’t real world goods.

It seems entirely possible to regard in game increases in ‘wealth’ as unrealized capital gains which are realized (and hence taxed) only once they are exchanged for actual cash (I found another blog suggesting the same). The question seems primarily to be one of whether to consider the individual items as the investment in question or the game account as the investment and the items mere properties of that account much like the stocks a mutual fund owns are properties of your shares in that fund. While I admit that I gave up trying to comb through the IRS materials to find a clear distinction about what counts as the asset intuitively this makes the most sense as you face risk to all the items your character owns jointly (you lose them all if your account in canceled) much like value in a wholly owned corporation.

However, a detailed analysis of how the current regulations might apply isn’t as important as understanding that tax law and policy is (mostly) made by reasonable, sane individuals not applied by some nefarious computer program. Sure tax law is often complex and twisted but usually if you look you will see a perfectly understandable reason, either the pressure of political advocacy groups or the need to avoid improper incentives. Once you realize that there is every political reason to avoid taxing in game wealth, that it would be absurdly difficult to track, and that there is a perfectly coherent option of viewing in game assets as unrealized capital gains it should be pretty clear that in game assets aren’t going to be taxed. Remember, unlike real barter economies their is no worry that people can avoid paying income taxes by simply eschewing cash. Even the most dedicated nerd cannot live on virtual goods alone.

If some game like second life ever decides to give their in game currency real value, e.g., not reserving the right to take all your money without compensation, things might be different but worrying that your Wow loot is going to be taxed makes about as much sense as worrying that you’ll be taxed on the items in your pen and paper RPG (you probably could trade them to your fellow player for cash).

Sure it’s remotely possible that the IRS will feel boxed in by some prior regulation to try and tax in game assets but the arguments given so far certainly don’t justify getting worried.