Trading in Massively Online Game makes Real Money in Virtual World

Kausar Ahmed
MS Candidate
University of South Australia
May 22, 2008

Abstract

This paper analyzes the issue of earning real world money from virtual world and the role of taxation on that income.
Many virtual worlds have their own internal trade based economy similar to real world economy with its own currency
acting as a medium of exchange. A huge virtual money flow in MMOG, so a virtual economic flow can be exist which can
effect the real world economy in terms of tax pay. And the gamer integrate real cash into the virtual world through an
internal currency exchange system. It illustrate the issues of taxes in virtual games recognizing income could be
established by regulators at the point when in-game transaction occurs and at the time of converting game assets into
real world money. The tax in MMOG is calculated from gross income of gamers when they receive anything of economic
value, whether in the form of cash, property or services. MMOG tax can be collected by voluntary reporting and Internal
Revenue Services (IRS) initiative and participating from different nation belongs to their country’s tax rules and
regulation.

Keyword: MMOEG, MMORPG, real money trade (RMT), virtual world, multi-user, linden dollar, internal revenue service (IRS),
second life, linden lab, virtual economy, taxation, Terms of Service ( TOS )

Introduction considerable number of people which is not a game

rather then collaboration, community development
Social network collaborate a group of people to and innovation inside the enterprise. According to
form virtual community which trends to virtual the Prentice (2007) virtual worlds are neither games
world other than real world where members are nor a parallel universe and every avatar acts as a
sharing resources, skills, profile, contacts, fun and real person. However, virtual world includes
doing business to achieve its mission goal in virtual MMORPG such as World of Warcraft and on the
networks. Online virtual games are one of the most other hand Second Life is one of the most popular
interesting innovations in the area of social MMOEG which was released by Linden Lab, a
network. These games are based on multi-user private company based in San Francisco, California
domains (MUDs) and they have utilized the internet in 2003. It’s a three dimensional forum that enables
as a new gaming forum that allows people to link users to interact with each other through motional
up and play together. In Massively Multiplayer avatars.
Online Economic Game (MMOEG) or Missilery
Online Role Playing Game (MMORPG), players
from different sites can easily participate and obtain
items that can have significant world value to other
players. And Second life is one of the good
examples of Massively Multiplayer Economic
Game where people can trade huge money by
selling and buying virtual property. And the virtual
world is not isolated from the real world as the
exchange of virtual goods and services for real life
money has become a fundamental part of the virtual
world experience.

Virtual World & Ownership

Virtual world is a computer simulated
environment in which social network users interact
with each other via graphical representation. Virtual
worlds have captured the imagination of a
Figure 1. Virtual demo
This platform creates a sophisticated level of
social network interactivities combined with
general aspects of virtual reality. And there is no
fee to join in Second Life but it takes money for
Linden dollars from participants which can be
exchanged for real money rate of approximately
300 Linden dollars to one US dollar. However,
according to Erriksson and Grill (2005) the
participants can create avatars and may own
property and game money but at the end of the day
when the game is over, the property and the money
itself is returned to the owner of the board game. As
a result the values and ownership is based on the
time it takes to acquire buying and selling. On the
other hand, Herman, Coombe and Kaye (2006)
acknowledge that the user have their own rights to
create and sell the virtual property in virtual
currency to other users which can be converted into
real life currency at a fixed exchange rate.
Economic Flow in MMOG
In MMOG the economy works differently since
it is so tied to real life money where it is replaced
with buying of virtual currency with real life
currency and the drain is taxes on land ownership.
As there is a huge virtual money flow in MMOG,
so a virtual economic flow can exist which can
affect the real world economy in terms of tax pay.
The basic difference in between these two terms is
that in real world economy there is a channel where
the government is getting a part of once gross
income but on the other hand in virtual economy
the agent collects Linden dollars as virtual tax when
two parties are involved in buying and selling their
goods or properties and at end of the year the
entrepreneur of virtual game pays real tax against
its entire revenue. However, the stakeholders of
MMOG try to prevent the players paying with real
currency to gain items or in-game currency from
other participant instead from them. Jordan
describes that Blizzard who run European online
game World of Warcraft banned over 800 accounts
because the players were involved in selling in-
game currency. In contrast, in 2005 Sony who runs
Everquest allowed players to sell virtual goods for
real currency and they also received a percentage
from each transaction. Moreover, Fairfield (2005)
acknowledges that real world system of trade such
as eBay and PayPall allow virtual-world users to
auction/sell virtual goods for real world currency.
A number of web sites, such as
MMOMarkets.com and the Internet Gold
Exchange, actively track the trading rate of online
currency in many games. Holland and Ewalt (2006)
acknowledge that MMOGchart.com put total
number of MMORPG subscriptions at over 13
million and NPD estimates that game developers
raked in $292 million in subscription fees in 2005.
On the other hand, Julian Dibbel as a retailer in
massively multiplayer game Utima online sold in-
game items, currency and real estate on eBay and
earned almost $4000 per month which is $36000 a
year. Surprisingly, some people make six figures in
a year.
Read Trade Money (RMT) and Effect
Real money trade is the act of exchanging real
life money for virtual world goods and services. In
fact, this is almost similar to the Casio trading
where people buy coins against money and gets the
money by exchanging this at the end of the day.
The only difference between virtual game and
casino is the gamer in casino cannot trade with the
other participants. But in MMOG people trade
themselves which is hidden from the company and
sometimes they trade real world assets with the
virtual items and it impacts real world economy
which is never counted as taxable.
Figure 2. Real & Virtual Money
Real money trade has many effects on both the
virtual worlds and their social networks and real
world through various means. Castronova (2006)
describes that on the beginning of 2005 real money
trading exceeded 100 million US dollars and may
actually be over 1 billion annually. It will not be a
problem if the scope of trade limits inside the
contour of virtual game but when it penetrates into
the real world then the question raised is whether
that portion of this huge amount of money is legal
or not, in the sense of taxation nowadays. There are
other motivations such as second life where the
trade is legal and the RMT is a part of the game as
the in game currency can be freely converted back
and forth between virtual and real money. Although
virtual currency in some cases has a better
exchange rate into US dollars than some smaller
countries. Wong (2007) acknowledges that recently
the magnitude of sales in virtual worlds is creating
real life profit for users. In America, the Internal
Revenue Service (IRS) has been looking at taxing
the sales of virtual items and gold.
Tax Compliance
In two alternative ways the MMOG tax can be
collected such as voluntary reporting and Internal
Revenue Services (IRS) initiative. According to the
report provided by Julien Dibbel (2004), his earned
income selling goods and services in MMOGS was
more than his general income profession as a writer
which is no more surprising for a second life
participant. The most interesting thing is that he has
to pay tax for his professional income but he can
refuse to pay tax for the income what he has earned
from MMOG, unless voluntarily announced.
Similarly, Anshe Chnag who is another second life
player has recently reported voluntarily of her
worth exceeding million dollar mark. So, IRS has
been undergoing self reported taxation method for
MMOGs player on their earned income ever since
the game has started from its journey.
Pros & Cons in Tax Compliance
The advantages of IRS initiative are
• Increases tax payer’s compliance
• Easier for tax payer to keep the record
• Game operator may incur some charge,
technically efficient.
Disadvantages of IRS are
• Players may grow with some regressive
behaviour
• Players might change the medium
transaction – barter transaction.
• Devaluation of Linden leading to the
collapse of game economy.
On the other hand, although voluntarily
reporting is less expensive and
• Few players comply with self-reporting
• Players, sometimes, are not even aware
of the fact that their income is taxable.
• Neither tax policy provided by IRS nor
any guidelines provided by game
operator which is a concern!
Tax in MMOG
The tax in MMOG is calculated from gross
income of gamers as taxpayers have gross income
when they receive anything of economic value,
whether in the form of cash, property or services
(Camp, 2007). But Miano (n.d.) describes IRS code
1001 that provides the tax payers should subtract
their basis from the sum of cash receive plus the
fair market value of any property received. So, in
Second Life to reach basis one must establish the
proper measure of virtual income. Surprisingly,
there are no such measurements for net income
unless gross income is measured. And later taxation
of Second Life implied on cashing out and
accessions the wealth. In virtual game the company
provides the basic stipend but they encourage
gamer to develop content and later sell to others.
This income, in turn, enables you to develop more
land which provides the revenue base for Linden
lab because the more land you own, the more
‘taxes’ you pay ( Grimmelmann 2003).
The gamers’ income could be recognized when
“in-game” transaction occurs or when the
conversion from “in-game” to real world currency
occurs. Perhaps, substantial risk of forfeiture could
take place which invalidates the point of income
recognition during the “in-game transaction”. If a
person runs the risk of forfeiture, he may not be
liable for tax.
The participant can ignore the Linden dollar
when it will lose its value leading to barter
transaction as well as exceeding the threshold
currency conversion set by Linden lab.
Surprisingly, the gamer has a tendency of not to pay
tax which leads the RMT transaction to form a
gigantic gray market. According to the Yoon
(2004), currently gray market has no tax assessed to
earnings from game item transactions by unlawful
activities. He also describes that it can be tackled at
the government level in the context of overall
policy dealing with gray markets. Their principle
roles include mediating disputes between players
and collecting information on game bugs which
they forward to the development team. Finally,
imputed income and loot is applied to MMOG
taxation. Haskell and Kauffman (1964)
acknowledge that the special feature of imputed
income is that it arises outside the normal process
of the market. Similarly, loot arises when a gamer
wins property in battle of MMOG.
The property right of copying items is not
clearly mentioned in Terms of Services (TOS) in
Second Life. Lederman (2007) clarifies that if any
participant creates any copy one of its game items;
it would be taxable if he wants to sell it to other
participants. As when a gamer creates a copy, it is
just a replicated copy of the Linden server.
Tax Procedure
Mennecke (2007) acknowledges that there are
two alternative ways IRS initiated to recognize
income could established for taxation by regulating
the point when in-game transaction occurs and
converts game assets into real currency. And he
also suggests that IRS established the specific rules
where the game operator like Linden lab is required
to track all economic records of in-game
transactions as a part of official documentation for
taxation. And the participant would be issued a
1099 form during any real world values that is
earned in exchange of virtual world object or
currency for the record purposes. This system
expected to increase user compliance for tax even
though have some pitfalls. If anyone tries to do
transactions with web portal, peer-to-peer or real
world, it could be detected by IRS.
Different Tax Policy in Different Countries
According to the Gartner analyst,
approximately 80 percent of internet users all
around the world participate in “Second Life”.
(Garter, 2007). Apart from Second Life there is also
some virtual games which deal with in game
currency. This massive population of MMOG is
from different nations participating in virtual game
via internet. As a result, this huge population
belongs to their country’s tax rules and regulations.
In this case, the transaction flow would be Linden
dollar to US dollar and US dollar would be
exchanged with other country’s currency followed
by the currency rate which implies penetration of
illegal money into the local economy. Chung
(2008) describes that these latter currencies act as
foreign currencies and should be taxed under the
foreign currency rules of Internal Revenue Code
(IRC). In order to avoid this charge, the gamer
voluntarily declares to make the money white.
However, the gamer plays another trick to avoid tax
by exchanging real world goods with virtual
property and later buyer can auction real world
goods to get real money. Davidson (2008)
acknowledges that Linden lab that they begin to
collect value added tax from residents of European
Union which will apply to premium registration
fees, purchases from the land store, private region
fees and auctions but would not apply to
transactions in Second Life currency between
individual residents.
Discussion & Conclusion
Is being a big challenge to calculate and thus
collect tax from the gamer in massively
multiplayer online game nowadays. Moreover,
IRS initiated tax method could make the game
currency weak which may lead to the fall of game
economy. However, due to the lack of specific
policies, regulations and guidelines from both tax
authority and game operator sides; participants are
not aware of the liabilities of paying tax. The
analysis makes an analogy between the transfer of
goods and real money trades where the transfer is
not a purchase of an item. As many people are
earning unrealistic real money through virtual
world activities, the governments are looking into
whether virtual world transactions are subjected to
real taxes even if the participant does not convert
his virtual income into cash out. However, the US
law has led to unclear and sometimes conflicting
interpretations.
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