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There's a follow-up article to it as well, published a couple weeks later in Jaunary, entitled . They asked me for an interview for it and a couple of my quotes ended up in it.
The game doesn't have to report it anymore than Ebay has to report it. The game isn't even capable of catching most of those transactions, through no fault of their own.
The player (in the US) would just report it, if acting as an individual, on his 1040. If I got my sword by adventuring in the game and sold it, I'd be paying taxes on the entire sale price, while if I had purchased it from someone else I'd be paying taxes on (or claiming a loss on) the difference between the price I paid and the price I'm selling it for. You may end up paying the capital gains tax rate if you bought and sold, and the personal income tax rate if you obtained the sword by playing, which does complicate things slightly.
This is pretty well established and pretty much everybody accepts that this kind of transaction is taxable under current tax law. It makes sense to tax these too.
The difficulty comes in your case #2:
This is, as you say below, definitely a grey area at this point. However, here's how I see it playing out, after having talked quite a bit to various legal and accounting experts (recognizing that there are no experts in the traditional sense on this yet because there's no large body of established knowledge in the area, but that the same accounting and legal principles that apply to everything else are going to end up applying to this. It's just a matter of distilling what is actually happening so that the law can be consistently applied).
The key decision here, I think, in the US at least, is one whose name I can't remember unfortunately, but which involved the question of whether a poker player (such as at a legal casino) should be taxed every time he wins a hand, since he is gaining something that can be immediately cashed in for real-world money.
Happily, and sensibly, I believe, the courts ruled that the poker chips represent some sort of temporary token that, in the context of the game (poker), do not have taxable value (as opposed to value) until the player exits the context of the game and cashes out.
I truly hope the courts end up seeing the sensibility of applying this standard to MUDs/MMOs as well, but there is really no way to know. I do believe it would be an "apocalypse" (as I said in the article above) for developers, but I believe it'd also be an apocalypse for players if in-game transfer of assets became a taxable event. Besides the fact that it would make playing these games an exercise that would be economically unfeasible unless you were regularly cashing out (by selling your items) in order to pay the taxes on them (and that is ridiculous), there are other very serious difficulties. For instance:
What if you're part of a hunting party that kills a monster that drops 100 gold and you have an agreement to evenly split all profits. Does this mean, since you're acting as a legal partnership, that you have to file partnership tax returns for every hunting group you join?
I'm not exactly the sort of person to jump up and down to defend the rationality of the legal system or the tax system, but it seems to me that taxing in-game assets would result in simply putting MUDs/MMOs out of business. Players couldn't afford to play them if simply by doing so they subject themselves to potential tax liability, not to mention the sheer hassle of reporting. I have some level of confidence that between the just beyond-absurd results that taxing in-game asset transfer would have and the aforementioned decision regarding poker chips (I wish I could find it again), that we're not going to see it happen, but crazier changes than this have been made before, so who can tell?
Another relevant article with a different viewpoint is Hiroshi Yamaguchi's "" - He makes the case that the way virtual currencies work in-game and the way in which they interact with physical world currency makes them a type of LETS (stands for Local Exchange Trading System). (See: for more on LETS.)
--matt
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