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Old 03-20-2006, 11:03 AM   #1
Valg
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Interesting article, pointed out to me by Thrakburzug, another staff member on Carrion Fields: Dragon Slayers or Tax Evaders?

The article raises a number of questions which I've seen bandied about in other publications as well, such as:

1) If a player sells virtual goods (i.e. The Flaming Hammer of Thrakburzug) for RL cash (eBay, etc.), it's obviously income earned from a service you provide.  How do the player and/or game report it?  How do you deal with an international playerbase?

2) If you 'farm' virtual goods which have a proven RL fair market value, but don't sell them, is this a gain in assets?  What if you barter them for things with a fixed market value, like official "tokens" sold at a fixed price by a game?  Is any this any different from, say, painting someone's house so they'll fix your car?  (As the article points out, such barter exchanges are taxable.)  If a "pile of tokens" costs $5000 at a game's website, and someone gives it to you in exchange for doing quests for them, is this any different from them giving you $5000 as a birthday present, or for painting your house?

It sounds like the IRS (the government agency which handles federal taxation in the US, for those overseas) hasn't made any decisions on most of this, largely because they don't fully understand the issues yet.  But what will happen as a new generation of twentysomething lawyers and accountants who do understand these markets rise through their ranks?

I admit it sounds like gamers are getting a free ride right now.  Once you establish that virtual goods equal money, how are they different from RL "treasures" like property or jewelry?
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Old 03-20-2006, 01:45 PM   #2
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Very interesting, I have always wondered about this. Especially considering games like Secondlife where you can trade their game currency for real currency right on the website. And it's only a matter of time before big brother gets his share.

Look what they did to online gambling.
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Old 03-20-2006, 02:08 PM   #3
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There's a follow-up article to it as well, published a couple weeks later in Jaunary, entitled Are Virtual Assets Taxable?. They asked me for an interview for it and a couple of my quotes ended up in it.

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1) If a player sells virtual goods (i.e. The Flaming Hammer of Thrakburzug) for RL cash (eBay, etc.), it's obviously income earned from a service you provide. How do the player and/or game report it? How do you deal with an international playerbase?
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:
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2) If you 'farm' virtual goods which have a proven RL fair market value, but don't sell them, is this a gain in assets? What if you barter them for things with a fixed market value, like official "tokens" sold at a fixed price by a game? Is any this any different from, say, painting someone's house so they'll fix your car? (As the article points out, such barter exchanges are taxable.) If a "pile of tokens" costs $5000 at a game's website, and someone gives it to you in exchange for doing quests for them, is this any different from them giving you $5000 as a birthday present, or for painting your house?

I admit it sounds like gamers are getting a free ride right now. Once you establish that virtual goods equal money, how are they different from RL "treasures" like property or jewelry?
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 "An Analysis of Virtual Currencies in Online Games" - 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: http://www.lets-linkup.com/ for more on LETS.)

--matt
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Old 03-21-2006, 02:46 AM   #4
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Actually, I am surprised no one has been sued in court because they stole an object or slew someone close to attaining said object based on the loss of the income potential of said object on Ebay.

You know something like this is coming one day. A person will form a company into which people invest real money in order to pay and outfit the person and their employees to attain objects that are sold on Ebay for a return on investment.

They will reason that even though one of the design elements of the game allows you to play a thief, the fact that theft has in game reprecussions equivalent to the real world based on laws developed in game signifies that it is viewed as immoral in the game as it is in real life.

As a result, either the thief should pay resistution as if they stole a real item of value (vs one comprised of 1s and 0s) or the game authorities, having apprehended the thief, should extract items and gold from the thief and sell them transfering the equivalent money to the stock company.

While the first of such cases may not get any traction, you know that eventually someone with enough money will get into a situation where the right lawyer with the right prescendent will argue in the right court.
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Old 03-21-2006, 03:20 AM   #5
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Actually, that happened for one of the first times (or the first time, but it's hard to keep track of Asia) in 2003, in China: http://www.cnn.com/2003/TECH/fun.gam...na.gamer.reut/

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Old 03-21-2006, 07:59 AM   #6
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Hooray for an interesting and flame-free topic.

I wonder what a bank would say if you tried to get a loan to buy something in an MMO. It seems a little silly, but are we that far off from that?
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Old 03-21-2006, 10:50 AM   #7
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Quote:
Originally Posted by (pwyll @ Mar. 21 2006,03:46)
They will reason that even though one of the design elements of the game allows you to play a thief, the fact that theft has in game reprecussions equivalent to the real world based on laws developed in game signifies that it is viewed as immoral in the game as it is in real life.

As a result, either the thief should pay resistution as if they stole a real item of value (vs one comprised of 1s and 0s) or the game authorities, having apprehended the thief, should extract items and gold from the thief and sell them transfering the equivalent money to the stock company.
This is why many of the pay-for-perks games do one or more of the following to the perks:

- Set up donation items so they can't be taken from the donator.
- Defang PvP action so no permanent consequences (item loss, permadeath, etc.) can occur.
- Only allow the purchase of perks which can't be taken or consumed in the first place, like character advancement.

All of these can be softened by appropriate disclaimers, but you eventually run into risk.

As an example, there was a case discussed on these boards where a game allowed you to buy training sessions which advanced skills. Now, you could join a clan-like structure, and you'd get new skills, and you could use these sessions (which you likely paid for with RL money) to advance new skills. The problem is, players (not even staff) could evict you from the clan, and you'd lose the use of those skills. I believe some sort of refund system was set up after complaints grew, but without a refund I think a player has a legal gripe-- other players took his RL money's purchase away from him.

That's not much different from the 'thief' scenario you posit above, of course. Is there a perks system out there where the perks are truly "up for grabs"? As in, you can buy a supersword, but you can be disarmed/robbed/killed and lose it without your consent?
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Old 03-21-2006, 12:19 PM   #8
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Originally Posted by
This is why many of the pay-for-perks games do one or more of the following to the perks:

- Set up donation items so they can't be taken from the donator.
- Defang PvP action so no permanent consequences (item loss, permadeath, etc.) can occur.
- Only allow the purchase of perks which can't be taken or consumed in the first place, like character advancement.
Actually, none of this has anything to do with legal risks, in our case at least. It's purely customer-oriented. Someone who has purchased something from us is happier if he/she knows he/she can't easily lose it.

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As an example, there was a case discussed on these boards where a game allowed you to buy training sessions which advanced skills. Now, you could join a clan-like structure, and you'd get new skills, and you could use these sessions (which you likely paid for with RL money) to advance new skills. The problem is, players (not even staff) could evict you from the clan, and you'd lose the use of those skills. I believe some sort of refund system was set up after complaints grew, but without a refund I think a player has a legal gripe-- other players took his RL money's purchase away from him.
The player wouldn't have a gripe in the US (yet) at least. If an item has value (and that's not really related to whether the player paid money for it or not) and it's taken by another player within the legitimate confines of gameplay, multiple lawyers have told us there's likely no issue. If this WAS an issue, then any thief on any game, whether hobbyist or commercial, could be prosecuted for stealing something of value, whether the game sells things, even whether the game is commercial at all (since being non-commercial doesn't prevent in-game assets from accruing value). It's not paying money for something that gives it value. One pays money for something because it already has value.

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Originally Posted by

That's not much different from the 'thief' scenario you posit above, of course. Is there a perks system out there where the perks are truly "up for grabs"? As in, you can buy a supersword, but you can be disarmed/robbed/killed and lose it without your consent?
I don't know if there are games where the game administrators sell things where this is the case, but it's certainly the case with items of value in many games, ranging from small DIKUs to World of Warcraft.

--matt
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Old 03-21-2006, 04:36 PM   #9
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Well, you'd think they wouldn't let virtual goods affect taxes as exemptions, or anything like that, because it'd be pretty much up to the game's owners to decide how much their perks were worth in real valuta. So like, I could just start a mud, price my Larksword at a million US dollars, and then donate one to Race for the Cure (if I could somehow convince them it would help) and write off that much. From what I'm wrapping my head around, at least. Am I halfway close?

And with the Chinese kid's case, I bet a lot of companies are starting to iron-clad their disclaimers for any sort of MMO deal...Act of God, Wheel of Fortuna, something something...
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Old 03-21-2006, 06:42 PM   #10
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Well, you'd think they wouldn't let virtual goods affect taxes as exemptions, or anything like that, because it'd be pretty much up to the game's owners to decide how much their perks were worth in real valuta. So like, I could just start a mud, price my Larksword at a million US dollars, and then donate one to Race for the Cure (if I could somehow convince them it would help) and write off that much. From what I'm wrapping my head around, at least. Am I halfway close?
Well, that's not how valuation really works, though again, I'm certainly not an accountant (thank god). You don't get to just set what you think something is worth and then write it off unless you can back it up with some reasonable evidence that this is what the market says that is worth. You'd have a difficult time convincing an IRS agent that your sword is worth a million dollars unless other people had paid a million dollars for them (or something in that ballpark) previously.

Now, an interesting question arises when you consider that the marginal cost of manufacture for your sword is 0. Once you have one sword, the cost of making the 2nd sword is effectively 0. So look at Iron Realms, for instance. Let's say we sell a certain virtual sword for $150, and do so repeatedly, establishing that the value is reasonably somewhere around there. Could we just create a hundred copies and donate them to a charity, then take the write-off? I would certainly assume not, but I don't nkow what regulation or whatnot would prevent us from doing so.

The reason I assume that doesn't work is because the marginal cost of manufacture for almost all software is 0 or approaching 0. I'm sure the clever fellows at Microsoft would have figured out a way to donate the heck out of software to charities that probably wouldn't buy their software and thus don't represent an opportunity cost for Microsoft (for instance, perhaps charities that have committed to using Linux) if MS donates non-transferable Windows licenses to them, were this legal.

I'm heading to our accountants' offices in a few minutes actually. I will ask how this works and report back.

--matt
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Old 03-21-2006, 08:16 PM   #11
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Quote:
Originally Posted by (the_logos @ Mar. 21 2006,13:19)
I don't know if there are games where the game administrators sell things where this is the case, but it's certainly the case with items of value in many games, ranging from small DIKUs to World of Warcraft.
Really? I was under the impression that there was no PvP looting or the equivalent in WoW. (I may well be mistaken.)
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Old 03-21-2006, 08:20 PM   #12
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So I inquired with our main CPA about this and he gave me his off-the-cuff opinion, but is going to do a bit of research and get back to me with a more final answer in a day or two (I'll post here when he does). What I asked, roughly, was, "Could Iron Realms simply duplicate a bunch of virtual swords and donate them to a children's charity to give to kids they help, and then take a huge write-off based on the market value of those virtual swords?

What he explained is that there are two types of property one might donate: Income property and long-term capital gain property. Long-term capital gain property is what you typically donate to charity when you're not giving money - an old car, your clothes, etc. I'm not sure how food fits into there, but he explained that there are certain legislated categories that automatically go into the capital gain column, such as computer equipment for the poor.

Now, what would happen if we donated a virtual sword that sells for $100 is that the IRS would look at it and see a couple things:

1. It's income property. In other words, it is property that is typically used to generate income. As such, the math on a donation would essentially assume that what you've done is sell the sword for $100 (thus generating $100 of income), and then donate that $100 (thus generating $100 of loss). This makes sense, but then I wondered, "Ok, what if we duplicated the swords, and held onto them for a year and a day (the timespan an asset usually has to be held to be classified as long term capital gains)?" This leads us to #2:

2. We're not actually giving swords to people. What we're doing is selling/giving/donating the license to use that sword, just like how most software is "sold" (ie you buy a license, not the software itself).

3. A final factor is something to do with definitions of inventory and why keeping virtual swords that we typically sell for a year wouldn't move them into long-term capital gains anyway, but I didn't completely follow this part of his explanation.

He's going to follow-up with me to make sure his first impression of how it would be treated is correct, but it does all fit and make sense. It means that when Microsoft donates 10,000 Windows licenses, it probably doesn't get to take a write-off for them, unless there is a legislated exemption that would exempt those licenses. He'll check on that.

Anyway, hope that answers your question Lark.

--matt
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Old 03-21-2006, 08:26 PM   #13
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Quote:
Originally Posted by (The_Disciple @ Mar. 21 2006,21:16)
Quote:
Originally Posted by (the_logos @ Mar. 21 2006,13:19)
I don't know if there are games where the game administrators sell things where this is the case, but it's certainly the case with items of value in many games, ranging from small DIKUs to World of Warcraft.
Really? I was under the impression that there was no PvP looting or the equivalent in WoW. (I may well be mistaken.)
Well, the law isn't likely to recognize a big difference between the game code directly "stealing" your item of value (via an NPC looting your corpse for instance) and another player of the game using that code to steal your item of value. In the former case you sue the developer/publisher. In the latter you sue the player....but more likely find some excuse to sue the developer/publisher anyway, because they have the money to sue for.

Luckily, I seriously doubt we have to worry about this too much. I don't think courts are likely to permanently take a stance that either of the above is actionable as long as it is within the normal course of gameplay. (Just like someone beating you in a hand at poker isn't them 'stealing' your chips. It's just them using the rules of the game to move the chips to their pile.)

You know, there's also the interesting issue of whether you CAN be stolen from, since almost no major games recognize player ownership of anything in the game. This will be tested in court, no doubt, but hasn't yet. Right now, Second Life is about the only major commercial MUD/MMO that explicitly grants ownership of IP to players....but then also says that Linden Labs (the owner of SL) basically has the right to do anything they want anyway, so it's up in the air how much that 'right' they granted to players is actually worth.

--matt
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Old 03-21-2006, 08:30 PM   #14
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Quote:
Originally Posted by (The_Disciple @ Mar. 21 2006,08:59)
Hooray for an interesting and flame-free topic.

I wonder what a bank would say if you tried to get a loan to buy something in an MMO. It seems a little silly, but are we that far off from that?
The big problems with loans for stuff in an MMO is that a) It's very open for debate as to whether you can actually buy something in most MMOs and b) The value of the collateral to the bank is not nearly what you're going to pay for it, because they're going to discount the value in terms of collateral by whatever risk they believe there is of being unable to recover and resell the item. If the game shuts down, bam, there goes 100% of the remaining part of the loan if you default on the loan.

Of course, you can get a loan to buy anything you want if you put up enough collateral or if, to a certain extent, you're a customer with a great credit record and a history of stability and verifiable income, but I'm assuming you meant getting a loan with the thing you're going to buy as collateral.

--matt
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Old 03-21-2006, 11:47 PM   #15
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Quote:
Originally Posted by (the_logos @ Mar. 21 2006,21:30)
Of course, you can get a loan to buy anything you want if you put up enough collateral or if, to a certain extent, you're a customer with a great credit record and a history of stability and verifiable income, but I'm assuming you meant getting a loan with the thing you're going to buy as collateral.
Without really thinking about it enough, I was meaning that. You're right, the implications of collateral or lack thereof shut that down pretty well.

On the other hand, if I could earn money with the purchase, might I be able to get some sort of small-business loan? Let's say buying a buff-ass sword on WoW will set me up to gold farm or win some sort of cash-prize PvP tourney that probably doesn't exist.

A lot of this speculation is premature and a little silly, but I think it's interesting nonetheless.
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Old 03-22-2006, 01:40 PM   #16
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I'd imagine another hole in the "charitable donation" problem is that you wouldn't even necessarily have to be giving the charity stuff they want.  If Microsoft gave the Salvation Army 1,000,000 licenses for some obscure developer tool with a bad reputation (but nonetheless a list price of $100), the SA would be foolish to refuse it (somewhere, someone probably wants a few copies), but good luck writing it off as a $100M donation. I guess you could make some sort of calculation as to how much Microsoft lost in sales by doing thatbut that all sounds very speculative.

And even that mass-developer-tool sounds infinitely more defensible than giving 1,000,000 Shiny Lightning Axes to charity, even if you can demonstrate that your players routinely pay $10 for a Shiny Lightning Axe.

It's obvious these schemes shouldn't work, but it's an interesting question to ask precisely why.  I mean, I can donate all kinds of ugly-ass and impractical household junk and write that off so long as the charity accepts it (they will refuse some things if they don't deem them worth the cost of storing them, which isn't an issue with virtual whatsits).  Where does the line get drawn between that and my pile of Shiny Lightning Axes?
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Old 03-22-2006, 01:51 PM   #17
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Quote:
Originally Posted by (the_logos @ Mar. 21 2006,21:26)
Luckily, I seriously doubt we have to worry about this too much. I don't think courts are likely to permanently take a stance that either of the above is actionable as long as it is within the normal course of gameplay. (Just like someone beating you in a hand at poker isn't them 'stealing' your chips. It's just them using the rules of the game to move the chips to their pile.)
However, all the rules of poker are available to all players before the game starts and the player chooses to play.

On a MUD, that can be different. Let's say you sell someone a virtual sword for $10, but you also populate your game with virtually undetectable NPC thieves who really like stealing those swords. You can stack the odds such that the player is extremely likely to lose that virtual sword within a week or two of gameplay, then use the "normal gameplay" defense. You're under no obligation to tell every player where every NPC thief is, and you can change what is "fair" as far as game difficulty without the consent of the player.

Another scenario would be: Let's say a game decides to shut down while they still have a fair number of players. Maybe a lawsuit is brewing, maybe they foresee the game spiraling slowly downhill anyway, maybe it costs too much labor or money to maintain. So they make a crazy sale: All kinds of unbelievably potent virtual stuff, better than anything in the game. Their players buy it up for a month, then *poof*, the game closes down due to "unforeseen" difficulties, and everyone at the company points at the disclaimer, shortly before running off with their bag of very real cash.

All legal, all bad for business, but all possible.
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Old 03-22-2006, 11:51 PM   #18
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Quote:
Originally Posted by (The_Disciple @ Mar. 21 2006,07:59)
Hooray for an interesting and flame-free topic.

I wonder what a bank would say if you tried to get a loan to buy something in an MMO. It seems a little silly, but are we that far off from that?
The_Disciple, this happened last year

Basically someone bought a 100k piece of virtual land, payed with 26k he had made while playing and got a real bank to lend him the rest of the money. So, basically, it has already happened
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Old 03-23-2006, 03:59 AM   #19
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Of interesting note during my playing of various MMORPGs is a group I ran into while playing the "Pay-for-Perks" MMORPG, 'Maple Story'. I ran into a group of korean kids grouping together, farming for important key quest/smithing/money items, for the purpose of selling them on eBay of the sorts. As I watched their fluid and extremely impressive mathematic approach to farming, I asked them how long they'd been farming this sort of thing. They told me that they worked in a sort of "sweat shop", where they were paid low-wage hourly costs to farm equipment for their "boss"/"company" to sell via the internet for higher prices. At first, I found this to be more than suspicious, but combined with research I did online and the pure consistant day-in/out methodical approach this team had to farming, I came to acknowledge it as the truth. All of the players in question claimed to be under 14, and their mastery of english(and even Korean, which I speak fairly fluently), seemed to agree with that claim.

So, if other countries are making a business approach to online game farming, it is only a matter of time before America takes a more "ethical" approach to the same thing - which, as law progresses and the courts come into more awareness of just how capital the mmorpg gaming market is becoming, will most likely prove to see some legal restraints/changes involving licensing, reselling, and taxing.

But who knows how long such things will go under the radar?
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Old 03-23-2006, 10:02 AM   #20
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The NY Times ran an article on virtual farming in China not that long ago. I'm not sure if you need to sign in to see in (I'm perma-signed-in), but:

Ogre to Slay? Outsource It to Chinese

It's a microcosm for how different a market can look when the cost of living and the value of currency is so different:

"For 12 hours a day, 7 days a week, my colleagues and I are killing monsters," said a 23-year-old gamer who works here in this makeshift factory and goes by the online code name Wandering. "I make about $250 a month, which is pretty good compared with the other jobs I've had."

That's 360 hours per month, or about $0.69/hour. This is why I'm surprised you mentioned South Korea, Don-- that's way below their minimum wage, and I'm surprised they can compete.
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