[MUD-Dev] Are gold pieces taxable?

Koster Koster
Wed Jun 25 12:14:23 New Zealand Standard Time 2003

>From Julian Dibbell's blog:


start quote--->
If You Take a Walk I'll Tax Your Feet

OK, so I realize I'm getting ahead of myself here, but what exactly
do I tell the IRS next April?

I'm not talking about the amusing but ultimately trivial question of
what I put down as my job category. (Gold Farmer?  Vaporware Vendor?
Merchant of Dreams?) This is a tougher one, with rather more
substantial implications both for me and the Ultima Online economy
in general. It's the big question, in fact, the heart of it all, the
only datum, finally, that the tax man is really interested in: What,
precisely, is my income?

This is a question much easier posed than answered. You might think
it's a simple matter of counting the dollars in my PayPal account,
but you would not, in that case, be thinking like the IRS. The IRS,
it turns out, doesn't just want to know how much sovereign currency
I've acquired in a given year -- it wants to know how much value
I've acquired. Fair market value, to be precise.

This means that as a matter of law it matters not whether the
payment I receive for services rendered is in dollars or in
doughnuts. Either way I have been paid, and no amount of pleading
the incalculably particular ding-an-sich-ness of a given doughnut
will undo that fact. The doughnut's dollar value is easily enough
established by a visit to the nearest Krispy Kreme -- and will be,
if push comes to audit.

More to the point, this means that while you're free to live outside
the cash economy if you so choose, the taxable economy is not so
easily escaped. The IRS is very clear about this.  Please see IRS
Publication 525 <
http://www.irs.gov/formspubs/page/0,,id%3D11916,00.html>, "Taxable
and Nontaxable Income," in which a brief but thorough section on the
cashless exchange of goods explains that "[y]ou must include in your
income, at the time received, the fair market value of property or
services you receive in bartering."

Helpfully, the section includes various real-world examples, among
them the hypothetical case of an artist who gives you, the owner of
a small apartment building, a work of her own art in exchange for
six months' rent-free use of one of your apartments. This sounds
like a lovely arrangement, doesn't it?  Rather glamorous -- possibly
even amorous. Here are the IRS's feelings about this lyrical
situation of yours:

  You must report as rental income on Schedule E (Form 1040) the
  fair market value of the artwork, and the artist must report as
  income on Schedule C or Schedule C-EZ (Form 1040) the fair rental
  value of the apartment.

I assume you see where I'm going with this. If I am obliged to
declare as income a work of art -- that is to say, an object of
highly subjective value that may never do anything more for me than
hang in its frame on my bedroom wall -- then how in the world am I
not also obliged to declare the readily salable Britannian gold
pieces I am piling up, whether or not I ever do sell them for eBay's
fair market value?

The case, it seems, is clear: I must declare those gold pieces as
and when I receive them, quarterly if possible, and never mind how
many of them I have managed to convert into U.S.  dollars. And to be
honest, I don't really have much of a problem with this. Already I
am keeping close track of the gold as it comes in, mentally
converting it into dollars long before I get around to doing so.

But here's where things start to get weird: What about all those
people who are actually just, you know, *playing* the game? All
those teenage boys and stay-at-home moms and hard- working weekend
warriors who are buying and selling their silver vanquishing katanas
and their south-facing polar bear rugs outside the West Britain bank
without any intention of ever cashing in the gold they make, without
even a shred of respect for those who do -- are they also required,
under federal law, to report as taxable income the eBay market value
of the imaginary riches they are thus acquiring?

What about the gold and other valuable goods they acquire without
ever entering into exchange with anybody else -- the stuff they get
by killing monsters and stealing treasure chests? No barter there,
but the IRS would seem to have that one covered
nonetheless. Pub. 525 again: "If you win a prize in a lucky number
drawing, television or radio quiz program, beauty contest, or other
event, you must include it in your income.... *Prizes and awards in
goods or services must be included in your income at their fair
market value.*" (Emphasis added.)

OK, well what about the fact that OSI, the company that produces UO,
can make a fairly defensible claim that all the goods to be found in
the game remain its property, and that the eBay market is thus at
best a form of mass delusion and at worst a collective trafficking
in stolen goods? The IRS, apparently, could not care less. Here, in
my very favorite section of Pub. 525, the IRS gives voice to tax
law's serene indifference to certain aspects of property that lesser
forms of the law can get so uptight about:

  Illegal income. Illegal income, such as stolen or embezzled funds,
  must be included in your income on line 21 of Form 1040, or on
  Schedule C or Schedule C-EZ (Form 1040) if from your
  self-employment activity.

It gets weirder. Pub. 525 makes repeated mention of a phenomenon
known as barter exchanges -- organizations set up to facilitate the
trading of goods and services among large groups of people,
typically issuing barter credits in the form of scrip to help
streamline the flow of trades. And if you think about this
description a bit, you begin to realize that it rather nicely fits
OSI itself (for scrip, read: gold pieces).  Does this mean, then,
that OSI is required, like every other barter exchange, to send out
yearly 1099-B forms to all its members and, in certain cases, even
to withhold taxes on the fair market value of goods exchanged?

Please, if anybody reading this is a tax lawyer, say it ain't
so. Until I hear otherwise, however, I'm going to assume the IRS
means just what it says -- and that sooner or later some clever IRS
functionary is going to read Prof. Castronova's paper on the $143
million GDP of EverQuest, put two and two together, and start
initiating some very interesting audits.

7:09 PM <2003_06_01_playmoney_archive.html>
<---end quote

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