[MUD-Dev] Are gold pieces taxable?

Amanda Walker amanda at alfar.com
Sun Jun 29 12:46:32 New Zealand Standard Time 2003


On Friday, June 27, 2003, at 01:01 AM, Boyle, Paul wrote:

> 3. The most likely scenario I see is that monetary value in a
> virtual economy is treated just like the stock market (the
> parallels abound) and that you're only taxed at the time of sale
> at the capital gains tax rate.

This was the proposal I made a while back during a "selling
characters/items on eBay" thread.

The main fallacy in the article Raph passed along concerned when
income is taxed.  Income is not taxed when value is received, it is
taxes when it is realized.  You can hold a stock as long as you
want, and its value can get as high as you want, with no taxes due.
The moment you *trade* it, you realize income.  The same is true for
barter.  I can keep that bottle of Dom Perignon in my basement as
long as I want, or do whatever I want with it (including drinking
it, breaking it against the bow of my new yacht, whatever) without
any tax consequences.  When I trade it to someone else, it becomes
taxable.

I agree that virtual "gold pieces" are very analogous to shares of
stock (including issues such as liquidity, dilution, etc.), but
there are a few aspects in which they are not.

Taxing conversions into real dollars (selling stuff on eBay, for
example) as a capital gain seems sensible.  It's the internal
transactions that are problematic, since they could count as barter.
There is some precedent for "in-kind" transactions not being taxable
(certain ways of structuring corporate mergers & acquisitions, for
example), but how these would be analogous to virtual resources is
unclear to me.

A better analogy might be gambling chips.  Since I don't gamble,
please correct me if I'm wrong, but I believe that gambling income
is realized when you cash out.  You can buy a set of chips, win a
lot, lose a lot, etc., but it only counts as income when you convert
them back into money.  In other words, *playing* isn't taxable, only
taking value back outside the casino is taxable.  This seems as
though it would be a reasonable model for in-game currency.

Amanda Walker
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