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07/01/2007 - 07/07/2007

Taxing Your Lewts: Part 2

July 05, 2007

I had cheezeburger, and heartily recommend it. Earlier this week I posted news about Korea's new tax laws aimed at MMO businesses who profit from virtual item sales. I joked that the U.S. hasn't even talked about legislation yet, but was corrected by fellow FilePlanet staffer David Mealing, who pointed out that congress has been eyeing virtual worlds since at least last year.

I also got an extremely helpful letter from Matt Mihaly, the CEO of Iron Realms Entertainment. Matt is not a lawyer, but follows legal issues associated with online worlds closely -- check out his analysis of the Bragg vs. Linden Labs case, where a Second-Lifer is suing for damages after he was kicked from the game for a form of virtual real-estate fraud. It's a strange case but the ramifications are deep.

I'm in ur akkount, taxing ur goldz!

Again reminding us that he's not a lawyer, Mihaly clarified the whole subject of tax laws and virtual worlds:
There are (at least) three separate issues here involving what can be/is taxed. I'm going to limit my commentary mainly to the US as I'm not intimately familiar with South Korea's tax regime and the law surrounding it.

1. Anyone who lives in a country that taxes realized income is already taxed on RMT [Real Money Transactions]. That includes the US and I'm 99% sure it includes South Korea though I'd welcome contradiction from someone more intimately familiar with the ins and outs of taxation there. In the US, you already have to pay tax on all income you earn or capital gains you realize. It doesn't matter if you earn it as a baker, a stockbroker, or a drug dealer. Regardless of the source of your income, the IRS wants its piece (your mileage as far as state taxes varies state by state, of course) and money is often easier to trace than any other type of evidence. It's cliche to point it out, but Al Capone ultimately was busted for tax evasion, which is what anyone who isn't reporting RMT income is engaged in. You called them 'virtual profits' in your post, but what people are generating is actual profit. Of course, along with reporting income one would want to consult a tax attorney to identify which costs are deductible from any income generated via RMT.

2. The South Korean tax is not the initiation of RMT taxation in South Korea. It's a new tax on RMT, but RMT is already taxed as described in #1. I bring this up to reinforce the fact that South Korea's new tax isn't a sea change in tax policy over there. Instead, it's the government placing a specific service tax on RMT, but I'm sure there are hundreds if not thousands of similar taxes applied, scattershot, to various industries.

3. The interesting/scary issue is how the IRS/Congress will eventually decide to treat gaining an asset in-game without selling it. Consider this question: if I'm playing WoW and gain 10 gold via playing the game, have I just gained something worth real-world money? There's no disputing it's worth real-world money insofar as I could go generate money by selling it on any number of sites. It has value. On the other hand, I'm playing WoW as a game and have no intention of ever cashing out that way (it's against the EULA after all), so does it make sense to tax me on that? And on my mutant third hand, does it make sense/is it feasible for the IRS to distinguish based on the alleged intent of the person who gained an in-game asset? There is an issue here that complicate this question as well:

There is (as will hopefully be recognized by lawmakers) a big difference between a virtual world that tells you that you own stuff in-game (Second Life) and one that tells you that you do not (World of Warcraft). If Blizzard is right and it (not the player) "owns" the virtual gold, then one might be tempted to opine that it's pretty clear that there's no reason to consider your avatar's gain of virtual gold as a taxable event. Conversely, Second Life has been telling people repeatedly that they own their stuff in Second Life (put to the lie a bit by their recent court filing in the Bragg vs. Linden case that I blogged about) for years, and if that is indeed true then it seems to me (as a non-lawyer) that gaining an asset in Second Life should be a reportable, taxable event whether you cash out or not. It's an asset you own after all, and it has value, so you've experienced income if it's worth more than whatever the IRS gift exemption is.

I wanted to directly address one of the questions in your post as well. You wrote, "Example: if you invested $200 into Second Life, and brought property that has grown to be worth $20,000 but still only exists online, would you have to report it as income?"

Almost certainly not now or in the future. Generally, we're only taxed on realized capital gains. One glaring exception is property tax in any jurisdiction where the value of a piece of (land) property may be adjusted at times other than the sale of that property. Let's just hope we can ensure legislators understand that there's a big difference between virtual "land" (which is the equivalent of rented server time in Second Life rather than an object of any sort) and physical land, and that the same difference exists between virtual "objects" (which are really elaborate permission sets to access and, in very proscribed circumstances, alter data that sits in someone else's database) and physical objects.

Now, having said that, if you bought $200 of "property" in Second Life and saw it grow to be worth $20k, then gave it to a friend, your friend would, at least in theory, potentially have to pay taxes on 20k worth of income, since he just got something worth 20k for nothing.

Again, I want to emphasize that I'm not a lawyer or a tax pro.
                        -Matt Mihaly
Thanks, Matt, for clarifying what's going on. I feel a little better about my purples now.

Posted by at 10:56 AM PDT
Edited on: July 05, 2007 11:02 AM PDT

Getting the Most from Insurgency

July 03, 2007

I had cheezeburger, and heartily recommend it. Earlier this week FilePlanet premiered Insurgency for Half-Life 2, a total-conversion of the game that takes players to war-torn Iraq to get a taste of modern tactical urban combat.

This is not an easy game! If you're looking for an arcadey deathmatch, you won't find it here. The realistic weapons spray bullets wildly if you don't brace yourself before firing, and most of the time you won't know where the shot that killed you came from. Welcome to the war. Teamwork is required if you want to have a prayer of survival, so keep your friends close and your enemies where you expect them.

Inspired by Insurgency's difficulty curve and the number of corpses I've been leaving on the battlefield throughout the beta, I thought I'd write a quick primer to help you not make the same mistakes I made. What better way to spend a mid-week holiday than with one of the most-anticipated Half-Life 2 mods ever created?

That'll teach you f'ers to key my car!
Take advantage of cover, learn to crouch or go prone, and don't move out
until you've got support of your team.

  • Installation: Make sure your Half-Life 2 and Steam clients are up to date, and if you haven't already, install the "Source SDK Base" from the 'tools' tab. Insurgency comes with an installation program that does all the work for you. If Insurgency doesn't show up in your games list, close down Steam and restart it; it'll be there in your games list, ready to play.

  • Joining a Squad or Cell: Insurgency divides players up into eight-player fireteams. In a perfect world you and your seven team-mates will work together as a well-oiled machine, although random players on the 'net aren't as organized as they should be. When you join a new server, you'll be asked to choose either the U.S. Marines or the Insurgency. Once you've chosen your side, a menu will display an eight-player squad (Marines) or cell (Insurgents). Press the number associated with an open slot to join -- your equipment will be determined by which slot you fill. If there aren't any positions you want in the currently displayed squad/cell, press the '0' (zero) button to look at a different squad/cell. Note that the Insurgents have soldiers armed with rocket launchers -- these are tough to play for new players and have limited use since you're always fighting infantry.

  • Learn the Maps!: Unlike, say, Battlefield 2 there's no map to look at to let you know where all your friends are and where the objectives are. Do yourself a favor: start up a local server and just tool around the level, learning the landmarks and the capture points. Depending on the mode, maps can have multiple capture points: Alpha, Bravo, Charlie, Delta, etc. Very often one main street will be the focus of the action, so it's good to learn the multiple approaches and sniper spots.

  • There's Not Much of a HUD: You'll have to rely on your teammates to tell you what's happening -- voice chat is important! But Insurgency does give you one hint: there's a compass at the top of your screen that will show you where your squad/cell leader is and where the objective he's selected is located. Sticking with your commander is a good way of making yourself useful. Other than the compass, you're on your own -- learn those maps!

  • Brace Your Weapon and Use Those Sights: You'll also notice that Insurgency doesn't have a crosshair. Firing "from the hip" is about as helpful as throwing bullets at the enemy with your hands. You need accuracy! By default the right mouse button will bring up your scope or iron weapon sight. Doing this will not only give you some crosshairs to aim with, it'll also help steady your shot. But your rifle will still jump around if you don't brace yourself: crouching will give you support, but going prone will steady your aim the most. Some weapons, like the AK-47, have a deployable tripod. Use your alternate fire button to deploy the tripod when you're prone or resting against a solid surface -- the difference is amazing. Once you get familiar with the maps, you'll learn some good places to set up like this to cover your teammates advance.

  • Smoke is Actually Useful: Smoke grenades completely obliterate someone's line-of-sight. In a stalemate situation, where the enemy has some serious defenses covering the entrance to a building, a couple of these can help a half-dozen of your teammates to dash across the open ground and infiltrate the stronghold. Make sure your team is ready!

  • That should help you get started. For more advice, check out the Insurgency Manual or look things up in the Official FAQ.

    Download Insurgency for Half-Life 2!

    Posted by at 12:56 PM PDT
    Edited on: July 03, 2007 1:22 PM PDT

    Taxing Your Lewts: It Begins

    July 02, 2007

    I has a flavor. Via Kotaku.com comes word that South Korea is starting to tax online game profits earned through RMT (real money transactions). In other words, if you've got yourself a profitable business selling virtual items for real money, you'll owe a little chunk to the government.

    The idea of taxation for virtual profits has been floating around as a concern for years. Way back in 2003 I interviewed leaders in the MMO community and it was already a hot-button topic.

    But there are some interesting things to note about South Korea's policy. For one thing, you have to be earning between the equivalent of $13,000-$26,000 (U.S.) per year before you're taxed. That limits this policy to businesses or to players who are serious about converting game-time into cash -- it would have no impact or your average player or even someone who, say, offsets their school tuition by selling off a couple grand worth of items over the course of a year.

    Another noteworthy feature about the new tax law is that it only kicks in once you've converted your items into real-world cash. A lingering question when it comes to taxing your MMO profits is if you have to pay for in-game assets. Example: if you invested $200 into Second Life, and bought property that has grown to be worth $20,000 but still only exists online, would you have to report that as income? According to the Korean law, no, not until you sell it off for real money. Will that become the new standard?

    Finally, I also found it interesting that anyone making over $26,000 (U.S.) per year would need to apply for a business license. This may be an effort on the part of the South Korean government to police the often less-than-legal labor practices of many gold-farming organizations. We'll see if it can make an impact.

    Meanwhile, there's no movement here in the 'States to tax virtual goods, as our backward Congress still thinks "Second Life" is what you get after your first Pac-Man dies.

    Posted by at 10:09 AM PDT
    Edited on: July 05, 2007 11:00 AM PDT

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