Trading in Massively Online Game makes Real Money in Virtual World

Kausar Ahmed

MS CandidateUniversity of South Australia May 22, 2008

Abstract

This paper analyzes the issue of earning real world money from virtual world and the role of taxation on that income. Many virtual worlds have their own internal trade based economy similar to real world economy with its own currencyacting as a medium of exchange. A huge virtual money flow in MMOG, so a virtual economic flow can be exist which caneffect the real world economy in terms of tax pay. And the gamer integrate real cash into the virtual world through aninternal currency exchange system. It illustrate the issues of taxes in virtual games recognizing income could beestablished by regulators at the point when in-game transaction occurs and at the time of converting game assets intoreal world money. The tax in MMOG is calculated from gross income of gamers when they receive anything of economicvalue, whether in the form of cash, property or services. MMOG tax can be collected by voluntary reporting and Internal Revenue Services (IRS) initiative and participating from different nation belongs to their country’s tax rules and regulation.

Keyword:

MMOEG, MMORPG, real money trade (RMT), virtual world, multi-user, linden dollar, internal revenue service (IRS),second life, linden lab, virtual economy, taxation, Terms of Service ( TOS )

Introduction

Social network collaborate a group of people toform virtual community which trends to virtualworld other than real world where members aresharing resources, skills, profile, contacts, fun anddoing business to achieve its mission goal in virtualnetworks. Online virtual games are one of the mostinteresting innovations in the area of socialnetwork. These games are based on multi-userdomains (MUDs) and they have utilized the internetas a new gaming forum that allows people to link up and play together. In Massively MultiplayerOnline Economic Game (MMOEG) or MissileryOnline Role Playing Game (MMORPG), playersfrom different sites can easily participate and obtainitems that can have significant world value to otherplayers. And Second life is one of the goodexamples of Massively Multiplayer EconomicGame where people can trade huge money byselling and buying virtual property. And the virtualworld is not isolated from the real world as theexchange of virtual goods and services for real lifemoney has become a fundamental part of the virtualworld experience.

Virtual World & Ownership

Virtual world is a computer simulatedenvironment in which social network users interactwith each other via graphical representation. Virtualworlds have captured the imagination of aconsiderable number of people which is not a gamerather then collaboration, community developmentand innovation inside the enterprise. According tothe Prentice (2007) virtual worlds are neither gamesnor a parallel universe and every avatar acts as areal person. However, virtual world includesMMORPG such as World of Warcraft and on theother hand Second Life is one of the most popularMMOEG which was released by Linden Lab, aprivate company based in San Francisco, Californiain 2003. It’s a three dimensional forum that enablesusers to interact with each other through motionalavatars.

Figure 1.

Virtual demo

This platform creates a sophisticated level of social network interactivities combined withgeneral aspects of virtual reality. And there is no

fee to join in Second Life but it takes money forLinden dollars from participants which can beexchanged for real money rate of approximately300 Linden dollars to one US dollar. However,according to Erriksson and Grill (2005) theparticipants can create avatars and may ownproperty and game money but at the end of the daywhen the game is over, the property and the moneyitself is returned to the owner of the board game. Asa result the values and ownership is based on thetime it takes to acquire buying and selling. On theother hand, Herman, Coombe and Kaye (2006)acknowledge that the user have their own rights tocreate and sell the virtual property in virtualcurrency to other users which can be converted intoreal life currency at a fixed exchange rate.

Economic Flow in MMOG

In MMOG the economy works differently sinceit is so tied to real life money where it is replacedwith buying of virtual currency with real lifecurrency and the drain is taxes on land ownership.As there is a huge virtual money flow in MMOG,so a virtual economic flow can exist which canaffect the real world economy in terms of tax pay.The basic difference in between these two terms isthat in real world economy there is a channel wherethe government is getting a part of once grossincome but on the other hand in virtual economythe agent collects Linden dollars as virtual tax whentwo parties are involved in buying and selling theirgoods or properties and at end of the year theentrepreneur of virtual game pays real tax againstits entire revenue. However, the stakeholders of MMOG try to prevent the players paying with realcurrency to gain items or in-game currency fromother participant instead from them. Jordandescribes that Blizzard who run European onlinegame World of Warcraft banned over 800 accountsbecause the players were involved in selling in-game currency. In contrast, in 2005 Sony who runsEverquest allowed players to sell virtual goods forreal currency and they also received a percentagefrom each transaction. Moreover, Fairfield (2005)acknowledges that real world system of trade suchas eBay and PayPall allow virtual-world users toauction/sell virtual goods for real world currency.A number of web sites, such asMMOMarkets.com and the Internet GoldExchange, actively track the trading rate of onlinecurrency in many games. Holland and Ewalt (2006)acknowledge that MMOGchart.com put totalnumber of MMORPG subscriptions at over 13million and NPD estimates that game developersraked in $292 million in subscription fees in 2005.On the other hand, Julian Dibbel as a retailer inmassively multiplayer game Utima online sold in-game items, currency and real estate on eBay andearned almost $4000 per month which is $36000 ayear. Surprisingly, some people make six figures ina year.

Read Trade Money (RMT) and Effect

Real money trade is the act of exchanging reallife money for virtual world goods and services. Infact, this is almost similar to the Casio tradingwhere people buy coins against money and gets themoney by exchanging this at the end of the day.The only difference between virtual game andcasino is the gamer in casino cannot trade with theother participants. But in MMOG people tradethemselves which is hidden from the company andsometimes they trade real world assets with thevirtual items and it impacts real world economywhich is never counted as taxable.

Figure 2.

Real & Virtual Money

Real money trade has many effects on both thevirtual worlds and their social networks and realworld through various means. Castronova (2006)describes that on the beginning of 2005 real moneytrading exceeded 100 million US dollars and mayactually be over 1 billion annually. It will not be aproblem if the scope of trade limits inside thecontour of virtual game but when it penetrates intothe real world then the question raised is whetherthat portion of this huge amount of money is legalor not, in the sense of taxation nowadays. There areother motivations such as second life where thetrade is legal and the RMT is a part of the game asthe in game currency can be freely converted back and forth between virtual and real money. Althoughvirtual currency in some cases has a betterexchange rate into US dollars than some smallercountries. Wong (2007) acknowledges that recentlythe magnitude of sales in virtual worlds is creatingreal life profit for users. In America, the InternalRevenue Service (IRS) has been looking at taxingthe sales of virtual items and gold.

Tax Compliance

In two alternative ways the MMOG tax can becollected such as voluntary reporting and InternalRevenue Services (IRS) initiative. According to thereport provided by Julien Dibbel (2004), his earnedincome selling goods and services in MMOGS wasmore than his general income profession as a writerwhich is no more surprising for a second lifeparticipant. The most interesting thing is that he hasto pay tax for his professional income but he canrefuse to pay tax for the income what he has earnedfrom MMOG, unless voluntarily announced.Similarly, Anshe Chnag who is another second lifeplayer has recently reported voluntarily of herworth exceeding million dollar mark. So, IRS hasbeen undergoing self reported taxation method forMMOGs player on their earned income ever sincethe game has started from its journey.

Pros & Cons in Tax Compliance

The advantages of IRS initiative are•

Increases tax payer’s compliance•

Easier for tax payer to keep the record•

Game operator may incur some charge,technically efficient.Disadvantages of IRS are•

Players may grow with some regressivebehaviour•

Players might change the mediumtransaction – barter transaction.•

Devaluation of Linden leading to thecollapse of game economy.On the other hand, although voluntarilyreporting is less expensive and•

Few players comply with self-reporting•

Players, sometimes, are not even awareof the fact that their income is taxable.•

Neither tax policy provided by IRS norany guidelines provided by gameoperator which is a concern!

Tax in MMOG

The tax in MMOG is calculated from grossincome of gamers as taxpayers have gross incomewhen they receive anything of economic value,whether in the form of cash, property or services(Camp, 2007). But Miano (n.d.) describes IRS code1001 that provides the tax payers should subtracttheir basis from the sum of cash receive plus thefair market value of any property received. So, inSecond Life to reach basis one must establish theproper measure of virtual income. Surprisingly,there are no such measurements for net incomeunless gross income is measured. And later taxationof Second Life implied on cashing out andaccessions the wealth. In virtual game the companyprovides the basic stipend but they encouragegamer to develop content and later sell to others.This income, in turn, enables you to develop moreland which provides the revenue base for Lindenlab because the more land you own, the more‘taxes’ you pay ( Grimmelmann 2003).The gamers’ income could be recognized when“in-game” transaction occurs or when theconversion from “in-game” to real world currencyoccurs. Perhaps, substantial risk of forfeiture couldtake place which invalidates the point of incomerecognition during the “in-game transaction”. If aperson runs the risk of forfeiture, he may not beliable for tax.The participant can ignore the Linden dollarwhen it will lose its value leading to bartertransaction as well as exceeding the thresholdcurrency conversion set by Linden lab.Surprisingly, the gamer has a tendency of not to paytax which leads the RMT transaction to form agigantic gray market. According to the Yoon(2004), currently gray market has no tax assessed toearnings from game item transactions by unlawfulactivities. He also describes that it can be tackled atthe government level in the context of overallpolicy dealing with gray markets. Their principleroles include mediating disputes between playersand collecting information on game bugs whichthey forward to the development team. Finally,imputed income and loot is applied to MMOGtaxation. Haskell and Kauffman (1964)acknowledge that the special feature of imputedincome is that it arises outside the normal processof the market. Similarly, loot arises when a gamerwins property in battle of MMOG.The property right of copying items is notclearly mentioned in Terms of Services (TOS) inSecond Life. Lederman (2007) clarifies that if anyparticipant creates any copy one of its game items;it would be taxable if he wants to sell it to otherparticipants. As when a gamer creates a copy, it is just a replicated copy of the Linden server.

Tax Procedure

Mennecke (2007) acknowledges that there aretwo alternative ways IRS initiated to recognizeincome could established for taxation by regulatingthe point when in-game transaction occurs and