Taxing your loot

***WARNING – THIS ARTICLE IS GOING TO TALK ABOUT U.S. TAXES AND GAMES.  MOSTLY TAXES.  IT IS A WALL OF TEXT. CONSIDER YOURSELF INFORMED.  USE OF A TEN-KEY IS ENCOURAGED. ANY FURTHER READING OF THIS ARTICLE IS DONE AT YOUR OWN RISK.***

Via Massively, it has come to my attention that the IRS has released a publication to Congress that may one day affect our little hobby.  This publication is the yearly report by the National Taxpayer Advocate (Nina E. Olsen is her name).  For those that care, this person’s office is charged to:

“assist taxpayers in resolving problems with the Internal Revenue Service, identify areas in which taxpayers have problems in dealings with the Internal Revenue Service, to the extent possible, propose changes in the administrative practices of the Internal Revenue Service to mitigate those problems identified, and identify potential legislative changes which may be appropriate to mitigate such problems” (thanks, Wikipedia!).

Among other issues raised and discussed, this document highlights the 20 “most serious problems encountered by taxpayers”, one of which is as follows: “The IRS should proactively address emerging issues such as those arising from virtual worlds.”

Before I go further, a bit of background is in order. Only longtime readers of Schlotzky’s will remember that in RL, I am a tax accountant. That’s right, I’m in the upper nerd echelon. An accountant that enthusiastically plays video games, then writes about them on his video game blog. At any rate, tax being my career of choice, this document is right in my wheelhouse*.

So, what exactly do we have with this new document? In short, nothing really of substance, other than a recommendation that the IRS release some clear guidance as to how taxpayers should deal with income resulting from their activities in virtual worlds. In long form, it’s a lot more complicated than that.

Let’s start off with an easy one. If you make actual, tangible real money from a virtual world, whether it be selling widgets in Second Life, selling your WAR account to another person, or exchanging your WoW gold for real money, you will most likely owe tax on the real world income. Pretty much anything you make money from, you owe tax on. Don’t believe me? Bribes received are taxable. Money acquired from theft is taxable. Just ask Al Capone.

Simply put, “income, broadly defined, is subject to tax”. The question then becomes if the money you are making from your MMO activity constitutes income. If you are making widgets in Second Life and selling them for Lindens that are easily converted to US$, then most likely the answer is yes.

What about though, when you pick up weapons or armor in an MMO that have a market value in the real world? Say you have a full set of Invader gear on multiple characters in your account, and say that you would be able to sell access to that account on ebay (regardless of rather that is allowed by the EULA, which it isn’t). Is the acquisition of that gear taxable each time you pick up a piece? Or is that income taxable only when you sell it on the open market? If you trade items with other players, are those trades then taxable in much the way a barter transaction would be in the real world?

To me, there are many problems with the arguments that would make virtual loot taxable in any form until sold for real world dollars. Typically, taxpayers will pay tax on any gain on the sale of assets, “gain” being the difference between the sale price over the amount of their basis in a piece of property, “basis” being typically the price they pay to acquire that property. Two problems appear just on that point. 1) The value of such loot at the time of acquisition would be nearly impossible to determine, considering the natural fluctuations of the game market, server differences, and the omnipotent power over the world of the developer (ie. if Mythic wanted to hand out Invader gear to newly rolled toons, the value of Invader set pieces would plummet). 2) How do you go about determining a player’s basis in such property? Conversion of value in game money to real-world money? Some sort of formula based on subscription fees paid over amount of time invested? The questions really are endless.

To get even more insane, are the developers responsible for withholding taxes of their players? Will you one day get a 1099 with your loot drop? And if so, at what threshhold is such reporting frivolous and overly burdensome on the taxpayer? $10? $1? Further than that, if you have been paying tax on the items you acquired when building up your character, are you then entitled to a huge taxable loss (and possible subsequent refund) if a game closes its doors, thereby making all your pixels worthless?

These are the kinds of questions that this document asks. And in the end, it seems to come on the side of making in-world transactions non-taxable, as the arguments on that side of the fence seem a lot more plausible than those to the contrary. When it comes down to it, all this report is recommending is for the IRS to issue guidance on the issue, one way or the other.

It seems pretty clear to me* that taxable income will be related only to real-world transactions (although that opens its own can of worms – Second Life’s $1 transactions say hello!). To try and tax in-world transactions would be not only nigh-impossible to track and enforce, but would be unduly burdensome on the developers.

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WOAH. Where am I? I blacked out there for a second. You’re still reading? Well, as a closing I’d like to add how surreal it is to see World of Warcraft referenced in an IRS document.

*Note that I am not an expert in this area, nor do I know much about it.  I do corporate taxes – what do I know?.  As such, any advice or comment contained in this article may not be used by any taxpayer, living or dead, in any country, state, province, city or locality, to avoid taxpayer penalties under any section of the Internal Revenue Code, or for any purpose other than entertainment. And maybe not even for that.   This is simply stream-of-consciousness rambling, most likely without merit.  Seriously, people – pay your taxes.  We all like roads.  I’ve also had a couple drinks tonight, so fair warning!  Disclaimers, FTW!

WAR crafting thoughts at 200

I like crafting.  In MMOs, crafting can be a great way to spend some down time, or take a break from the usual questing and combat.  It can also be a nice way to make a little extra cash on the side.  I recently hit the crafting skill cap of 200 for both apothecary and cultivation.  Based on those experiences, I can confidently say WAR’s crafting mechanics are decent and full of potential, but far from perfect.  There are some really solid ideas and some definite areas for improvement.

WAR in particular is a game where an exceptional crafting system would be a great complement to the core game design.  Let me explain: the design of the game is centered around ORvR.  ORvR consists of a lot of action, interspersed by periods of inactivity.  What happens when you capture a BO?  You wait three minutes for the enemy to come and take it back, which almost never happens in that time window.  Great time to make a couple potions or talismans!  I know I’ve spent a lot of time hanging out on the walls of a keep, waiting for the Destro push that we knew was coming.  I generally prefer to spend that time crafting, rather than just hanging out looking at the scenery.  Crafting was created for times like these.

So what does WAR do well?  What does it do poorly?  Let’s break it down.

Pros

The base mechanics are interesting and fun.  When I first heard about the mechanic for cultivation, I thought it sounded totally stupid.  Despite the need to suspend disbelief a bit (do you carry these four plots with you?), it turns out I really like cultivation.  I like being able to plant a seed or spore and forget about it.  I’ll come back to it later and harvest the plant.  If I want to add water and nutrients I can, but I don’t have to.  And the plants that I get from cultivation naturally lead me right into my next profession.

Apothecary is nice in that the interface is well done and it doesn’t take too long.  It also produces useful items, as potions will never go out of style.  I like how you can use different items (e.g. stabilizers) that can change the characteristics of the crafted item, although that leads to problems as you’ll see below.

Contrary to what I was originally thinking as I was leveling up my skills, I like the fact that the professions are such a money sink.  Even though I was near-broke through the majority of my 20′s, I realized (too late, as it turned out), that I was leveling my professions too quickly relative to my realm level.  I think professions SHOULD be a money sink, but only if you make that money back and then some later on.  As an alternative to having to spend a lot of money, you could get your mats from your guild, which is also a good thing as it promotes the community aspect of the game.

Cons

I have a few minor issues and one major problem with crafting in WAR.  Minor ones first.  I wish the ingredients for cultivation were more readily available.  It seems like seeds drop for everyone, regardless of profession.  Why then are nutrients not common drops as well?  You need to have scavenging or butchering or something to get those, which is kind of annoying - both for the cultivators who can’t get their mats and everyone else who doesn’t need seeds.

Secondly, I miss recipes.  I miss them desperately.  I can see what Mythic is trying to do; by getting rid of recipes you make the process seem more organic.  Unfortunately, this leads to the problem of too many possibilities.  In apothecary, you quickly realize that the breadth of main ingredients and possible stabilizers give rise to a vast amount of potions, all of which are just slightly different, whether it be level, duration, stability, or whatever.  This takes up room in your bag and makes it hard to sell them (or even mail them for that matter), as you may have 4 different healing potions, all only slightly different and therefore not stackable.

That leads into my major gripe, which actually has nothing to do with crafting, at least not directly:  the auction house is weak.  Not so much in design – although there are some quirks – but more in the fact that the economy just does not seem established.  As much as I want WAR to have a strong, flourishing economy, it just doesn’t right now.   At least not that I can tell.  An offshoot to that problem is that its hard to sell potions on the auction house. At least for any amount of profit.  I believe part of this problem is due to the fact that there are so many types of potions out there.  As alluded to above, the variations on each potion are so extreme that it makes it hard to know what does what without doing a large amount of tooltip research.  As a result, the market has not been established, and you see prices wildly fluctuating for the same potions.

Not only that, it’s hard to search for materials as well.  Within the main search function you can search for crafting items only, and then there’s a dropdown for “All Crafting Skills” which looks like you’ll be able to sort by skill, but when you drop the menu down, there’s no further categories.  (BTW, am I doing this wrong?  This seems ridiculous.)  This lends credibility to the theory that crafting was simply tacked on near the end of development.  When I was desperately trying to level up my cultivation skill and searching for seeds, there was no good way to do so.  I will spare you the tedium of describing looking up different types of seeds on Wardb just so I could type in the individual  name and see if there were any for sale.  That was not fun.

Summary

OK, time to catch a breath.  It seems like I’m coming down hard on WAR’s crafting, and that’s really not the case.  I do like crafting in this game, as evidenced by my maxed-out skills.  It’s just that I see the (currently unrealized) potential for some really great stuff.  The economy in any MMO is a big part of the experience, even in one as combat-focused as WAR.  And crafting is a big part of any solid MMO economy.  Maybe I’m in the minority, but I feel like the player base would respond positively to improvements in both the crafting system and auction house.  Those improvements would go a long way toward establishing a thriving economy and making WAR feel more like a virtual world.

I’m fairly new to the MMO scene.  Since this is my first MMO that I’ve played from launch, I have no idea how long it takes for the economy to establish itself, although I would think that would’ve happened by now if it was going to.  Here’s hoping that the kinks get ironed out one day.  Now that I’ve hit 200, I will be looking to do some more potion-making, both for the guild and for profit.  I’m interested to get deeper into the AH and either confirm or reject my suspicions.

Is a good economy essential for me to enjoy WAR?  No, it’s not.  RvR still rocks, and if the crafting system went away tomorrow I’d still play the game.  But it’s the icing on the cake.  And I don’t know about you guys, but I like my cake with icing.

EVE Online continues to pique my interest

This time it was another article via Massively describing how a player lost around $19,000 in real money in some sort of illicit transaction involving EVE’s currency (Inter Stellar Kredits, or ISK) being exchanged for actual real-world currency.  Putting the stupidity and possible in-game unfairness of such a transaction aside for a minute, another issue has now come to the forefront of my mind: shouldn’t I be playing EVE Online?

I mean, with all this controversy over the games economy, it sounds like something that could really hold the interest of a person who has an unhealthy interest in virtual economics, such as myself.   (As you may have heard, the court decision referred to in the article above comes on the heels of the announcement that an exploit causing an influx of several trillion ISK recently rocked EVE’s community and economy.)  My favorite part of World of Warcraft was always the thriving economy based around the auction house, something that my current game, Warhammer Online, is severely missing at this point.  Not only that, but according to the Massively post, EVE players can trade their in-game currency for play time.  Which seems like a cool idea.

Not only the economy, but also the one-server-for-all setup that EVE maintains interests me greatly.  As I was going through Steam’s sales over the Holiday, I came across a 21-day free trial for EVE (not related to the sale).  Consider me officially interested in EVE, and my preliminary research begins now.

Currency tampering in MMOs

I’m an avid reader of Joystiq, and one of its recurring columns is the Law of the Game, which speaks to how various laws apply to the video game world. The column is written by Mark Methenitis, a lawyer in the state of Texas whose take on many issues I often find insightful.

Mark’s 12/12/08 column was about the potential for currency manipulation in the persistent worlds of MMOs, particularly at the hands of unscrupulous developers. This article was framed in light of the recent insider trading crap that has been going down on Wall Street.

In the article, Methenitis correctly states that the developers of a game have a control over that world’s prices that would never be possible in the real world. For example, if Blizzard wanted to make Frostmourne available in-game (maybe it already is – I don’t play WoW), but only have one such sword available to each server, the price for that piece of gear on the open market would be astronomical. But they could easily start dropping Frostmournes more often at no incremental cost to them, which would cause the price to plummet. This situation (and it’s inverse where gear drops less often) has the potential for “insider trading” by rogue devs who have information the public does not possess. A similar play would be available if a dev knew an upcoming in-game event would raise or lower the relative value of the currency.

Where I begin to disagree with the article is the potential for federal government intervention in such cases. Here’s why. It seems to me that the crux of his argument requires currency to be legally traded against or bought for real world money. Is game currency bought for real money? Sure it is, but not legally. As I understand it, legally nothing you possess “inside” an MMO actually belongs to you, rather it belongs to the developers. Sure people sell their accounts to other people, but I believe that is technically an illegal transaction.

So here’s the problem. All real world transactions are effectively black market transactions. If you got ripped off, what is your recourse? Do you go to the police and say that an illegal advantage was used which devalued your transaction, which was also illegal? That’s like reporting your pot dealer for selling you zoysia. (Somebody stop me if I’m way off base here – I’m certainly far from a lawyer- but the situation as presented does not seem plausible. I’ve probably screwed up some of my legal analysis somewhere above.)

Regardless of whether or not the above situation could happen, the harm that such developer manipulation would do to the games economy and playerbase enthusiasm would obviously be irreparable.  Take the recent EVE controversy for example, which will most likely have far-reaching economic consequences for that game. 

It is so obviously in the interest of these MMO developers to keep their employees in line and not game the system that I don’t really see this issue being a problem.  If it did happen though, I don’t think there’s anything the subscribers could do about it.