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Taxing MMORPGs

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Could the IRS one day tax your dwarf paladin? While the IRS has not proposed an actual plan for the taxation of virtual reality goods, a congressional committee has already announced an intention to block such a move. New Jersey Representative Jim Saxton says, "There is a concern that the IRS might step forward with regulations that start taxing transactions that occur within virtual economies. This, I believe, would be a mistake." IRS spokeswoman Theresa D. Branscome claims in-game transactions could be taxable, but that no process was formally on the table for doing so. Furthermore, she indicated the conversion of virtual items into real cash could result in taxable consequence. It is not without precedent as Ultima gamer Julian Dibbel paid taxes in 2004 on $11,000 of income made by selling virtual products. Gaming for money, also known as "gold farming" is already a global phenomenon with established companies and guilds. Virtual worlds such as Second Life have booming in-game economies for real estate, trade and even prostitution. Even name brand companies and news affiliates have established virtual representations of themselves to cash in on advertising opportunities.

An MMORPG (Massive Multiplayer On-line Role Playing Game) is a virtual world comprising thousands of linked players interacting simultaneously in real time. Some may recall such games on a smaller scale existing on BBS's (Bulletin Board Services) like Legend of the Red Dragon as far back as the late 1980s. In the late 1990's, Sony's Everquest redefined the game genre. Since then, MMORPGs have evolved into the popular World of Warcraft and Second Life.

At the moment, the government has not actively sought control over these dynamic, virtual worlds. But with the moves already made by America, Britain and Australia in banning on-line gambling, the government recognition of "digital dollars" is very real.

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