In the beginning, there was the MUD. The first Multi User Dungeon, Richard Bartle and Roy Trubshaw’s “MUD1,” came online at the University of Essex in 1979. A text-based computer adventure game, much like the board game Dungeons & Dragons, the MUD allowed players at remote terminals to interact and play in the game’s nearly 400-room virtual world–acquiring swords with which to slay dragons, and the like. It was a programming and gaming milestone.
As computers–and networks–spread and became vastly more powerful and pervasive, the idea of the MUD expanded and evolved. In 1998, the game design firm Verant Interactive created EverQuest, which it dubbed the first “Massively Multiplayer Online Role-Playing Game” or MMORPG. From the outside, EverQuest couldn’t have looked more different from MUD1: Instead of text, players saw a complicated, three-dimensional, graphic version of a virtual world, and they chose an avatar to represent themselves in the activities of that world (trading, fighting, questing).
Unlike MUD1, which required expensive terminals hidden away in university computer labs, connected to gigantic main-frame computers, EverQuest could be played by almost anyone with a home computer and a modem. Also unlike MUD1, which hosted just dozens or scores of players at a time, EverQuest quickly accumulated nearly half a million players, each of whom paid an initial price for the purchase of the software and then a monthly fee of $12.95 for the privilege of slaying orcs, dragons, and other beasties in the virtual world while getting to interact with hordes of likeminded players.
Because a successful MMORPG franchise like EverQuest is a cash cow, many game developers have since gotten in on the action. Most of the games descend from the same swords-and-sorcery lineage as the original MUD1, the most successful being World of Warcraft–a property owned by Vivendi-Universal–which in November crossed the threshold of 7.5 million players worldwide. But there are other, nonfantasy online role-playing games, most notably Second Life, which offers the chance to live a “normal” life in a virtual world modeled on the real world. Players–or “residents,” as they’re referred to in the Second Life lexicon–go to work, hang out with friends, purchase houses. It’s nearly as interesting as it is unsettling.
How big is the business of virtual gaming? Very big, but it exists at different levels. At the top level, multi national entertainment companies such as Vivendi-Universal and Sony (which now owns the EverQuest franchise) make hundreds of millions of dollars a year from these games. Take World of Warcraft: With 7.5 million subscribers paying about $15 a month each, that’s a monthly cash gusher of $112.5 million. To put that in perspective, in 2006, all of the movies released by Universal together grossed about $800 million at the box office.
Beneath the corporate economy is a smaller consumer economy. MMORPGs have internal economies where virtual currency allows players to buy virtual goods. In Ultima Online, for instance, players win Britannian gold pieces by completing quests, slaying monsters, etc. These Britannian gold pieces can then be exchanged at shops in the game for special items–better weapons, better armor, mystical creatures–and between players within the games. Many players then hold real-world auctions, on websites such as eBay, to sell these virtual goods. This market is much bigger than you might expect.
In early 2005, for instance, a man named David Storey paid $26,500 for a virtual “Treasure Island” in the game Project Entropia. Later that year Jon Jacobs paid $100,000–remember, we are talking about real, U.S. dollars–for a virtual space station in the same game. Mind you, these aren’t simply kids playing a game for fun–they are speculators hoping to get rich from the virtual economy. After his mammoth purchase, Jacobs told the tech website CNET, “I’ve seen the potential of it all, and I’ve gone through it, and I learned my lesson, and my lesson was that I can’t afford not to do this. I could not afford not to get the space resort. It’s too valuable. The guy that bought the Treasure Island recouped his investment in a year.”
Jacobs was probably influenced by the success of a Second Life player known as Anshe Chung, whose virtual land and currency holdings are estimated to be in the neighborhood of $1 million. (Second Life is the only MMORPG that gives actual property rights to players.)
That’s the high end of the virtual market. If you go to eBay or any number of other websites you can find people selling virtual belongings or even avatars for smaller, but still significant, sums. A weapon could be as cheap as $50. An avatar might cost several hundred or even a couple thousand dollars. Virtual real estate–land, castles, buildings–is, as a rule, more expensive.
There are people who make their living by speculating in virtual goods. A piece on the “Unreal Estate Boom” in Wired magazine profiled Bob Kiblinger, a former chemist for Procter & Gamble who quit his job to create the site UOTreasures.com, which buys the accounts and virtual assets of MMORPG players and then resells them at a profit. Think of it as a virtual pawn shop. In 2005 the New York Times did a story on the phenomenon called “gold farming”: There are companies in China, where labor is cheap, that pay people to sit in warehouses full of computers playing MMORPGs in order to accumulate virtual loot, which is then sold back to Western gamers.
The virtual currencies themselves have secondary markets. Websites such as IGE.com or GameUSD.com buy and sell the pretend currencies for real dollars. Second Life’s unit of currency, the “Linden dollar,” for instance, trades at a rate of about 300 Lindens to the greenback.
An article on these MMORPG economies at CNET estimated that the market for virtual goods and currency might be in the range of $880 million annually. Other estimates put the figure closer to $1 billion. All of which has created a fat target for a very brick-and-mortar institution: the Internal Revenue Service.
In 2004, Julian Dibbell wrote a piece in Legal Affairs detailing his attempt to make the sale of imaginary goods his primary source of income. In one year of playing Ultima Online he made $11,000 by selling Golden Runic Hammers, Britannian gold pieces, and other pretend items on eBay. Dibbell then went about trying to report this income to the IRS. It was quite an adventure.
Paraphrasing the IRS’s bible on “Taxable and Nontaxable Income,” Dibbell noted that “goods taken in trade or won at play are taxable the moment they fall into somebody’s hands, even if they are not sold for money.” So while Dibbell clearly understood that he owed taxes on the $11,000 he made from real-world auctions, what wasn’t at all clear was whether the government would want a piece of the Britannian gold pieces he had won, Golden Runic Hammers he had purchased with them, and the other items which he had bartered, bought, or traded for during the year. Each of these items had real market value, even if he had not realized it by selling them on the real market.
The tax code is reasonably strict on such matters. As Bryan Camp, a tax law professor at Texas Tech Law School, explained to Gamespot.com, Section 61 of the U.S. tax code provides that all income, “from whatever source derived,” is taxable. Meaning that “if two people were to exchange copies of books, one of which is worth $30 and the other worth $24, the person ending up with the more expensive volume would have acquired $6 of taxable income.”
The IRS has been strict on the concept of barter. In the 1970s, a small network of barter clubs arose that sought to exchange goods and services between members without giving the government a cut. They used a marker called “trade dollars.” As Dibbell explained, “In a 1980 ruling, the [IRS] said that barter club transactions produced taxable income, even though no actual money changed hands. A 1982 law made enforcement of the ruling easier by requiring clubs to provide the IRS with information about every transaction.” The net effect of which was to shut down the clubs.
There are, of course, good reasons for the government to be interested in virtual economies. As Indiana University economist Ted Castronova points out, “From the standpoint of economic theory . . . there’s no fundamental distinction between selling euros and buying magic wands.” And just as opportunistic Chinese companies have become interested in them, virtual game markets might in the future attract other unwelcome attention. It is not hard to imagine them becoming appealing for criminal activities, such as money laundering.
In any event, Dibbell went up the chain of command at the IRS looking for a ruling on whether or not he owed taxes on the whole of his virtual economic activity, and not simply his eBay gains. Not yet ready to set precedent, the IRS declined to give an answer.
But that was two years ago. Today, the government has finally turned its attention to the matter. Speaking on a “Tax and Finance” panel at a recent computer gaming symposium, Dan Miller, a senior economist on Congress’s Joint Economic Committee, shed some light on the government’s developing stance towards virtual gaming.
Miller’s committee began examining virtual gaming economies last October and is expected to issue a report early in 2007. And while Miller said that the committee wouldn’t “[seek] to impose a new tax on virtual economies,” he said that the report would clarify “what is a taxable event in a virtual world.” “Congressional and IRS interest in this issue,” he explained, “is simply a matter of time.”
So gamers take note. The day may be approaching when, after killing an orc and slaying a dragon, you will get your 1,000 gold pieces–and a 1099 form.
Jonathan V. Last is online editor of THE WEEKLY STANDARD.
