We may soon be adding an extra line to this classic song, something like: "If you play a game, I'll tax your keyboard." That is... if the government has anything to say about it.
It's a well-known fact that the Massive Multiplayer Online genre is plagued by the ubiquitous "gold farmer" and the illicit "farming" industry that has sprung up to harvest millions of real world dollars off virtual assets. Many of today's current MMOs subsist around virtual economies created by their players. They exist because of the many unique artifacts, as well as in-game currency, which is hard to collect and/or generate. Thus, "farming" of these rare items has evolved into a secondary market that's raking in millions of not-so-virtual dollars. The term "farming" is a derogatory one in the gaming industry. It got this moniker because these "business men" will go out and hire people, usually for a pittance, in order to "play" a game 24/7 for the sole purpose of "farming" its uncommon objects. They do this by going to locations within the game world known to drop rare loot and continuously "harvest" it before a true and loyal player to that game has a chance to find it. They're also not above spam-begging for currency handouts.
Hop onto eBay and you'll be able to purchase, with bona fide cash - any number of virtual objects. Don't feel like spending months leveling up your 'toon to level 50 in City of Heroes? For a price you can have someone do it for you in days. Short on Influence (CoH in-game currency), Clink ("money" in Auto Assault, or Gold (the currency for World of Warcraft)? It's there in whatever amount your little wallet desires - for a price. Same with unique weapons, armor, mounts... you name it. IGE, according to their website, is "The Leading MMORPG Services Company," where you can sell, buy and trade these items for over a dozen different MMOs.
If you Google the world "power leveling" you'll be inundated by page after page of these so-called "service" companies that will quite literally power level your character from zero to the max level possible without even actually playing a single minute of the game yourself. Now, I can see where someone might be in a pickle and need some extra gold in a hurry, or have serious time constraints wherein they either need or want to circumvent some of the insanely tedious and boring aspects of grinding. I've been there and done that — once... just for the experience. But as with most of humanity, once you find an easy way out your opt to use it again because 1) it's the easy way out, and 2) it becomes an addiction. Now, if they were doing this without any negative side effects — eh. But there are several, not the least of which is that they're ruining the very experience of the genre itself.
Because of this, there's been major backlash from not just gaming publishers, but the gaming community in general. Case in point: PC Gamer, led by Editor-in-Chief Greg Vederman, recently made a bold, public stand against these types of companies. "Lately, 'gold farming' companies such as IGE and Power Leveling — companies whose business is the accumulation and (potentially illicit) real-world sale of virtual MMO property, including gold, in-game items, and characters — have begun running ads in magazines like ours. For the record, PC Gamer's official stance on these types of companies is that they are despicable: not only do they brazenly break many MMOs' End-User License Agreements, but they all-too-often ruin legitimate players' fun."
The selling of virtual assets has become so big that Sony Online Entertainment recently became the first major publisher of MMOs to create and operate its own "secondary market." The Station Exchange allows players of Everquest 2 to buy and sell the game's goods in a controlled environment. Other publishers are taking notice.
Back in 2001, then Indiana University economist, Edward Castronova figured that EverQuest's annual Gross Domestic Product — the total wealth in goods and services an economy creates — was around $135 million. In other words, it was approximately half the GDP of the real world Caribbean island nation of Dominica. That was five years ago, before the MMO boon occurred. Can you imagine what that number might be today? Virtually every development and publishing company in the gaming industry is working on a massive multiplayer game of their own, mainly because of the success from the likes of World of Warcraft and the host of games from NCsoft (City of Heroes, Guild Wars, etc.).
In March of this year, Blizzard announced that WoW had attained the 6-million-customer mark. This is staggering considering the game only officially launched in North America, Australia and New Zealand back in November of 2004. WoW is a game wherein the player created economy is enormous. It seemingly shatters milestones on a continual basis, many of which were once thought unattainable. Everyone wants to jump on the bandwagon of success; including those who are associated with the selling of virtual goods.
To give you an idea of just how much money can be made, let me tell you the story of Julian Dibbell, a freelance writer and avid MMO gamer. Back in June 2003, Mr. Dibbell set a challenge for himself, writing this on his blog: "On April 15, 2004, I will truthfully report to the IRS that my primary source of income is the sale of imaginary goods — and that I earn more from it, on a monthly basis, than I have ever earned as a professional writer."
That's like opening Pandora's Box. Volunteering information to the IRS — unsolicited information — about how much you make? That's either bravery on a WoW-ian scale, or sheer insanity. By the end of his little experiment, Mr. Dibbell had accumulated $11,000 by selling items on eBay that he procured while playing Ultima Online. As promised, he reported his profits to the IRS, and paid the requisite taxes. Keep in mind that while this might seem like a lot, it's small peanuts made by one unorganized man (compared to the mass-farming companies in existence today) out to prove a point.
With the exception of the sweatshop "gold farmers" you're probably going, "WTF?! What's the big deal? This is free country." And you'd be absolutely right — at least in theory. Aside from crossing some shady ethical lines and pissing off a few game developers though, these "farmers" are starting to attract the attention of some much larger fish: global economic movers and shakers and the Internal Revenue Service for starters. A misnomer about America is that the whole "free" part of this free country... really ain't so free. It comes with plenty of checks and balances... and taxes. Ah yes — taxes: as certain as death, but not nearly as fun. Did you now that the Income Tax system in the United States is a relatively "new" concept?
From 1791 to 1802, the U.S. government was maintained by internal taxes on things like distilled spirits, tobacco and snuff, property sold at auction, carriages, refined sugar, and slaves. Due to the exorbitant cost of the War of 1812, the first sales taxes were enacted on gold, silverware, jewelry, and watches. That lasted all of five years, when Congress did away with all internal taxes in 1817, reverting to tariffs on imported goods to fund the running of the government. That lasted for forty-five years, when in 1862, Congress ratified the nation's first income tax law in order to support the Civil War effort. This was the precursor to our modern income tax law. (taken from The Origin of the Income Tax by Adam Young)
Jump ahead nearly 150 years worth of tax revisions. The current tax law has a clause, #525 to be exact, entitled "Taxable and Nontaxable Income." This verbose, meandering clause describes all manner of abstract (legal, illegal and otherwise) means by which you can earn income. Some of these obscurities can only be taxed by the speculative and vague term, "fair market value." Also listed are things like stocks, bonds, options, and... get this — stolen goods. Oh yes, believe it. And I quote: "If you steal property, you must report its fair market value in your income in the year you steal it unless in the same year, you return it to its rightful owner". How asinine is that?!
But what's that got to do with selling virtual armor? This clause also includes a statement about goods acquired through barter or won (prizes or cash) in a game. Technically speaking this means those "earnings" are taxable the very moment someone comes into possession of them, regardless as to whether or not they are sold for money.
While no one knows the exact worth of all the virtual assets floating around the MMO gaming-verse, estimates for the sale of these goods range as high as $880 million a year. Step back and think about that for a minute... EIGHT HUNDRED AND EIGHTY MILLION! That's a crapload of real world money! Money made during what can be considered the infancy of the genre. Can you imagine how exponentially greater this amount will be in a few short years?
Edward Castronova, who I mentioned earlier from the study done in 2001, is now an expert on virtual economies and co-editor of Terra Nova, the leading website on the subject. He states: "From the standpoint of economic theory... there's no fundamental distinction between selling Euros and buying magic wands. They carry value with them. If you're going to tax exchanges in the real world, you've got to tax exchanges in the virtual world... in economic theory."
As Castronova sees it, the problem isn't so much about economics as it is about common sense. "Common sense says that when people are playing a game of Monopoly, you don't tax (the properties they buy and sell)." There's also the real world problem of the individual game company's implementing some way of tracking the value of every kind of in-game asset, and every single player transaction in every single MMO.
"That would be an apocalypse for developers," said Matt Mihaly, CEO of Iron Realms, which publishes such online games as Imperian and Lusternia. "I think it would make running (massively multiplayer online games like EverQuest or WoW) an unprofitable business to be in, except for the biggest publishers. We'd spend all of our time tracking deals between players. I don't know how we'd deal with the fact that we're creating wealth every time a monster makes a drop, or there's a reward."
Castronova agreed, "That would be insane," he said. "You could do it. But it would just be a ridiculous burden. These game companies would have to keep a digital record of players' income and sales. It would generate a lot of paper. You'd have to set aside a lot of servers to keep records. It would add to the cost of games."
But things are changing much quicker than expected. In a recent interview with BusinessWeek's Silicon Valley bureau chief, Robert D. Hof, Castronova said, "These products like Second Life, and the way that World of Warcraft broke out, have just shocked the hell out of me. I thought the big impact might take until maybe 2010." He went on to comment on the virtual economy of other online games: "When I saw how it connected to the real economy, as you can see clearly in Second Life with its translation of Linden dollars into real dollars, and then you imagine how big this phenomenon could get, it started to have real-world macroeconomic implications."
Second Life can be thought of as the next evolutionary step to the MMO genre. Or at least a distant cousin. According to their website, it's a "new online society, shaped entirely by its residents." Modest really, because Castronova expands on that, giving it much more importance. "It's an infinitely scalable content creator's dream. It's an extension of the landmass of the Earth. As long as somebody wants land to build on, Second Life will make land. If you're into creating content — whether it's a building or a logo, anything — it's just a dream space. That's what explains how it's growing."
Large, mainstream businesses are starting to make use of this virtual, second world, finding it a cheaper and better way to perform some corporate tasks. The Disney Corporation even used it during the making of their movie, Hitchhiker's Guide to the Galaxy. Companies are using it as alternate offices and conference rooms for colleagues, partners and clients. There are folks selling land, offering themselves as escorts, and of course — brothels have opened. What would a place be without its own red light district, right? And all of them are making real world bucks because residents get to keep the rights to whatever they build and buy. Thus, SL's goods and service industries is exploding.
If you haven't heard of Anshe Chung yet — you will. She's a "real" estate agent... but not your ordinary "real" estate agent. She's not real, at least not in the flesh and blood sense. She's merely the online avatar for a Chinese-born language teacher living near Frankfurt, Germany. But her virtual business is very real.
Second Life members pay "Linden dollars" (the in-game currency) to rent or buy virtual homes from Chung. However, Lifers can convert that "play money" into real U.S. dollars by using their credit card at online currency exchanges. The current exchange rate is about 276 Lindens to the U.S. dollar. Today Chung's firm currently has about $250,000 U.S. dollars worth of virtual land and currency holdings. Sounds weird doesn't it. Tomorrow? Who knows, but the company is expanding so fast that she had to open a 10-person office in Wuhan, China. Chung's real world counterpart, who prefers to remain anonymous, reports, "This virtual role-playing economy is so strong that it now has to import skill and services from the real-world economy."
Apparently. According to Catherine Smith, Linden Lab (owner's of Second Life) director of marketing, "In January of 2006, SL residents exchanged $1,384,752,765 in-world 'Linden' dollars, or over $5 million U.S. dollars."
Julian Dibbell sees a time in the not to distant future when the taxman will come a callin'. If anything, his experience a few years ago showed that while the IRS has ruled that some forms of goods with inherent value — like record-breaking home run baseballs for example — are not taxable assets until they're sold, that might not always be the case. "As the RMT (real money trading) markets get bigger and more normalized, how long are the tax agencies of the world going to forebear?"
To say that the government's of the world aren't keenly aware of how much money is out there is akin to the proverbial ostrich with his head stuck in the ground. And at some point, they're going to want their fair share in taxes from all this revenue.
Dibbell foreshadows the future by saying, "At a certain point, it will be less crazy-looking to everybody and therefore more palatable, and there will be more money involved."
Lots more money. And where's there money... the taxman can't be far behind.
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