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Tuesday, January 17, 2006

Sales of virtual property

Here's an interesting note on the IRS's lack of a position on the taxation of virtual property. From a legal point of view, the virtuality of the property is of little import. Property is rights, whether the property is a car, air space, a name, or a series of bits on a computer. The IRS knows how to tax the sale of the right to name a stadium, the right to turn Grandpa's farm into a of Parade of Homes-style subdivision, and the right to play Sim City 4.

I am not a tax lawyer, but I did pay attention in that class, at least some of the time. If I sell my +2 sword (+4 vs orcs) over eBay, I have experienced a net accession of wealth (Glenshaw Glass, 348 US 426 (1955).) A net accession to wealth is taxable as income and I would expect to pay tax as ordinary income.

Now, if you do this as a hobby, I would expect that you would not be subject to self-employment taxes. If it's deemed not a hobby, then something brilliant this way comes to gamers everywhere: the full tax deductibility of your gaming computer for business purposes. If that comes to pass, it's time to buy shares in nVidia.