Online gamers have sold weapons, clothes, and spells (all pixelated) for years using "black market" third-party sites. The gaming industry wants a cut of that virtual economy. So would the IRS.
In one month, Diablo III, a hugely popular role-playing game made by Blizzard Entertainment, will become the first major online game to launch with PayPal integration. It will encourage players to sell digital possessions for actual dollars within the game. The lines between virtual and real economies are about to get even blurrier.
Diablo III is not the first game with players selling digital bits for dollars. Players in other games, including Diablo III's predecessor, have sold virtual possessions, characters, user accounts, and in-game currency for over a decade. But until recently, all such transactions were explicitly against a game's Terms of Service. As such, players needed to use third-party sites to make these rule-breaking transactions.
These black markets enjoy a big following. The leading such site, d2jsp.org, was originally built around Diablo III's predecessor. It expanded to cover virtually every popular massively multiplayer online role playing game (MMORPG) available today. According to comScore Analytics, d2jsp garnered 94,000 unique visitors and over 60 million page views last month in the US alone. Given that online gaming is indifferent to international boundaries, the actual amount of traffic to the site is undoubtedly much higher.
How can there be real economies in virtual games? When players satisfy certain requirements such as solving a puzzle, completing an in-game task, or defeating an opponent, an in-game item with variable properties is sometimes generated. Most such properties make the player character more powerful. For example, allowing the player to do more damage to opponents, survive longer in combat, or slightly nudge the odds in favor of finding better items.
The number of possible properties is enormous, and the magnitude of each property also varies, having an enormous impact on an item's sell value. An item making a character twice as powerful sells for orders of magnitude more than one making a character 1.99 times as powerful. A single percent's difference can equate to hundreds of dollars. Thus, an item that possesses both the right combination of properties and in sufficient quantity is exceedingly rare, and commands a price reflecting this rarity. At its most extreme, big-ticket items can fetch prices in the thousands of dollars. Most items, however, do not reach this degree of rarity and instead are sold for small sums or not sold at all.
But all these black markets don't make the gaming companies any richer. That's why Blizzard Entertainment is looking for a way to get in on the action. With next month's PayPal-integrated launch, gamers can sell their digital possessions -- such as a weapon or pair of boots for your avatar -- in the game's own online auction house. The first few listings per month on the auction house will be free. After that, high-volume traders will pay a fixed fee to sell their digital wares. As a result, those who stand to make the most money will also pay the highest cumulative transaction fees.
IRS vs. MMRPG
Companies employing such a business model should -- and almost certainly will -- declare these earnings in their tax filings. For players, however, the legal bridge between virtual and real economy is fuzzy. While "in-game possessions sold for dollars" certainly qualifies as income, many players might not report such income. Blizzard's obligation ends with declaring its own earnings. This gamer's paradise will be a nightmare for both the IRS and international tax agencies.
One need only have a PayPal account to begin selling items in the in-game market, and many who meet that qualification likely are not considering tax ramifications when doing so. It seems quite likely that these virtual economies will occupy the same space that online poker did a decade ago. Income that should be taxed at the player level will escape the eye of the IRS.
Murkier still is the legal status of possessions sold for credit. Rather than opting to sell digital bits for dollars, players can instead apply digital currency toward credit within the umbrella of the gaming company's offerings. In this model, a player can sell an item, but rather than collect currency that can be spent on any commodity, instead limit him or herself to products only offered by the gaming company. A player who sells an item in Diablo III could pay subscription fees toward Blizzard's World of Warcraft, for example. While such a player undoubtedly gains assets in this model, they never visibly accrue additional earnings in their bank account.
Iceland-based CCP's EVE Online helped pioneer this second model in 2008, allowing players to sell in-game currency to cover their monthly subscription fees. This eventually led to several similar programs, including "PLEX for Good," which allowed players to leverage in-game wealth to make charitable real-money contributions to assist victims of natural disasters. Most recently, the company allowed players to purchase NVIDIA graphics cards with in-game wealth, albeit in limited supply--only 100 such cards were sold, and only one per customer. That the cards sold out in 108 seconds indicates the player-side demand for bridges between virtual and real.
Companies are well aware of this demand. "Finding innovative ways for our players to enhance and extend their relationship with EVE into the real world is something we're intrigued by," said Thor Gunnarsson, CCP's VP of Business Development. "It's part of improving the overall EVE fan experience."
While CCP has managed to successfully integrate the two types of economies, it also enjoys a relatively smaller player base than Blizzard will support next month. While Blizzard may well implement best practices in the industry, its expanded player base will almost certainly leave a significant footprint on the boundary between economies real and virtual, and certainly draw the attention of governments looking to increase taxable revenue.