GAME THEORY



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.