Video Game Industry Thrives

The video game industry now brings in more money than movies do at the box office. Total sales in the United States rose 6 percent last year to more than $10 billion, according to research firm The NPD Group.

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RENEE MONTAGNE, host:

On Friday's we focus on your money. Today, the real cost of playing virtual games.

(Soundbite of virtual game)

MONTAGNE: Millions of people are obsessed with computer role-playing games. Some are so determined to win that they pay real money to get ahead. One player realized that could lead to complicated tax questions.

Steve Inskeep spoke to Julian Dibbell, who wrote about this in a recent edition of Legal Affairs. He told us about tax law and the games he plays on the Web.

Mr. JULIAN DIBBELL (Author): You're a wizard or you're a knight or you're a warlock or something, going out there, battling dragons, slaying goblins and so forth, and banding together with your fellow players to go on quests, come home with booty, with loot, magic swords and good pieces of armor.

So what ends up happening is that it takes so much time to get some of these more powerful items, and it's so desirable to get them, that people will end up paying a lot of money: ten, twenty, thirty, a hundred, thousands of dollars.

STEVE INSKEEP, host:

So, but these are real transactions in real life now. People are paying real money, they're selling the rights to these goods, these virtual goods, on eBay and so forth?

Mr. DIBBELL: It's a commercial transaction and there's lots of them going on. And so I started looking into the business of buying and selling these things for a living.

I wasn't as good as some people. I know a lot of people who make six figure incomes doing this. I only made about $11,000 dollars on the side, in the course of nine months.

INSKEEP: Here's the first and simplest tax question that's raised here, and there's going to be a more complicated one in a moment.

Mr. DIBBELL: Right.

INSKEEP: When you get paid cash for playing this game and handing over your winnings, is that taxable income?

Mr. DIBBELL: No question about it. I mean, any way that you get your hands on dollars, the IRS is going to be interested.

INSKEEP: What is happening that makes it a more complicated tax question?

Mr. DIBBELL: Ostensibly all of this is just play, right? People are playing the game until they start handing over money. But the IRS doesn't necessarily see things that way.

There are rules they have about barter income that say in certain cases when you get something, even if you don't sell it for money, you are liable for tax purposes for the fair market value of that item.

INSKEEP: What's happening here is two people are playing, and I want a shield and you want a sword, and neither of us wants to spend time to go out to get it ourselves, and so we just swap.

Mr. DIBBELL: Right. In other words, if I'm a painter, and you're a plumber, and you come and fix my pipes, and instead of paying you five hundred dollars, I give you a painting of mine that's worth five hundred dollars. We have not dodged the tax man. The IRS rules on barter clearly state that both of us are now liable for income of five hundred dollars on that trade.

INSKEEP: So the question that you were facing was, as a taxpayer trying to be honest, do you then have to pay taxes on these thousands and thousands of dollars worth of virtual goods that you're trading? And where did you go to try to find that out?

Mr. DIBBELL: Well, first I went to my local IRS office and talked to a man who, you know, looked like he'd heard it all. But about halfway through explaining my situation, his exact opinion was, That's weird.

But he said, I may not be the last word on this, why don't you contact the business specialty line. And ended up at a place called the barter income desk, and talked to a woman who put me on hold, left me there for a quarter of an hour and then came back transformed. She had been having a discussion with all her colleagues on the barter income desk, and as far as they could tell, what I was describing was indeed taxable income. Not only that, but even if you don't trade, when you go and slay a monster, and you get, you know, a magic dilly bopper that's worth $300.00, that too is possibly taxable under the rules that cover prize winnings.

INSKEEP: Are you going to be declaring income and paying taxes on all the trades you've made in the last year?

Mr. DIBBELL: I am not. The final word I got from this agent at the barter income desk was there is just no ruling on this, you know, and she urged me to go and seek one. And I just said no. You know, first of all, if I end up being the guy that woke the IRS up to this and brought on a ruling that means every game company has to file a 1099 every time someone gets a magic earring off of a dragon whelp, I'm going to be, you know, the most hated man in video games.

So I'm just going to let this one lie and hope they don't come after me.

INSKEEP: Julian Dibbell is author of the upcoming book, Play Money. Thanks very much.

Mr. DIBBELL: Thank you.

MONTAGNE: The video game industry now brings in more money than movies do at the box office. Total sales in the United States, including console and portable hardware, software, and accessories, rose six percent last year to more than ten billion dollars, according to research firm the NPD Group.

Here are five of the top-selling video games from last year: Madden NFL and NCAA Football on Play Station 2 were last year's big sports games, a driving game, Gran Tourismo, and a Star Wars game called Battlefront II also made the list. Finally there's Pokomon Emerald, featuring those favorite little pocket monsters from Japan.

Those who follow the market say video game sales got off to a sluggish start in 2006, but sales are expected to rebound as gamers switch to the next generation of consoles later this year.

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