Friday, 5 August 2011

Diablo 3: there's far too much nonsense being talked about tax

Reading the comments and forum posts of people I'm realising there's an astonishing amount of ignorance about how tax works.

For the full picture check the website of your local tax office. But here's a short summary of how it works in most Western countries.

- you are liable to pay tax on your income. All income, certainly including AH profits. If you find a penny in the street you are liable to pay income tax on it.

- you cannot retroactively decide you're a business and your expenses (buying the game, your computer etc) are tax deductible. If you want to do this you will usually have to let them know you're a business.

- you cannot hide this income or stay under the radar. It's online run by companies who are obliged to give details of your transactions to the tax authorities.

- it's your responsibility. Not Blizzard's, not Paypal's not your tax authority's.

- in some countries (for example the USA and the UK) you may be able to avoid having to pay if they accept that this income is from a hobby. D3 item selling is likely to be a very borderline case and they may decide either way. They may even analyse game logs to see if you did magic finding runs. If you did and then sold the items for real money you may be deemed to be a trader.

If Al Capone played Diablo 3 he'd avoid paying tax.

OK those are facts, now I'll move to speculation.

- I think most tax authorities will realise a huge untaxed trade is occuring. If a million people sell items worth $20 over the course of a year and they pay 25% tax as their highest marginal that's $5 million lost government revenue. In an era where every country is desperate to balance its economy all of our governments are going to want high to perfect tax collection efficiency.

- I think the most likely first starting point for the tax authority will be a public awareness campaign. It's kinda absurd to jail people for selling a Sigon's Boots for $2. This is the point at which you should make sure you're compliant if you haven't done so before.

- they will probably then move to a targeted phase. You might get a letter or an email stating that they think you have undeclared income. DO NOT IGNORE THIS. Sort it out and pay what they ask.

- the last step is enforcement. They will take some people to court. This could be really expensive and damage your credit rating and employment prospects if you let it get to court. Don't, ask to settle with them out of court. If you fight it you will lose anyway and get a judgment recorded against you on your credit score.


- trade in gold not money. In particular don't regularly cash out money. Someone who takes £20 every month looks much more like a trader than someone who plays the game for a year then cashes £240 out. Be aware though that gold will deflate much faster than normal currency so keep your wealth fluid (for example buying cheap gems then selling them on all the time).

- consider buying stuff from the Blizzard store. This may help prove that your earnings are part of a hobby.

- don't ignore any official communication.

- don't expect any of your dealings to be kept secret from your tax authority.

- do accept that it is your personal responsibility to pay tax. I'm not suggesting you phone them every time you sell a rare but you should be aware that if you sell a lot you need to sort it out with your tax office.

- stop posting these stupid BLIZZ GONNA BE IN TROUBLE WITH THE IRS posts. They won't, you might be.


  1. An interesting thought though is that if d3 works with any random numbers could you claim that all winnings are from gambling which are exempt at the moment from tax (in the UK at least).

  2. Good point. There's some guidance on their site covering electronic lottery machines and electronic bingo that states that winnings are VAT exempt.

    Regarding income tax the situation is a bit less clear.

    And of course it would be very tough to go into court against the government lawyer's and prove that playing D3 is gambling if the IR say it isn't.