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What online gaming income could mean for your taxes

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Earning real money in online games may be a taxable transaction, though the IRS doesn't provide specific guidelines about income players earn, according to revenue service.

"Cyber-economic activities in the online world may have tax consequences that real world avatar counterparts need to consider," a page on the official IRS website called "Tax Consequences of Virtual World Transactions" reads. A 2013 U.S. government report called "Virtual Economies and Currencies" (PDF link) also examined "questions about related tax requirements and potential challenges for IRS compliance efforts."

Elisabeth Ashley, a Florida-based certified public accountant, described the "tricky business" of becoming tax compliant when players earn income through marketplaces like Diablo 3's recently shuttered real-money auction house.

"Offering advice on virtual world transactions (such as those found in [massively multiplayer online role-playing games]) is tricky business, considering the IRS itself has not developed any regulations or rulings that can be directly relied on for tax compliance," Ashley told DealNews. "Instead, the IRS points to existing tax guidance for hobby, business, gambling, and barter income."

The distinction between a hobby and a business is difficult to discern, particularly when accounting for losses, Ashley said. As an example, Eve Online's economy contains an in-game item called PLEX, which grants owners time to play the game. Players can earn PLEX by playing Eve Online, purchasing it with real world money and trading for it. Because players can also purchase play time with real-world money, PLEX has a real-world value. Financial loss enters the scene when players lose PLEX, as has happened in Eve Online's massive battles. If you lose PLEX, and PLEX has a real-world value, have you experienced a financial loss?

"If your gaming is a hobby, the loss could only be deducted up to your hobby income," Ashley said. "If you are gaming as a for-profit business, then the full loss could be taken."

It may not be quite that simple, though. Ashley said that the "IRS takes a hard look at businesses that generate regular losses and seem like they are actually hobbies performed for personal pleasure. Take care that the activity is run in a professional, business-like manner."

For more on Eve Online and its economy, be sure to read our recent feature and our interview with players and Dr. Eyjólfur Guðmundsson, the game's lead economist.