One of the side benefits of getting to a high level in a multi-massively played online roleplaying game (MMPORG) like World of Warcraft is that it sparks its own industry offline. As everyone who has played WOW knows there are uber items that make the game so much more fun to play, and players always need gold to purchase anything useful. One method of obtaining these items is to use real world cash if you have money to to spare. In some cases purchasing of game advantages has gotten so out of hand that some players will spend thousands of dollars just to have a well-developed character with all the uber and rare items available in the game.

In fact, some very early players of WOW got into the game from previous game platforms specifically to raise characters quickly and sell them off for hundreds of dollars, without any intention to continue playing the game for the longterm. The demand for preplayed, high-level characters for sale was already well established on eBay by Ultima Online players.

As a result of all of this selling and cash changing hands, new revenue from occasional pocket change to outright businesses has developed, generating and producing high value characters and game items to the highest bidder, literally.

However, more than just online game players are paying attention to this booming market. The IRS has long been aware of the activities of creative players and their ability to generate cash from virtual game items. In cases the games themselves have tried to stop the activity with no real success.

From the IRS’ perspective most players are your average joe who sell an item here, some gold there and move on. The tax agency’s view of this occasional sales is generally the same as anyone who runs their own small business or garage sale: they have a responsibility to report it on their annual tax forms. If you don’t and the IRS does catch it later by asking about odd deposits to your bank account records, then you can be subject to an audit finding and penalties for back taxes owed. State tax agencies deal with the issue the same way.

However, the bigger players in this issue are those that farm gold and uber items for big cash. We’re talking about thousands of dollars at a time. To the extent that a constant stream of revenue is generated through eBay and the payment system of Paypal, transactions can be traced and retrieved. The IRS can and has access to all these records, and eBay has no problem handing over this information to the government. Those that run WOW characters as a business have a legal requirement to pay their taxes on costs earned and are best advised to keep records on all they transact for reporting in April.

In 2006 there was a concern that the IRS was even going to extend tax consequences to in-game control of WOW assets, before they are sold for real-world cash. However, that idea died and went away.

But there is another reason the IRS is now interested in WOW: illegal laundering. Laundering of money is when someone takes money that was earned through illegal activity, say drug sales, and injects it into a legal business. By doing so, the money appears to be legal revenue and gets washed, thus removing the question of where it came from. The response by the seller is “I earned it in the normal course of my business.”

Prior to the Internet, there has been a long history of laundering through casinos and business that transact large amounts of cash. The IRS thinktanks are primarily concerned now with someone getting the smart idea of moving large cash through WOW.

How would it occur? One party can pretend to be selling large amounts of game gold or uber items for big bucks. The second party pays the money, secretly in collusion and online through an out-of-country email account. The first party gets the cash and records it as a regular WOW item sale, and to all appearance it looks like the WOW player is just a smart computer geek making a big buck. The reality is, the two parties just moved a couple thousand dollars in illegal money into a legal-looking business.

The tax agency is not clear yet on exactly how to solve this problem, nor has there been any comment on if it will. But there is no doubt they are aware of WOW, its money potential, and its ability to be corrupted by very serious criminal activities. To the extent that the IRS begins to push for tax regulation of game earnings turned into real cash, it will affect WOW and similar online games and how they are played. In some opinions it may be for the better by removing players who are not there to enjoy the game and end up spoiling it for others. In other views, the idea of the IRS spooking around WOW may be potentially the scariest monster in the game.