The Magazine

Dungeons, Dragons, and Taxes

The IRS is eyeing your hard-earned virtual gold.

Jan 1, 2007, Vol. 12, No. 16 • By JONATHAN V. LAST
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In the beginning, there was the MUD. The first Multi User Dungeon, Richard Bartle and Roy Trubshaw's "MUD1," came online at the University of Essex in 1979. A text-based computer adventure game, much like the board game Dungeons & Dragons, the MUD allowed players at remote terminals to interact and play in the game's nearly 400-room virtual world--acquiring swords with which to slay dragons, and the like. It was a programming and gaming milestone.

As computers--and networks--spread and became vastly more powerful and pervasive, the idea of the MUD expanded and evolved. In 1998, the game design firm Verant Interactive created EverQuest, which it dubbed the first "Massively Multiplayer Online Role-Playing Game" or MMORPG. From the outside, EverQuest couldn't have looked more different from MUD1: Instead of text, players saw a complicated, three-dimensional, graphic version of a virtual world, and they chose an avatar to represent themselves in the activities of that world (trading, fighting, questing).

Unlike MUD1, which required expensive terminals hidden away in university computer labs, connected to gigantic main-frame computers, EverQuest could be played by almost anyone with a home computer and a modem. Also unlike MUD1, which hosted just dozens or scores of players at a time, EverQuest quickly accumulated nearly half a million players, each of whom paid an initial price for the purchase of the software and then a monthly fee of $12.95 for the privilege of slaying orcs, dragons, and other beasties in the virtual world while getting to interact with hordes of likeminded players.

Because a successful MMORPG franchise like EverQuest is a cash cow, many game developers have since gotten in on the action. Most of the games descend from the same swords-and-sorcery lineage as the original MUD1, the most successful being World of Warcraft--a property owned by Vivendi-Universal--which in November crossed the threshold of 7.5 million players worldwide. But there are other, nonfantasy online role-playing games, most notably Second Life, which offers the chance to live a "normal" life in a virtual world modeled on the real world. Players--or "residents," as they're referred to in the Second Life lexicon--go to work, hang out with friends, purchase houses. It's nearly as interesting as it is unsettling.

How big is the business of virtual gaming? Very big, but it exists at different levels. At the top level, multi national entertainment companies such as Vivendi-Universal and Sony (which now owns the EverQuest franchise) make hundreds of millions of dollars a year from these games. Take World of Warcraft: With 7.5 million subscribers paying about $15 a month each, that's a monthly cash gusher of $112.5 million. To put that in perspective, in 2006, all of the movies released by Universal together grossed about $800 million at the box office.

Beneath the corporate economy is a smaller consumer economy. MMORPGs have internal economies where virtual currency allows players to buy virtual goods. In Ultima Online, for instance, players win Britannian gold pieces by completing quests, slaying monsters, etc. These Britannian gold pieces can then be exchanged at shops in the game for special items--better weapons, better armor, mystical creatures--and between players within the games. Many players then hold real-world auctions, on websites such as eBay, to sell these virtual goods. This market is much bigger than you might expect.

In early 2005, for instance, a man named David Storey paid $26,500 for a virtual "Treasure Island" in the game Project Entropia. Later that year Jon Jacobs paid $100,000--remember, we are talking about real, U.S. dollars--for a virtual space station in the same game. Mind you, these aren't simply kids playing a game for fun--they are speculators hoping to get rich from the virtual economy. After his mammoth purchase, Jacobs told the tech website CNET, "I've seen the potential of it all, and I've gone through it, and I learned my lesson, and my lesson was that I can't afford not to do this. I could not afford not to get the space resort. It's too valuable. The guy that bought the Treasure Island recouped his investment in a year."

Jacobs was probably influenced by the success of a Second Life player known as Anshe Chung, whose virtual land and currency holdings are estimated to be in the neighborhood of $1 million. (Second Life is the only MMORPG that gives actual property rights to players.)

That's the high end of the virtual market. If you go to eBay or any number of other websites you can find people selling virtual belongings or even avatars for smaller, but still significant, sums. A weapon could be as cheap as $50. An avatar might cost several hundred or even a couple thousand dollars. Virtual real estate--land, castles, buildings--is, as a rule, more expensive.