Are Some Video Games Gambling?

Whoever said "you won't get rich playing video games," never played Entropia Universe -- an online computer game where players adventure, build, buy and sell everything from real estate and services to weapons and armor for real dollars.

In Entropia Universe, players create characters who co-inhabit the futuristic planet of Calypso, along with hundreds of thousands of other players.

The game uses what's called a "real cash economy." Players can exchange their own real money for pretend money their character can use in the game. Entropia uses a fixed exchange rate where $1 = 10 PEDs, (Project Entropia Dollars, the game's currency).

But the game offers players a unique opportunity -- they can take money out of the game using a regular ATM card provided by the game makers at the same $1:10 PED exchange rate. For example, a player with 1,000 PEDs could use his or her Entropia Universe ATM card to take out $100.

"Some players lose and some players win," said Mike Everest, a 17-year-old Colorado high school student who earned roughly $35,000 playing the game over the last three years. "Succeeding in the game is a combination of getting lucky and playing smart."

Mike is one of the winners. But he's certainly not the only Entropia entrepreneur to make some serious money playing the game. Last year alone, the game's 500,000 players took over $160 million out of the game.

In Dec. 2004, the game set a world record when 22-year-old David Storey of Australia spent $26,500 for a virtual "Treasure Island." A new record was set late last year when another player purchased a "Space Resort" for $100,000. He was able to break even within eight months by charging "tourists" a fee to visit the resort.

With monies ranging in the tens-of-thousands increasingly changing hands in Entropia, it likely won't be long before the tax man comes knocking. But who will pay and how much? Is this gambling, work or, perhaps, sales?

Gamer or Gambler?

A long-time gamer, Everest got into Entropia Universe while searching for a game he and his mother could play together.

"I watched over his shoulder as someone taught him how to mine [a game activity] and I really, really liked that," said Mike's mom, Pat.

Everest says she started playing the game to spend more time with her son, but soon discovered that in addition to whatever fun they were having and the bond they were strengthening, they were making money, too.

But she also says she never considered the question of whether or not the money they've made is taxable.

"I hadn't even thought about it," she said.

But you can be sure the IRS is thinking about it. Though no one from the service was willing to comment on this, they referred us to a portion of their Web site entitled "Gambling Income and Losses."

According to the page, "Gambling winnings are fully taxable and must be reported on your tax return."

But just as winnings are taxable, losses are deductible.

That could mean that while any of the game's players living in the U.S. would be forced to declare any money they've acquired through the game, they'd be entitled to declare losses incurred, as a deduction. And you can be sure there are a lot more losers in the game than winners -- in terms of money, that is.

"I doubt if the IRS would be too keen on allowing people to declare that," said Ken Goldberg, a tax attorney and partner with Brown, Rudnick, Berlack and Israel in New York.

Goldberg believes that income generated by playing the game is analogous to the collectible market. Despite or because of the fact that the items, services and properties changing hands don't exist in a tangible way, they're only worth what someone else is willing to pay.

"If you buy a rare baseball card, it's still just a piece of cardboard with a picture on it," he explained. "You need someone who's willing to pay for it."

Who's Responsible?

The idea that turning a profit in a game like this is considered gambling, raises all kinds of legal questions.

First of all, online gambling is illegal in the U.S., and a number of online gambling executives have been arrested in recent months as a sign that law enforcement is not going to tolerate the activity.

Plus, at least some of the game's players are minors -- as Mike's presence in the game shows -- and minors are not allowed to gamble.

Does that make players of games like Entropia Universe criminals?

"We'd have to look at each case individually," said Paul Bresson a spokesperson for the FBI. "There's a lot of things to take into consideration. We're not gonna exhaust our resources on something we'd never be able to prosecute."

The makers of Entropia Universe say it's the responsibility of the players to make sure they comply with local laws.

"We provide Entropia Universe as a service, so we see ourselves as a content provider," explained Marco Behrmann, CIO of MindArk, developer of Entropia Universe. "I believe it's up to each participant to check that [the legality and taxability of game profits] out with their government."

Millions of Minor Criminals

While Entropia Universe's real cash economy makes it unique, other games in the same genre have experienced the emergence of a secondary market that's cropped up around them. Players buy and sell items and currency to others who are willing to pay for what they may not have time, patience or luck to acquire themselves.

The most popular of these, World of Warcraft, is closing in on 7 million players worldwide. Could all of those players living in the U.S. be criminals?

For the sake of Mike Everest, who plans to use most of his earnings to pay for his and his two brothers' college tuition for a year, let's hope not.