TAXING VIRTUAL WORLDS: CAN THE IRS PWN YOU?

Abstract

This article examines whether the transactions between players of online virtual world games can give rise to taxable events. It also compares two earlier articles on the same topic, and argues that the intellectually pure conclusion is that every transaction in virtual worlds creates a taxable event. While the article concludes that the events are taxable, it argues that similar to frequent flier miles, the income from a virtual transaction should not be taxed until it is converted to real world currency. The IRS has implemented Section 6050W designed to require companies like PayPal to report the transactions of their biggest customers. The rules are applicable to virtual world players, but do not perform a sufficient function of ensuring reporting compliance because the number of transactions required to trigger a report  are far too high.