Taxation of Virtual Worlds, Not.

Ok so the hype is on about the US "National Taxpayer advocate's 2008 annual report to Congress" because of the section called, “The IRS Should Proactively Address Emerging Issues Such as Those Arising from Virtual Worlds”. This has lead to stories from various sources with titles like Get Ready for Virtual Income Tax, Taxes Coming To Virtual Worlds?, and my personal favorite The taxman cometh? IRS urged to tax virtual worlds, economies. What all of these articles fail to mention is that there is NO actual recommendation to start taxing virtual worlds in the report at all. 

The section in question states that there is no IRS code about what goes on inside virtual worlds and that it should be addressed in some way including the statement that, "IRS guidance could improve taxpayer compliance even if it simply clarified that in-world transactions are not taxable". It would not be the first time that the IRS deemed virtual monetary systems not subject to tax. Frequent flyer miles are not subject to tax even thou they can be used to purchase real world items of value.

All the pro tax virtual worlds arguments revolve around the perceived real world value of these transactions. In the case of second life, yes there is an exchange rate between lindens and real life currency. Even then the report points out that "...statistics suggest that most transactions on Second Life are for less than $1 and would not be subject to information reporting, even if the IRS treated Second Life as a barter exchange." 

Its only the real world valuation that the IRS is ever going to care about. When I play Dead Space on the PS3 I'm in a virtual world.  There is a money system, and stores, and items I buy and sell. I generate value when I upgrade my weapons, it's valuable to me while I'm playing the game anyway. But if I can't cash out where is all this value when I eject the disk? If you play WOW all day and get this great weapon but never sell it on E-bay who cares? If you do sell it, that money is considered reportable income, and is already covered by IRS laws. Think of it like this, if you grow corn in your back yard and sell it that income is taxable. But if you just eat it yourself or let it rot, you haven't profited financially from it so there is nothing to tax so the IRS doesn't care about it. 

Of course there are grey areas like IMVU Music where you can use virtual monies to buy real MP3s and this wacky notion of buying pizza with lindens that seems to have never happened. (at least I couldn't find it in world) If things like this become the rule and not the exception it will be more likely that the IRS will really take notice. Or I could be wrong and the next update to Dead Space will include a sales tax upgrade to the ships store.