Sunday, January 3, 2010

IRS May Push for Tax Compliance in Virtual Worlds

By Sharon McLoone
The Washington Post
Thursday, January 8, 2009

The IRS soon may keep a closer watch on the thousands, if not millions, of small firms and the self-employed that have sprouted up in virtual worlds.

The nation's taxpayer advocate, who recommends to the IRS how to improve the average consumer's tax-paying process, released her annual report Wednesday describing some of the most serious problems encountered by taxpayers as well as some issues that the IRS should proactively address.

Taxpayer advocate Nina Olson listed the usual perennial suspects -- telling the IRS it should simplify the tax code and improve its working with taxpayers experiencing financial difficulties, among many other things.

But she also told the agency that it should "proactively address emerging issues such as those arising from virtual worlds." Her report said that about $1 billion in real dollars changed hands in computer-based environments during 2005. Additionally, more than 16 million people are said to have active subscriptions in these worlds, "many of which have their own virtual economies and currencies."

But Olson said the IRS hasn't effectively been able to respond to taxpayer inquiries about how to report transactions associated with them. "Economic activities in virtual worlds may present an emerging area of tax noncompliance, in part because the IRS has not provided guidance about whether and how taxpayers should report such activities," said Olson's report. She suggests that to improve voluntary tax compliance, the IRS issue guidance addressing how taxpayers should report economic activities in virtual worlds.

For further reading:
"Real taxation of virtual commerce", Steven Chung, Virginia Tax Review, Winter 2009
"Why the IRS Has Not Taxed Income from Virtual World Transactions . . . Yet", Zachery Jones, Yale Law Review, January 26, 2009
"The taxman cometh? IRS urged to tax virtual worlds, economies", Jacqui Cheng, January 12, 2009
"IRS Closer to Taxing Virtual Goods Transactions", Virtual Goods News, January 8, 2009
"China Taxes Real Profits from Virtual World Transactions", Pillsbury Law Advisory, November 17, 2008
"China Imposing 20% Tax on Profits on Virtual Money", Benjamin Duranske, Virtually Blind, November 4, 2008
"Federal Tax Consequences of Virtual World Transactions", G. Martin Bingisser, Shidler Journal of Law, Commerce & Technology, Volume 5 Issue 2, Autumn 2008
"Sweden moves to tax in-game transactions", Vili Lehdonvirta, April 16, 2008
"Two Experts Suggest Virtual World Profits May Be Taxable Even Before Conversion to Real World Cash", Benjamin Duranske, Virtually Blind, October 23, 2007
"European Residents to pay Value-Added Tax on Second Life", Gwyneth Llewelyn, September 27, 2007
"'Stranger than Fiction': Taxing Virtual Worlds", Leandra Lederman, New York University Law Review, Volume 82, 2007
"The Play's the Thing: A Theory of Taxing Virtual Worlds", Bryan Camp, Hastings Law Journal, Volume 59, No. 1, 2007
"Virtual World Taxation: Theories of Income Taxation Applied to the Second Life Virtual Economy", Timothy J. Miano, 2007
"The Virtual Taxman Cometh", Wired, December 18, 2006
"IRS taxation of online game virtual assets inevitable", CNET News, December 3, 2006

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