IRS Should Look Into Taxing Virtual Goods, Says Tax Advocate

If you’re running a virtual goods business in, say, Second Life, you may soon find yourself on the radar of the Internal Revenue Service.

The Washington Post reports that Nina Olson, who serves as the U.S. Taxpayer Advocate, has recommended to the IRS that it take a closer look at the exchange of virtual goods in online worlds, which she estimates at $1 billion annually. From the WaPo:

[Olson] 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.

GP: It’s not entirely clear what Olson expects the IRS to gain from this line of inquiry. Anyone doing substantial business in a virtual world is already obligated by law to report their earnings, just like anyone running a real-world business. If a virtual goods vendor chooses to run his or her business "under the table," it would seem that they place themselves in legal peril.

UPDATE: New World Notes has a thoughtful analysis of how the IRS might look at the tax implications of Second Life transactions.

Via: Kotaku

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  1. Wolvenmoon says:

    Or the IRS could stop looking at taxing consumers and individuals ( 306 million based on the latest survey I could find) and levy all taxes onto businesses that employ a large number of individuals at the payroll level, and not tax consumers directly one bit, thus dropping the number of people they have to keep up with from 306 million to ~6 million (businesses that employ others) (20 million including small businesses)

    It would save us annually at least a billion, and the IRS wouldn’t have to chase after as many people. Right now businesses have to pay so many different taxes on so many different things, too, holding it at the payroll level (flat federal tax of x%, then a state tax that the states decide).

    Of course, we’d have to keep import/export fees, but that’s handled at the business level too.

  2. Derovius says:

     They could claim jurisdiction over US servers, ala the DRM enforcement methodology. And WoW players wouldn’t be all that stranger than what they get now. Just off the top of my head, I’m sure legalized prostitution needs to declare all sex toys as business assets… and to use the former as a pun, other "assets" as well.

  3. silversnowfox says:

    The simple fact is that the IRS wouldn’t have jurisdiction.  Second Life (or anything else) may have servers in the US, but it exists on the internet.  A place that is, and I quote, "No where, and Everywhere."  As such, something of this nature, would require a world wide tax organization.

    Also, I have to agree with Cavalier, the calls from WoW players would be quite interesting.  IRS could sell the tapes of conversations for profit.

  4. Cavalier says:

    If the IRS seriously wants to start taxing raid loot, they’re going to get some very interesting calls about the quality of leadership and co-workers.

    Seriously though, this looks a lot more like it’s aimed at say, Second Life merchants, that kind of thing.

  5. Lost Question says:

    maybe she wants a tax on WoW gold (silver and copper) and MS messo. Or wants the irs to attempt calling all virtual worlds part of the united states.

    but im with you gp i actually have no clue why she’s driveing at

  6. axiomatic says:

    "Tax Advocate"? That is similar to "Root canal advocate" or possibly "Cancer advocate"?

    I’m sure she gets all the boys.

  7. Ryno says:

    Wait a minute: she’s the TAXPAYERS’ ADVOCATE, and she wants to find new ways to tax the payers? Shouldn’t her job be to, I don’t know, ADVOCATE on their behalf?

    I can get behind making it clearer how and when people should report earnings so that they don’t get caught with an audit, but finding new ways to tax people seems contrary to her title.

  8. Awol says:

    Can I pay my taxes in virtual money as well? If so that would great cause its easy to make virtual money in Second Life.

  9. Neeneko says:

    This sounds like another case of ‘rather then enforce existing laws, let’s make new ones and take credit for solving the problem!’.

    New laws get the new people credit, enforcing old laws gives credit to the earlier lawmakers.  Guess which is more advantagous to a politition?


  10. DeepThorn says:

    Wow, this idiot doesn’t understand current tax laws…  Granted, I only know a little bit due to still being in the first year of running a business, but how to run a business for dumbasses 101 says if you make any kind of money period, you are to report it.  No matter if it is a good or service, even though you can not donate services to non-profits, which I think is BS, but hey.  I understand that there are some dirty bastards that would take advantage of that, just like many big businesses take advantage of tax deductions, which is also BS when those deductions are to help a company grow, not pay the CEO and other execs more.

    I think everyone has a couple laws that they think are stupid or unfair, but that is life.  No government is perfect because no person is perfect, especially in a government so heavily based off of religion…

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  11. Nekowolf says:

    Or…how’s this for an idea. This is pretty fucking radical, too.

    How about using tax money, on stuff that isn’t bullshit. More money to go around then. I’d go even further, but I don’t feel like getting into it. Cause apparently, there’s some bullshit excuse that Socialism always means Communism.

  12. Alex says:

    They may be obligated to report their taxes, but assuming that what she said in the block you quoted is true, it sounds like the problem (or at least part of it) is that many people don’t know how to report the money they earn from virtual-world transactions, and the IRS hasn’t provided effective guidance on that point.

    I’m not under the affluence of incohol as some thinkle peep I am. I’m not half as thunk as you might drink. I fool so feelish I don’t know who is me, and the drunker I stand here, the longer I get.

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