IRS Closer to Taxing Virtual Goods Transactions

The Internal Revenue Service inched closer to taxation of virtual goods Wednesday, as national taxpayer advocate Nina Olson released her 2008 Annual Report to Congress. The report describes ongoing issues faced by taxpayers and recommends issues for the IRS  to address. For what appears to be the first time, the issue of virtual goods transactions in virtual worlds is cited as a major concern

"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," states the report's Executive Summary.

The result of this lack of guidance from the IRS is that most taxpayers do not report any earnings relating to sales of virtual goods, even in cases where an individual earns all of his or her yearly income in virtual worlds.

The report describes $1 billion in transactions happening in virtual worlds in 2005 alone. With more virtual economies and firms concerned with sales of virtual goods emerging, it is only reasonable to assume that figure has grown larger in successive years.

"Over 16 million people are estimated to have active subscriptions to these environments, many of which have their own virtual economies and currencies," states the report.  "To improve voluntary tax compliance, the National Taxpayer Advocate recommends that the IRS issue guidance addressing how taxpayers should report economic activities in virtual worlds."

While this is the first time that the report has made such recommendations, other parties in the U.S. government have been researching tax issues surrounding virtual worlds for some time. Dan Miller, an economist for the Republican staff of the Joint Economic Committee, spent a fair part of 2007 working on a report on virtual goods and taxation, though, as far as I know, it hasn't come out yet. In the spring of 2008, though, executives from various virtual worlds and MMOGs addressed Congress on issues ranging from terrorism to taxation. 

While the U.S. has been researching taxes and virtual goods, other countries are already putting the theory into practice. Sweden is in the process of constructing a tax code to handle taxation of virtual goods. Korea began taxing real money transactions in virtual worlds in July of 2007. The United Kingdom is moving to apply laws that affect gambling and Internet commerce to virtual goods transactions in virtual worlds.

If (and, more likely, when) the United States implements a tax code that takes virtual goods and virtual worlds into account, the government will only be following a global trend.

This post by Alicia Ashby originally appeared on our sister site, VirtualGoodsNews.com.