Real Taxation of Virtual Commerce

Abstract

In virtual worlds, people participate in fantasy adventures or socialize in a visually immersive online environment. Popular examples include World of Warcraft, Second Life, Everquest and Ultima Online. As more people are reportedly earning real money through their virtual world activities, governments are looking into whether virtual world transactions are subject to real taxes, even if the participant does not convert his virtual income into cash. However, the application of U.S. tax law has led to unclear and sometimes conflicting interpretations.

This paper instead looks into the virtual world's economic environment to determine whether in-world transactions should be taxable events. Many virtual worlds have their own internal trade based economy with its own currency acting as a medium of exchange. While most of these economies are closed off from the real world, some integrate real cash into their economies through an internal currency exchange system. This paper proposes that these latter currencies act much like foreign currencies and should be taxed under the foreign currency rules of the Internal Revenue Code.

Keywords: virtual worlds, mmorpg, tax, second life, video games, regulation, online games, currency, foreign currency, money, virtual world transactions, virtual world tax, virtual economy