Taxation Policy in Virtual Worlds: Issues Raised by Second Life and Other Unstructured Games
Journal of Legal Tax Research, Vol. 6, No. 1, pp. 94-107, Fall 2008
Posted: 24 Oct 2008 Last revised: 5 Aug 2014
Date Written: October 1, 2008
Massively Multiplayer Online Economic Games involving the creation and trade of virtual goods are rapidly gaining in popularity. Although most individuals participate for their own social or entertainment purposes, a substantial number of participants rely on the sale of virtual goods as an important source of real wealth. To date, these economic returns have largely escaped taxation due to the lack of a well-developed body of tax law in this area. This paper examines whether and when taxes should be assessed on virtual world income. We conclude that an in-game sale of a virtual asset constitutes an income realization event for federal income tax purposes. In contrast to prior research, we also suggest that members be allowed to defer recognizing their virtual earnings until they are converted into real world currency.
Keywords: virtual worlds, synthetic worlds, massively multiplayer online games (MMOG), Second Life, currency exchange, tax law, taxation policy, virtual environments, online games
JEL Classification: H24, L86
Suggested Citation: Suggested Citation