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

See all articles by William D. Terando

William D. Terando

Iowa State University

Brian Mennecke

Iowa State University

Diane Joyce Janvrin

Iowa State University - Department of Accounting and Finance

William N. Dilla

Iowa State University - Department of Accounting and Finance

Date Written: October 1, 2008

Abstract

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

Terando, William D. and Mennecke, Brian and Janvrin, Diane Joyce and Dilla, William N., Taxation Policy in Virtual Worlds: Issues Raised by Second Life and Other Unstructured Games (October 1, 2008). Journal of Legal Tax Research, Vol. 6, No. 1, pp. 94-107, Fall 2008. Available at SSRN: https://ssrn.com/abstract=1287232

William D. Terando (Contact Author)

Iowa State University ( email )

613 Wallace Road
Ames, IA 50011
United States

Brian Mennecke

Iowa State University ( email )

Ames, IA 50011-2063
United States

HOME PAGE: http://www.bus.iastate.edu/mennecke

Diane Joyce Janvrin

Iowa State University - Department of Accounting and Finance ( email )

College of Business
Ames, IA 50011-2063
United States

William N. Dilla

Iowa State University - Department of Accounting and Finance ( email )

College of Business
Ames, IA 50011-2063
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,551
PlumX Metrics