Tracing Basis Through Virtual Spaces

46 Pages Posted: 29 Jul 2009 Last revised: 18 Oct 2015

See all articles by Adam Chodorow

Adam Chodorow

Arizona State University (ASU) - Sandra Day O'Connor College of Law

Date Written: July 28, 2009


Whether and to what extent virtual income should be subject to tax has received recent interest from both tax scholars and governments. Options range from a pure cash-out rule, where virtual income is taxed only if it is exchanged for real-world currency or property, to a rule of full taxation, where in-world transactions are taxed to the same extent as similar real-world transactions. To date, the IRS has remained silent on this issue, creating a de facto cash-out rule. The National Taxpayer Advocate has recently called on the IRS to provide guidance regarding the taxation of virtual income, lest taxpayers become inadvertent tax cheats and noncompliance in this area affect compliance more generally.

This Article addresses a question that must be resolved regardless of the approach ultimately chosen, namely how to account for the tax basis in virtual items. Current law generally takes one of two approaches to basis recovery. The first considers each item of property separately, affording each piece of property its own basis. The second treats property on an aggregate basis and allows for the pooling and averaging of basis. After reviewing the existing approaches, I conclude that the nature of virtual worlds warrants a hybrid approach, where the basis in individual virtual goods is separately tracked, but the basis in fungible currency is pooled and averaged.

Keywords: taxation, basis, virtual reality, virtual worlds, accounting

JEL Classification: K34, H20, H24

Suggested Citation

Chodorow, Adam, Tracing Basis Through Virtual Spaces (July 28, 2009). 95 Cornell Law Review 283 (2010), Available at SSRN:

Adam Chodorow (Contact Author)

Arizona State University (ASU) - Sandra Day O'Connor College of Law ( email )

Box 877906
Tempe, AZ 85287-7906
United States

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