United States Taxation of Virtual World Economies: A Review of the Current Status

The taxation of virtual world economies is uncharted terrain, one that both researchers and government officials are just beginning to scrutinize. Taxes are inevitable in any economy, but what about the increasingly lucrative virtual world economies? The market for virtual goods and services in the U.S. alone is estimated to be between $2.9 and $3.5 billion annually and is predicted to grow to $5 billion by 2016. So it is no wonder that governments are beginning to take notice. Experts are divided as to the feasibility of taxation of virtual economies. Most experts agree however that there is significant ambiguity in the current U.S. Internal Revenue Code with respect to virtual worlds. It is unclear if transactions occurring in a virtual world are taxable in the U.S., and the Internal Revenue Service has to date not offered any strong guidance regarding the issue. In this chapter, we argue that virtual transactions are already subject to taxation under current U.S. law, at any point in time that the U.S. Internal Revenue Service should decide to enforce the current law, whether taking place in game worlds or unscripted worlds. This would include virtual-to-virtual transactions as well as virtual-to-real transactions, as the issue at hand is whether or not virtual activity is taxable, regardless of realization, because all goods and services have a fair market value.