Taxation of Virtual World Economies: an empirical review

Jamie S. Switzer, Ralph V. Switzer

Abstract


Experts are divided as to the feasibility of taxation of virtual economies. We argue that virtual transactions are already subject to taxation under current U.S. law as well as possibly the tax laws of other countries, whether taking place in game worlds or unscripted worlds. This would include virtual-to-virtual transactions as well as virtual-to-real transactions, at any point in time that the U.S. Internal Revenue Service (IRS) should decide to enforce the current law. There is no need for new legislation amending the current U.S. tax code in order for the IRS to begin enforcement; in fact, given the strategic approach employed in the current U.S. tax code, amendments relating specifically to virtual transactions might actually weaken the application of the law as now written. This is because the strategic approach within the tax code is that taxation of income is an all inclusive net unless that type of income is specifically exempted. This strategy eliminates the difficulty inherent in trying to identify all methods of commerce capable of generating income, now or in the future. As more and more people buy and sell virtual goods and services in exchange for real currency, the issue of income earned in virtual worlds will only become more critical. One possible consequence of taxation would be for virtual worlds to move to a peer-to-peer network or another country to avoid detection and identification by a government. Another, more likely, scenario would be that the tremendous growth of virtual worlds would be severely impeded, depriving Internet scholars of a rich and vast database for studying how people communicate and interact in such an environment.

Keywords


real money trading; tax code; virtual world transactions; virtual worlds

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