The Taxman Cometh to Virtual Worlds - So What Might Be Taxable?
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Trying to navigate the U.S. tax code can be trickier than trying to find your way through the mines of Moriah. But section 6012 states that those required to file an income tax return include "every individual having for the taxable year gross income which equals or exceeds the exemption amount..." And what exactly is gross income? Checking section 61, "gross income means all income from whatever source derived, including (but not limited to) the following items..."
In other words, it doesn't matter what source your gross income came from; it is taxable - which is how the IRS was able to nab Al Capone on tax evasion, in case you didn't know. That all-inclusive "including (but not limited to)" phrase also demands attention. Just because income earned from selling stuff on eBay or in a virtual world isn't actually listed in the tax code, doesn't mean the IRS doesn't consider it taxable.
The question becomes one of profit. Texas Tech University School of Law tax professor Bryan Camp explained this in some detail at a panel called "Tax and Finance" at the State of Play/Terra Nova symposium. This gathering was held at the New York Law School. Anyway, Camp pointed out that, in the eyes of the tax law, if two people exchanged identical copies of books, one worth $24 and one worth $30, the one who received the $30 book has acquired $6 of taxable income, even if no money was exchanged. A more striking example is Kyle MacDonald, who over the course of a year traded up from a red paper clip to a house. "He has massive tax issues," Camp noted. "He started with (the value of) a paper clip and ended up with (the value of) a house."
Personally, if income is to be taxed, I can agree that anything that puts real, hard currency in your hands may count as income - but a virtual asset that isn't converted? How do you evaluate such a thing? Use the prices that others have paid for it? That raises quite the can of worms, as I'll explain in the next section. What I will say now is that it's not entirely without precedent - though the precedent goes both ways.
"From the standpoint of economic theory...there's no fundamental distinction between selling euros and buying magic wands," notes Ted Castronova, an associate professor at the University of Indiana at Bloomington who is also an expert on virtual economies. "They carry value with them. If you're going to tax exchanges in the real world, you've got to tax exchanges in the virtual world, in economic theory." True enough, but there are certain assets and forms of goods that do have inherent value which aren't taxed until you sell them - autographs, for example, or even stock unless you earn dividends on it.
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