So We Have to Pay Taxes on The Things We Buy With Fake Money in a Video Game Now?

Not exactly, but under certain circumstances you might! Online role playing games, made famous by games such as World of Warcraft (WoW), are a great example of the growing trend of virtual economies and virtual currencies. The relationship between the virtual economies and the actual economy and what is taxable is becoming a growing area of concern for the IRS, Congress, and taxation law in general.

To use WoW as an example, the game is based entirely online in a virtual world in which players select different mythical creatures to roam the world and defeat enemy creatures. In “living” in this world, players can buy, sell, and trade different items and weapons to complete the tasks, or quests, they may have. A virtual currency, simply called “gold” in the game, is used to buy and sell said items. While within the game, such transactions are clearly all virtual and not necessarily tied to any actual monetary transaction. But the popularity of the game has changed that dynamic and brought it very much into real world transactions.

Some items in the game have become so sought after that people are willing to pay real money for them. People would sell the items on sites such as eBay for thousands of dollars and then transfer the items within the game. This has a clear impact now on taxation, and the IRS has been concerned about it for a while. Upon the request of the Senate Finance Committee, the Government Accountability Office (GAO) issued a report on the state of virtual economies and virtual currencies and their impact on tax compliance.

The GAO’s report was somewhat inconclusive. While it indicated that the growing pervasiveness of virtual economies and currencies would certainly lead to tax compliance risks for the IRS, it was unknown to what level or what quantity. The principle compliance risks were thought to derive from innocent lack of knowledge that such transactions are taxable, or how to calculate the income. Recommendations including informal guidance from the IRS about virtual currencies on their web site, much like the informal guidance they have already posted for virtual economies.

The IRS commented that they generally agreed with the GAO’s recommendations and that steps such as more training for agents, more links to information already on their site, and new informal resources were in the works. But as the virtual economies and the spread of virtual currencies into real world transactions grows, the IRS will likely have to step up their initiatives if they want to ensure that tax losses do not also increase.