A congressional committee is exploring the idea of taxing in-game virtual economies. This is not a tax on the sale of video games themselves (especially violent ones), nor is it a tax on the sale of virtual assets in a real market like eBay. As Mike explains:

Note that the politicians aren't talking about virtual items in the game that have been converted to real dollars or other assets. That's already taxable as income. Instead, they're looking at actually taxing the items within the game based on the perceived value of those assets.

The complexity in even attempting such a system should be obvious. Different games have different economies and different currencies, and unless those currencies are convertible to real dollars there is no (easy) way to set the tax basis for the income.

If the virtual assets are not readily convertible, this would be what is known as "phantom income" - that is, income in the eyes of the IRS but not in your pocket.  This is a common topic with stock grants (especially in private companies where there is no market) or in pass-through corporate structures where income flows through to the partners even if they never actually receive the money.  While the IRS surely has no problem collecting taxes on such situations, it all depends on the value of the asset received.

The valuation is where the real complexity comes in. If you're dealing with something like Second Life where the virtual currency can be exchanged for real money, you can easily set a basis for taxation. In other words, if you have an exchange rate of $250 Linden dollars to $1 USD, I can tax the sale of a $1000 widget at $4. On the other hand, what's the valuation on something that has no market? If it's strictly virtual, then one could argue that the value is effectively zero. And yet in the corporate world, a single transaction can sometimes set a value for something even when there's no market.  That is, someone willing to invest $1,000 for 100 shares gives us a real value for a share - $10 - even if I couldn't find someone to buy or was otherwise restricted from selling. (I'm grossly oversimplifying with this example). So even if we took this route and assume that the sale of a single virtual asset on eBay sets the price for other items of the same type, you still have to manage all of that - and figuring out what is and isn't equivalent to that item (which can obviously vary from game to game).

So as much as the US government would love to be able to get its hands on more money, I doubt anything will ever come to this in light of the complexity and overhead in administrating such a system. 

Of course, I am far from a tax expert - but I would love to hear the opinions from those who are on how such a system would, or should, work.


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