JEC Warns IRS: Do Not Tax Virtual Economies

Joint Economic Committee Chair Jim Saxton has issued a press release warning the IRS to not tax participants in on-line games: Virtual Economies Need Clarification, Not More Taxes:

“There is a concern that the IRS might step forward with regulations that start taxing transactions that occur within virtual economies. This, I believe, would be a mistake,” Chairman Jim Saxton said today. In response to this concern, the staff of the Joint Economic Committee has begun an examination of the public policy issues related to virtual economies. A virtual economy is defined as the universe of transactions that occur within an online community, such as Second Life or World of Warcraft. These transactions include the sale of goods and services and take place entirely within virtual economies; there is no real-world or physical exchange. However, a real-world value can often be assigned to such transactions using exchange rates or other methods.

Based on existing law, if an individual generates cash income in U.S. dollars from transactions in virtual economies, the question may arise whether a tax is due on that real-world income. However, if the transaction takes place entirely within a virtual economy, then it seems there is no taxable event. Such distinctions should be addressed and resolved in a common-sense manner. Clearly, virtual economies represent an area where technology has outpaced the law. The goal of the forthcoming JEC study is to help lawmakers understand the issues involved and head off any premature attempt to impose a tax on virtual economies.

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