Interesting article today on CNNMoney.com: Second Life’s Looming Tax Threat: Come April 15 Profits Earned Online Must be Reported to the IRS. But What About "Money" That’s Virtual?, by Grace Wong:
In case you haven’t noticed, Second Life is booming, and its economy has boomed too – putting the virtual reality world in the crosshairs of tax authorities, experts say. …
Under current tax law, it’s clear that earnings in real U.S. dollars generated within virtual realities are reportable to the IRS. If a Second Life real estate mogul cashes out of her in-world property portfolio, she’s liable to pay income tax on any profit that’s been exchanged into real greenbacks – just as an eBay seller is responsible for reporting income generated from an online sale.
Tax law is murky, however, when it comes to dealings that occur solely within Second Life or other computer-simulated environments. For instance, is a transaction that occurs only in Linden dollars and doesn’t involve any real-world, dollar exchange taxable? Questions like that have the tax community buzzing about the issue, said Paul Caron, a professor at the University of Cincinnati who edits the TaxProf Blog.
The issue has also attracted the interest of the Joint Economic Committee of Congress, which said last fall that it was studying issues related to the economies of virtual realities like Second Life and World of Warcraft, an online role-playing game. Results of the study – due to be released before the end of the month – suggest that "as long as virtual activity stays within the virtual economy, it shouldn’t be taxable," said Christopher Frenze, executive director of the JEC, which conducts policy research on economic issues facing Congress
But there is a valid argument that even profits that come from, and stay in, the virtual world are taxable, according to Bryan Camp, a professor at Texas Tech University School of Law. "As soon as you start looking at what’s going on in these worlds, they look a lot like real economic transactions," he said. Even if profit isn’t realized in real dollars, there’s still an exchange of items of economic value. In the real world, if someone trades goods or services without the exchange of real money – also known as bartering – that’s a taxable event, Camp noted.
Given all the attention paid to the topic, the IRS eventually will have to respond to the situation, said Caron. "I think it’s on the IRS’s radar screen in a way it was not six months ago," he said.
