The IRS' taxpayer advocate has suggested the agency take a proactive posture toward real money transactions (RMT) in virtual worlds. "Proactive posture," in IRS speak, means "tax it."
In her annual report, Nina Olson, whose job is to recommend to the IRS "how to improve the average consumer's tax-paying process," noted that more than $1 billion changed hands in RMT during 2005, and that more than 16 million participate in virtual worlds "many of which have their own virtual economies and currencies."
The problem, she said, is that individuals and firms within these worlds who make enough of an income to get into hot water if they didn't report it, don't know how best to do so on their tax returns. "Economic activities in virtual worlds may present an emerging area of tax noncompliance, in part because the IRS has not provided guidance about whether and how taxpayers should report such activities," she said in her annual report to the IRS.
She's suggesting that the IRS issue guidance addressing how taxpayers should report these kinds of economic activities. The good news, it legitimises and mainstreams these virtual worlds and their economies somewhat; the bad news, anything legitimate and mainstream pays taxes.
China's already taxing RMT at 20 percent. Olson's suggestion isn't like that or sales tax, it regards how sellers report it as income, so it doesn't need a new chapter of the tax code per se. But "active guidance" to "improve voluntary compliance" with reporting income can definitely be taken to mean, "where's my money, man."
Whatever the IRS does, I really do hope they provide some sort of threshold for RMT, because I can scarcely imagine that selling a few $20 items in a virtual world would require filing Schedule C, the same way Joe Average with a real job elsewhere doesn't report the video games he sells on Half.com.
IRS May Push for Tax Compliance in Virtual Worlds [Washington Post via GameRates, thanks Andrew S.]