Should We Tax Virtual Worlds?

Catherine Rampell (economix) discusses a new law review article (Yale) by Leandra Lederman, a tax law professor at the Indiana University Maurer School of Law, Bloomington. Catherine excerpts several paragraphs, including this:

[P]rofits received in the form of Lindens (Second Life’s currency) should be taxed in much the same way profits received via PayPal, a widely used electronic-payment system, are. Although Second Life profits could instead be taxed once the taxpayer sells for real money (“cashes out”), that would create a special exception for Second Life that does not exist for platforms such as eBay. It would facilitate abuse and distort economic activity.

This seems to be overstepping some sensible grounds. I think it is inevitable that one day all money that is converted from Linden dollars to USD will be taxable, but I do not think we want to start taxing in-game transactions. The IRS would have to issue a rule about what actually constitutes a game and what doesn't, and given the ambiguity inherent in these worlds, this would be problematic and could stifle innovation. The author suggests SL is equivalent to Ebay, but this hardly seems to be the case. Anyway, it's an interesting discussion.

Speaking of the IRS, the National Taxpayer Advocate released its Annual Report to Congress earlier this month. It included a 13 page section on taxing virtual worlds. You should read Dan Miller's analysis of that report at his blog, Economics of Virtual Worlds.