Julian Dibbell has an interesting piece in the Jan/Feb issue of Legal Affairs where he explores the idea of whether the trading of virtual "goods" in virtual worlds could constitute an income-generating, and therefore, taxable exchange under the IRS rules of barter. This may sound ridiculous on the face of it, but because virtual world goods now have real-world market values, there is a legal argument here (albeit an unsettling one for anybody who plays online multiplayer games or hangs out in SecondLife). The good news is that, when he pursued the question with IRS officials, they cocked their heads to the side like dogs hearing a high-pitched noise, i.e. don't expect to see 1099 forms shipping with multiplayer games anytime soon.Link
Reader comment: OM says: "…This whole “can profits off of selling WoW items be taxed” rings of a similar predecessor incident from the Golden Days of the dial-up BBS world. Back in the early 90’s, some former IRS worker was running a WWIV-based BBS, and somehow – probably through a drug-and-kiddie-porn induced brain hemorrhage – concluded that downloads are taxable income. That’s right, according to his addled excuse for a mind, if you downloaded a Doom .WAD file, or a .JPEG of Ginger Lynn taking on five guys, or even a text file showing you how to cheat at Trade Wars, you owed Uncle Sam and the IRS money. Of course, the Sysop in question also required real names *and* addresses to access his BBS, and was actually sending 1099 forms back to anyone using his BBS, telling them they needed to file them with their income tax returns or they’d get nailed in an audit. This caused a major uproar in the WWIVnet community, and actually spread across to other BBS networks as a major threat to everything associated with BBSing. One WWIVnet Sysop – Filo – took the matter before a judge *and* an IRS official, and the two of them concluded this former IRS worker was nuts, and that downloads *not* taxable income. In fact, the IRS official made it clear that it would have been virtually impossible to have enforced such a ruling in favor of taxing downloads, due to the sheer logistics of the situation – decentralized networks, stand-alone systems, unpublished phone numbers, lack of proof of identity, etc, etc. In fact, the best they could have hoped for was to collect sales tax on any fees collected for actual access to the BBS, and even then most Sysops were declaring that as donations for non-profit, and going after so little an amount – he estimated the average tax collected per BBS for just access fees at less than $5-$10 a year – would have been far more costly even with penalties than it would have been worth.
…And when you think about it, the BBS downloads case probably set a precedence of sorts; the same reasoning the IRS took at the time is probably the same reason why you don’t see the IRS trying to tax BitTorrent, eDonkey, Kazaa, Napster and iTunes downloads, much less those off of “legit” filesharing sites such as those run by some of the online computer rags, or the WAD and Mod sites for the hundreds of games out there. It really would be akin to charging a tax on farts and then trying to enforce collection on each and every outgassing. The IRS may be greedy, but they’re not *that* dumb."