Don't Tax Virtual Assets Until They Are Sold

Posted on March 22, 2006

As the tax deadline looms closer it is important to look back at the issue of taxing virtual assets. News.com has an article that discusses the idea of taxing not only real world earnings from the sale of virtual assets (which are taxable) but also taxing the player's current stash of as-yet-unsold virtual assets like virtual property, gold coins, magic swords, etc.

The idea first appeared in Legal Affairs magazine in an article called, "Dragon Slayers or Tax Evaders." Fortunately, the IRS has so far only said, "that it expects players to report any real-world earnings from the sale of virtual goods." One expert, a Stanford Law School professor, quoted in the article has the best answer.

Stanford Law School professor Joseph Bankman says, "I think the common-sense answer is that the IRS wouldn't and shouldn't go after folks until they sell the assets. The common sense reason for this is that for most folks, the 'assets' represent enjoyment value--what we call imputed income--that's not taxed. It's a little bit like getting an autograph of a baseball player or movie star. You could sell the autograph, and folks do, but we don't tax folks who get the autographs and don't sell them."

That is really the way it should be handled. It would be far too annoying and complex to try it any other way.