Tax Consequences of Virtual World Transactions
Online games create computer-generated settings for multiple users to interact as characters called avatars. These avatars frequently exchange goods and services in both the real and virtual worlds. Cyber-economic activities in the online world may have tax consequences that real world avatar counterparts need to consider.
The IRS has provided guidance on the tax treatment of bartering, gambling, business and hobby income - issues that are similar to activities in online gaming worlds.
In general, you can receive income in the form of money, property, or services. If you receive more income from the virtual world than you spend, you may be required to report the gain as taxable income. IRS guidance also applies when you spend more in a virtual world than you receive, you generally cannot claim a loss on an income tax return.
In addition, the IRS issued guidance on the tax consequences of various activities that apply to Internet-based activities and online businesses. This guidance can help answer questions about the tax consequences of your online virtual world activities.