Every so often we hear rumors that the government wants to tax our emails. My inbox gets flooded with chain emails about this when it happens. So far, our emails are not taxed. Whew!
But what about virtual currency? What about those online games with in-game currency? Some gamers pay cash for virtual currency. Sex has been used to gain virtual currency. Could the government tax it?
But expect to eventually get some emails stating that your virtual currency will be taxed in reality. There have been some irresponsibly written articles based off of the paper "Virtual Currency in Virtual Economies: Income Characterization Issues for Social Media Companies" in the November 21, 2011 edition of "tax notes international." The most egregious article is at AllGov.com. That is such a disappointment since it is usually a decent site as a source for information.
Just as I titled the post "Taxing the Virtual World" as an attention getter, others also gave attention grabbing titles. But the first paragraph will lead you to think that virtual currency will be taxed. If you do not read the whole article then you were just lied to.
You will see China being cited as taxing virtual currency. This too is a LIE!
What has happened is that one of the issues bought up in the original paper, "Virtual Currency in Virtual Economies," is that the law is unclear if the money made from selling your virtual currency for real money is taxable. The government is looking into that issue. China considers this money taxable. This is what is being mischaracterized. The articles are portraying the taxation of real money as the taxation of virtual currency.
The original paper also focuses on many other issues. Is virtual currency property, a deposit, a real currency, or other another type of intellectual property. In general the paper describes how in general it is not and would not be taxable. Again, the paper's arguments define that virtual currency is not taxable. It does go on to warn that the "user agreements" that online games have need to be written properly so that there is no case for taxation.