Submitted by dillon coil last modified Mon, 07/07/2008 - 11:24am
It may not be long before the IRS recognizes the sale of Linden Dollars for U.S. Dollars as a taxable event in the sale of property.
According to Internal Revenue Code section 61(a)(3) “gross income means all income from whatever source derived” including “gains derived from dealings in property.” If virtual property is property, wouldn’t that also mean gains derived from its sale would be includable in gross income? All income is taxable and should be reported on your tax return, but the characterization of that income within the code may significantly alter your tax liability.
The main argument in favor of taxation of virtual property is fairness. Would it really be fair to afford virtual property holders the same protections under the law as intellectual property holders while refusing to tax the sale of their property? Virtual property holders can’t have it both ways, can they?
The rate at which virtual property will be taxed will depend on how income from the sale of virtual property is characterized. Some believe that gains from the sale of virtual property should be taxed at short and long term capital gain rates. Does that mean individuals should get depreciation deductions on their virtual capital assets? Can a virtual building depreciate?
Others argue that virtual property transactions should be taxed as prize winnings or gambling income, and some even suggest the possibility of a ‘Virtual Gaming Commission’ akin to the Nevada Gaming Commission in order to assure participants a fair gaming environment. Gambling earnings are generally taxed at the highest available rate and can be offset by gambling losses, but only up to the value of an individual’s winnings for that year. This would be bad news for those making a living in the virtual world.