It was only a matter of time: A blind spot in the tax code effectively allows for some types of tax-free e-commerce transactions provided the purchase happens in a “virtual world.”
Now taxpayer advocate Nina Olson is raising the issue direct with the IRS.
WashPost: The IRS soon may keep a closer watch on the thousands, if not millions, of small firms and the self-employed that have sprouted up in virtual worlds…
Olson said the IRS hasn’t effectively been able to respond to taxpayer inquiries about how to report transactions associated with them. “Economic activities in virtual worlds may present an emerging area of tax noncompliance, in part because the IRS has not provided guidance about whether and how taxpayers should report such activities,” said Olson’s report. She suggests that to improve voluntary tax compliance, the IRS issue guidance addressing how taxpayers should report economic activities in virtual worlds.
Now that the issue is definitively on the IRS’ radar, how long until we see the first audit of a virtual business? Linden Lab, the company behind Second Life, likes to brag in its marketing that about 60,000 avatars have a positive flow of game currency — that is, they’re making money in Second Life. Should avatars get issued 1099-MISCs?
Nothing but bad news for Second Life and its competitors. In the virtual world as in the real one, there’s nothing like accounting, paying taxes, and fear of audits to chill people’s entreprenerial impulses.
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