Article on Taxpayer Guidance Mitigating Tax Compliance Risks

Jeffrey Anand (Hofstra University School of Law) recently published an article entitled, Virtual Economies Virtually Unregulated: How Clear Taxpayer Guidance Can Mitigate Tax Compliance Risks, 43 Hofstra L. Rev. 253-290 (2014).  Provided below is a portion of the article’s introduction:

With the national debt rapidly approaching  $18 trillion, the need for the U.S. government to increase revenue has soared to new heights. In light of this fiscal crisis, the government has consistently sought ways to increase revenue through its taxing power by: increasing marginal tax brackets; implementing new taxes; and imposing additional reporting requirements to foster compliance. Despite these initiatives, the government has failed to provide clear and comprehensive guidance to taxpayers and practitioners regarding tax consequences arising from virtual economies and virtual currencies, multi-billion dollar industries, and growing sources of noncompliance with the existing tax code.

Virtual worlds provide a continuous and growing source of entertainment for individuals, primarily in the form of simulated interactions between characters in constantly changing environments. Scripted virtual worlds provide social havens for players seeking to express themselves in contexts other than everyday life, enabling them to quest, raid, and band together with other players to achieve common goals. On the other hand, unscripted virtual worlds offer minimal guidance to participants, and instead, focus on merely providing a simulated world, leaving the level of interaction purely up to the individual. Regardless of which type of virtual world one chooses to engage in, barter transactions, exchanges, prizes, in-game windfalls, and sales of virtual goods for real currency may give rise to potential tax consequences.