Two weeks ago, the U.S. Internal Revenue Service's "taxpayer advocate," Nancy Nina Olson, announced the release of her office's annual report to Congress, a yearly federal ritual whose long and impeccable streak of unnewsworthiness was broken this year by the inclusion of an item that actually made headlines. IRS May Push for Tax Compliance in Virtual Worlds, was the Washington Post's. IRS Official Recommends Policy on Virtual World Transactions, echoed the gamers at Kotaku, and IRS Report Recommends Self-Reporting Virtual World Income, added Second Life watcher Wagner James Au at New World Notes. The stories all correctly related the basic fact of the matter: In a detailed, 13-page passage, the report urged the IRS to "proactively address emerging issues... arising from virtual worlds." And if the stories all nonetheless failed, each in its own way, to relate the real news of the matter, that's understandable, because the news here is subtle: What this report delivers, in effect, is nothing more and nothing less than official recognition that the question of virtual-goods taxation is actually, like, a question.
Believe me, this will come as news to many. Having worried this question in public for over five years now, I can attest that a lot of people have a hard time accepting that existing IRS regulations and practices, followed to their logical conclusions, could even conceivably require taxation of purely virtual income -- of the minerals you mine from asteroids in EVE Online, of the Azerothian gold you earn trading enchanting materials in World of Warcraft's auction houses. Many will nod their heads as if appreciating the complexities while at the same time -- and incidentally not unlike the Washington Post story on the Olson report -- offering little evidence that they have any meaningful idea what's being talked about. Others will make the mistake, as Kotaku's write-up did, of thinking that the issue at hand is the far less ambiguous, far less controversial, and far less interesting one of taxing real-money income from the sale of virtual goods.
But even those who recognize the true surreality of the issue will often as not prefer to believe that the IRS could only, in the end, come down on the side of common sense. And even when the multiple and mutually contradictory IRS rulings that might apply to virtual goods are laid out as clearly and as thoroughly as the taxpayer advocate has just done, they will choose to ignore the contradictions and see only the rulings that fall in with their sense of the sensible. This seems in any case to be what Au did in singling out as the report's "key point" a finding that arguably equates virtual property with deck chairs on a cruise ship -- each one "owned" perhaps by a particular passenger for the duration of the cruise but only in the most provisional and ultimately untaxable of ways.
And while I agree that's a potentially productive point, what seems ultimately to be "key" in this report is not any one, decisive argument -- whether for or against the taxation of virtual goods as such -- but a warmly inconclusive phrase that recurs at various points throughout it: "A taxpayer may wonder." As in, "A taxpayer may wonder if creating virtual items or setting out to obtain them is similar enough to farming and harvesting crops that such acquisitions are not taxable," or "a taxpayer may wonder if the acquisition and sale of virtual property for virtual dollars is nontaxable because it is similar to winning a hand of poker before leaving the table or cashing out."
A taxpayer may wonder about all these frankly nutty analogies and scenarios, in other words, without having also to wonder whether it is he himself -- and not the tax system -- that is a little nuts for entertaining them. Needless to say, this sort of permission to question the sanity of a basic economic institution would have been a lot more useful if it had been broadly handed out a few years earlier and if the institution in question were the banking system.
But I'll take it. And thank you, Nancy Nina Olson.