A recent news story reports that Second Life residents will soon be able to order -- from within SL -- real pizza for delivery to their home. (This ability was once available for players of Everquest, but has been discontinued.) More importantly, residents can pay for the pizza with
Now, in and of itself, this is not a major development that will dramatically change the nature of virtual worlds. Nonetheless, this service does cross a meaningful line that opens the door for much more complex treatment of virtual worlds: using virtual currency for the purchase of real goods or services.
Suppose I have a Second Life business that generates
What is the proper tax treatment of real-world purchases using virtual currency? Should I report $20 as ordinary income? As barter income? If I do, that could raise my compliance costs since I have to file Schedule C. What about horizontal equity – the tax treatment of individuals in similar economic circumstances? If I don’t report the $20, but my buddy who spends $20 on pizza using salary income does, then I will end up paying less in taxes, even if he and I make exactly the same amount of income.