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Virtual Economies Attract Real-World Tax Attention
doug141 writes to point out a Reuters story on the attention tax authorities are beginning to focus on virtual economies. From the article: "Users of online worlds such as Second Life and World of Warcraft transact millions of dollars worth of virtual goods and services every day... People who cash out of virtual economies by converting their assets into real-world currencies are required to report their incomes to the U.S. Internal Revenue Service or the tax authority where they live in the real world... 'Right now we're at the preliminary stages of looking at the issue and what kind of public policy questions virtual economies raise — taxes, barter exchanges, property and wealth,' said Dan Miller, senior economist for the Joint Economic Committee of the U.S. Congress."
News flash: When you make money, you owe income tax on it. Doesn't matter if the money comes from real-world work, virtual-world work, services, corporate gifts, or even illegal activity. The second you get U.S. dollars for your work, the IRS gets to claim a chunk of them.
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When dealing with illiquid assets (such as real estate or, in this case, baseball cards) you are only required to recognize and pay taxes on income when you convert the illiquid asset into cash or a cash equivalent. When you trade illiquid assets, though, you keep your original basis for tax purposes. If you paid a nickel for your baseball card and I paid $500 for mine, we can swap without being taxed but when you sell your card you will be taxed on the sale price less your original basis (.05) as will I, even though the card you're selling was bought for $500 and the card I'm selling was bought for $.05.
There's one cool tax consequence of this, btw. As a taxpayer, you can allocate basis when you receive both cash and an illiquid asset in exchange for your own asset. So, if I buy my card for $500 and you bought yours for $.05, I can sell you my card for $500 plus your card and not owe any taxes until I sell your card. For baseball cards that's small potatos, but for things like real estate it can make a huge difference in whether a transaction is profitable or not.