The possibility of the U.S. government taxing virtual property amassed by users in online worlds like Second Life and World of Warcraft is by no means new. That having been said, Congress may be taking another look at the subject of taxing in-world gains based on the recent recommendation of the United States Taxpayer Advocate Nina Olson (FYI: the U.S. Taxpayer Advocate is the only employee of the IRS authorized to make legislative proposals directly to Congress).

While the 2008 Annual Report to Congress from Olsen’s office suggests taxing virtual property as one viable means by which Congress can deal with the issue, the Advocate’s recommendations would be better described as pointing out the varied reasons for confusion among taxpayers as to whether virtual property is taxable and urging Congress to take steps to clarify the government’s position on the matter. As for whether the report favors including or exempting in-world transactions for tax purposes, the neutrality of the Taxpayer Advocate is evidenced by positive statements that “promulgating guidance would likely promote voluntary compliance even if it exempts in-world transactions from tax.”

Regardless of whether the report leads to congressional action on the subject of taxing virtual property, the portions of the National Taxpayer Advocate’s 2008 Annual Report to Congress dealing with virtual property make for an interesting read based on its even-handed and comprehensive treatment of points both for and against the taxation of virtual property and in-world transactions. The discussion of taxing virtual property begins at page 214 in Volume I, Section I of the National Taxpayer Advocate’s 2008 Annual Report to Congress, made available courtesy of the United States Internal Revenue Service.