Quote from: JoelKatz on July 22, 2011, 12:38:25 AM

Quote from: mpfrank on July 22, 2011, 12:34:19 AM

Quote from: JoelKatz on July 22, 2011, 12:28:22 AM

Say I play World of Warcraft and I kill a boss and get an item worth 10 gold. If the fair market value of that 10 gold is $5, do I have a taxable gain of $5? (As I understand it, the answer in the United States is "nobody knows".)

I would guess the IRS isn't interested in WoW gold. Although that might be a mistake on their part. Some people have made a lot of money off of Chinese sweatshops that play WoW and rake in the gold...

They are definitely interested in businesses that extract money at the end. For example, if I kill WoW bosses for money and sell those items on eBay, there's no question the IRS wants me to pay income tax on the dollars I get. I can deduct my basis in the item and if I really do play WoW for profit, I can deduct my reasonable business expenses too.

The question is -- what if I never pass through to dollars? What if I earn Bitcoins for consulting -- how is that materially different from getting an item for killing a boss on WoW? And if I buy hardware with my bitcoins, how is that materially different from buying an item at auction in WoW?

The problem is that if they're not taxable if they don't contact a real currency, then you really can bypass income and sales taxes. And if they are taxable even if they don't contact a real currency, then playing WoW could run up a tax bill even if you have no intent to ever cash out.

Bitcoin unit is an encrypted piece of data transmitted by p2p network, it doesn't fall under legal definition of commodity that barter taxation could be applied to nor it is security or currency http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1817857. And according to CampBX it is impossible to explicitly define bitcoin and therefore create a law that affects only bitcoin http://www.theregister.co.uk/2011/07/10/camp_bx_goes_live/