VIRTUAL 

ECONOMIES AND 

CURRENCIES

Additional IRS 

Guidance Could 

Reduce Tax 

Compliance Risks

Report to the Committee on Finance, 

U.S. Senate

May 2013

GAO-13-516

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-13-516, a report to the 

Committee on Finance, U.S. Senate

May 2013

VIRTUAL ECONOMIES AND CURRENCIES

Additional IRS Guidance Could Reduce Tax 

Compliance Risks

Why GAO Did This Study

Recent years have seen the 

development of virtual economies, 

such as those within online role-playing 

games, through which individual 

participants can own and exchange 

virtual goods and services. Within 

some virtual economies, virtual 

currencies have been created as a 

medium of exchange for goods and 

services. Virtual property and currency 

can be exchanged for real goods, 

services, and currency, and virtual 

currencies have been developed 

outside of virtual economies as 

alternatives to government-issued 

currencies, such as dollars. These 

innovations raise questions about 

related tax requirements and potential 

challenges for IRS compliance efforts.

This report (1) describes the tax 

reporting requirements for virtual 

economies and currencies, 

(2) identifies the potential tax 

compliance risks of virtual economies 

and currencies, and (3) assesses how 

IRS has addressed the tax compliance 

risks of virtual economies and 

currencies. 

To accomplish these objectives, GAO 

reviewed tax laws, IRS guidance and 

program documents, federal program 

internal control guidance, and 

interviewed IRS officials and 

knowledgeable experts on the topics.

What GAO Recommends

GAO recommends that IRS find 

relatively low-cost ways to provide 

information to taxpayers, such as on its 

website, on the basic tax reporting 

requirements for virtual currencies. In 

commenting on a draft of this report, 

IRS agreed with our recommendation.

What GAO Found

Transactions within virtual economies or using virtual currencies could produce 

taxable income in various ways, depending on the facts and circumstances of 

each transaction. For example, transactions within a “closed-flow” virtual 

currency system do not produce taxable income because a virtual currency can 

be used only to purchase virtual goods or services. An example of a closed-flow 

transaction is the purchase of items to use within an online game. In an “openflow” system, a taxpayer who receives virtual currency as payment for real goods 

or services may have earned taxable income since the virtual currency can be 

exchanged for real goods or services or readily exchanged for governmentissued currency, such as U.S. dollars. 

Virtual economies and currencies pose various tax compliance risks, but the 

extent of actual tax noncompliance is unknown. Some identified risks include 

taxpayers not being aware that income earned through virtual economies or 

currencies is taxable or not knowing how to calculate such income. Because of 

the limited reliable data available on their size, it is difficult to determine how 

significant virtual economy and currency markets may be or how much tax 

revenue is at risk through their usage. Some experts with whom we spoke 

indicated a potential for growth in the use of virtual currencies.

Beginning in 2007, IRS assessed the tax compliance risks from virtual 

economies, and in 2009 posted information on its website on the tax 

consequences of virtual economy transactions. However, IRS has not provided 

taxpayers with information specific to virtual currencies because of other 

priorities, resource constraints, and the need to consider the use of these 

recently-developed currencies, according to IRS officials. By not issuing 

guidance, IRS may be missing an opportunity to address virtual currency tax 

compliance risks. Given the uncertain extent of noncompliance with virtual 

currency transactions, formal guidance, such as regulations, may not be 

warranted. According to IRS officials, formal guidance requires extensive review, 

which adds to development time and cost. However, IRS may be able to develop 

more timely and less costly informal guidance, which, according to IRS officials, 

requires less extensive review and can be based on other existing guidance. An 

example is the information IRS provides to taxpayers on its website on the tax 

consequences of virtual economy transactions. Posting such information would 

be consistent with IRS’s strategy for preventing and minimizing taxpayers’ 

noncompliance by helping them understand and meet their tax responsibilities.

View GAO-13-516. For more information, 

contact James R. White at (202) 512-9110 or 

whitej@gao.gov.
Page i GAO-13-516 Taxation of Virtual Economies and Currencies

Letter 1 

Background 3

Virtual Economy and Currency Transactions May Be Taxable If 

They Produce Income 10

Virtual Economies and Currencies Pose Various Tax Compliance 

Risks, but the Extent of Noncompliance Is Unknown 12

IRS Has Provided Some Guidance on Tax Reporting Requirements 

for Virtual Economies but Not for Virtual Currencies Used 

Outside of Virtual Economies 15

Conclusions 16

Recommendation for Executive Action 17

Agency Comments and Our Evaluation 17

Appendix I Comments from the Internal Revenue Service 19

Appendix II GAO Contact and Staff Acknowledgments 22

Figures

Figure 1: Types of Virtual Currency Systems 4

Figure 2: How Bitcoins Enter Circulation and Are Used in 

Transactions 7

Contents 
Page ii GAO-13-516 Taxation of Virtual Economies and Currencies

Abbreviations

EBEI Electronic Business and Emerging Issues

IRS Internal Revenue Service

MMORPG massively multiplayer online role-playing game

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

copyrighted images or other material, permission from the copyright holder may be 

necessary if you wish to reproduce this material separately.
Page 1 GAO-13-516 Taxation of Virtual Economies and Currencies

441 G St. N.W.

Washington, DC 20548

May 15, 2013

The Honorable Max Baucus

Chairman

The Honorable Orrin Hatch

Ranking Member

Committee on Finance

United States Senate

Recent years have seen the development of virtual economies, such as 

those within online role-playing games, through which individual 

participants can earn and exchange virtual goods and services. Within 

some virtual economies, virtual currencies have been created as a 

medium of exchange for goods and services. Virtual property and 

currency can have economic value outside of virtual economies, such as 

when individuals trade these virtual goods for dollars or other 

government-issued currencies. More recently, virtual currencies have 

been developed outside of virtual economies as alternatives to 

government-issued currencies to exchange for real-world goods and 

services. These innovations raise questions about their related tax 

requirements and whether their increased adoption could pose 

challenges for the Internal Revenue Service (IRS) in its efforts to ensure 

tax compliance.

You asked us to review virtual economies and currencies and IRS’s 

approach to addressing their tax implications. This report’s objectives are 

to (1) describe the tax reporting requirements for virtual economies and 

currencies, (2) identify the potential tax compliance risks of virtual 

economies and currencies, and (3) assess how IRS has addressed the 

tax compliance risks of virtual economies and currencies.

To describe reporting requirements for virtual economies and currencies, 

we reviewed the Internal Revenue Code and applicable IRS regulations, 

including relevant sections of the Internal Revenue Manual, and 

interviewed IRS officials. We also reviewed academic articles and 

interviewed academics whose research focuses on virtual currencies and 

taxation of virtual transactions, as well as tax practitioners and 

representatives from the American Institute of Certified Public 

Accountants. We selected academics to interview based on criteria 

including the recognition and citations of their research in the relevant 

literature. We selected tax practitioners and representatives based on 

 
 

Page 2 GAO-13-516 Taxation of Virtual Economies and Currencies

their association with an organization with widely-recognized expertise in 

federal tax matters. 

To identify potential compliance risks associated with virtual currencies 

and virtual economies, we reviewed and analyzed legal and academic 

literature and government reports, including the National Taxpayer 

Advocate’s 2008 Annual Report to Congress and the European Central 

Bank’s October 2012 report on virtual currencies. We then discussed 

these compliance risks with knowledgeable experts, including the Bitcoin 

Foundation, a virtual currency user group; tax professionals, including 

members of the American Institute of Certified Public Accountants; 

representatives from a company that publishes a virtual economy 

platform; and academics who have written about virtual currencies and 

taxation of virtual economy transactions. We selected experts based on 

criteria including their recognition and citations in the literature, and their 

expertise and recognition in representing taxpayers in federal tax matters 

or in representing virtual economy or currency concerns. We interviewed 

IRS officials knowledgeable on virtual economies and currencies and 

overall IRS tax compliance enforcement efforts. We also performed 

Internet searches to see what information was circulating for determining 

the proper tax treatment of virtual economy and currency transactions.

To assess how IRS has addressed compliance risks, we reviewed IRS 

documentation, including training manuals, examination guides, and 

internal reports detailing compliance challenges posed by virtual 

economies. We also interviewed knowledgeable IRS staff on the agency’s 

efforts to learn about virtual economies and currencies and address them 

through compliance efforts. We compared IRS’s efforts to federal 

program management guidance on gathering and monitoring information 

to identify and assess program risks, including the internal control 

standards for federal government and our Internal Control Management 

and Evaluation Tool.

1 Such guidance stipulates that agencies should 

have adequate mechanisms to identify risks to agency programs arising 

from external factors and that agencies should consider and, if 

appropriate, address the risks associated with technological 

advancements and developments and risks resulting from business and 

economic changes, among other types of changes. We also reviewed 

 

1GAO, Internal Control Management and Evaluation Tool, GAO-01-1008G (Washington, 

D.C.: August 2001).
 

Page 3 GAO-13-516 Taxation of Virtual Economies and Currencies

general IRS procedures and plans for providing information to taxpayers 

to help them comply with tax requirements included in IRS’s Taxpayer 

Assistance Blueprint and related progress reports to Congress.2

We conducted this performance audit from September 2012 to May 2013 

in accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

There are no legal definitions for a virtual economy or currency, but 

generally, a virtual economy is comprised by the economic activities 

among a community of entities that interact within a virtual setting, such 

as an online, multi-user game. Virtual economies can be closed, meaning 

the economic activities and units of exchange used within the community 

do not interact with the real economy outside of the virtual environment 

setting, or they can be open, with some economic activity occurring in 

both the virtual setting and the real economy. A virtual currency is, 

generally, a digital unit of exchange that is not backed by a governmentissued legal tender. Virtual currencies can be used entirely within a virtual 

economy, or can be used in lieu of a government-issued currency to 

purchase goods and services in the real economy. Some virtual 

economies may function similarly to barter exchanges,3 where bartering is 

the exchange of goods or services in lieu of monetary payments. For 

example, a carpenter may build a desk for a dentist in exchange for 

dental work. Barter transactions are taxable transactions, and taxpayers 

must report the fair market value of the good or service received on their 

tax returns. Some of the variations in virtual currencies and their 

interaction with the real economy are shown in figure 1.

 

2The 2007 Taxpayer Assistance Blueprint—a 5-year strategic plan for improving service to 

taxpayers—is a collaborative effort of IRS, the National Taxpayer Advocate, and the IRS 

Oversight Board. Congress has received annual update reports on the implementation of 

the blueprint.

3The term “barter exchange” means any organization of members providing property or 

services who jointly contract to trade or barter such property or services. 26 U.S.C. § 

6045.

Background 
 

Page 4 GAO-13-516 Taxation of Virtual Economies and Currencies

Figure 1: Types of Virtual Currency Systems

In a “closed-flow” virtual currency system, a virtual currency can be used 

only within a game or virtual environment to purchase virtual goods or 

services, such as additional tools to use within a game. Virtual tools 

amassed by players can be traded in a game for other in-game assets or 

to advance to higher play levels, but they hold no value outside of the 

game and cannot be cashed out for dollars or other government-issued 

currencies.

In a hybrid system, one or more of the flows between the virtual currency 

and real dollars or goods and services is closed. For example, 

participants can purchase virtual currency with real dollars or earn virtual 

currency by completing tasks, such as taking surveys, and then use the 

currency to purchase real or virtual goods and services. However, the 

virtual currency might not be exchangeable back into real dollars. An 

example of a hybrid system is some massively multiplayer online roleplaying games (MMORPG). MMORPGs allow users to create avatars, or 

graphical representations of themselves, that exist within a digital world 

and interact with other avatars around the globe to carry out tasks. Some 

MMORPGs operate as a closed-flow system, but some of these closed-
 

Page 5 GAO-13-516 Taxation of Virtual Economies and Currencies

flow systems can leak into the real economy via third-party transactions. 

Some MMORPGs, like World of Warcraft®, a large MMORPG, have thirdparty exchanges that allow users to exchange virtual goods for real 

dollars. This interaction between the virtual and real economies can be 

limited by the game’s distributor through terms of use agreements.

In an “open-flow” system, virtual currencies can be used to purchase both 

real and virtual goods and services, as well as be readily exchanged for 

government-issued currency, such as U.S. dollars. One example of an 

open-flow currency designed primarily for use in a virtual economy is 

Second Life® LindenTM dollars. Second Life, a product of Linden Lab®, is a 

virtual economy created in 2003 that has its own virtual currency. 

“Residents” of Second Life create avatars and interact with other avatars 

in a user-defined and user-created environment. Within Second Life, 

residents can create virtual assets, such as buildings that they rent or sell 

to other residents, or operate virtual businesses, such as virtual clothing 

stores that sell virtual goods to other residents. Transactions taking place 

within Second Life use Linden Lab’s virtual currency, Linden dollars. 

Second Life residents can sell their Linden dollars to other residents for 

U.S. dollars through the LindeXTM exchange, which uses third-party 

payment networks to process the payments and allows residents to cash 

out of the Second Life world.

An open-flow currency can also be developed and designed primarily to 

be used to purchase real goods and services outside an online game 

virtual economy. An example is bitcoin, a decentralized digital currency 

that uses a peer-to-peer computer network to move bitcoins around the 

world. Developed in 2009 by an anonymous programmer or 

programmers, bitcoin is a privately-issued digital currency that exists only 

as a long string of numbers and letters in a user’s computer file. Bitcoins 

use cryptography to secure and safeguard against counterfeiting. Unlike 

U.S. dollars and other currencies, bitcoin is not government issued and 

does not have a physical coin or bill associated with its circulation, such 

as a Federal Reserve note. Bitcoin has grown in popularity since its

introduction and, according to academics and user groups with whom we 

spoke, is the most widely circulated virtual currency available. Bitcoins act 

as a real world currency in that users pay for real goods and services, 

such as coffee or web development services, with bitcoins as opposed to 

U.S. dollars or other government-issued currencies. Third-party 

exchanges allow bitcoin users to exchange their bitcoins back to 

government-issued currencies, such as U.S. dollars, euro, or yen.
 

Page 6 GAO-13-516 Taxation of Virtual Economies and Currencies

Bitcoins are created and entered into circulation through a process, called 

mining, that members of the bitcoin network perform. To perform the work 

of mining, bitcoin miners download free bitcoin software that they use to 

solve complex equations. These equations serve to verify the validity of 

bitcoin transactions by grouping several transactions into a block and 

mathematically proving that the transactions occurred and do not 

represent double spending of a bitcoin. When a miner’s computer solves 

an equation, the bitcoin network accepts the block of transactions as valid 

and creates 25 new bitcoins and awards them to the successful miner.4

By the bitcoin program’s design, there will be a maximum of 21 million 

bitcoins in circulation once all bitcoins have been mined, which the

program’s design projects to be in the year 2140. In addition to mining 

new bitcoins, users can also acquire bitcoins already in circulation by 

purchasing them on third-party exchanges or accepting bitcoins as gifts or 

payments for goods or services. Figure 2 shows an example of how 

bitcoins enter circulation and how an individual can use bitcoins to pay for 

real goods or services.

 

4According to bitcoin’s design, the number of bitcoins issued to successful miners will 

halve every time the network reaches 210,000 blocks, or approximately every four years. 

From inception through November 2012, rewards were 50 bitcoins. In 2016, rewards are 

expected to halve again to 12.5 bitcoins. 
 

Page 7 GAO-13-516 Taxation of Virtual Economies and Currencies

Figure 2: How Bitcoins Enter Circulation and Are Used in Transactions
 

Page 8 GAO-13-516 Taxation of Virtual Economies and Currencies

Bitcoin transactions can be anonymous, since all that is needed to 

complete a transaction is a bitcoin address, which does not contain any 

personal identifying information. Only the private key holder knows the 

identity of the bitcoin address owner.

The size of the virtual economy and currency markets is unclear due to 

limitations in available data. For example, some companies that offer 

virtual economy platforms are private firms and do not report statistics 

about their virtual worlds’ activities. Further, due to the global nature of 

the Internet, borderless transactions, and an individual’s ability to have 

multiple virtual economy or currency accounts, we did not find reliable 

data available indicating the use of virtual economies or currencies by 

individuals or exclusively by U.S. taxpayers.5 Even with these limitations, 

some data exist that may provide some context for the size of virtual 

economy and currency markets.

• According to bitcoin’s peer-to-peer-network-generated statistics,6 as of 

May 1, 2013, approximately 11 million bitcoins were in circulation.7

Bitcoin exchange rates against the U.S. dollar historically have been 

volatile. From May 2012 through February 2013, prices ranged 

between $5 and $20 for 1 bitcoin. Prices increased through March 

2013, and then from April 1, 2013, to May 1, 2013, ranged between 

$79 and over $237 for 1 bitcoin.

8 In the same time period, the number 

of bitcoin transactions per day ranged from approximately 8,000 to 

70,000 transactions per day.

• As of December 31, 2012, there were over 9.6 million active users of 

World of Warcraft, a large MMORPG, according to Blizzard 

Entertainment®

, the company that develops and publishes the World 

of Warcraft games.

 

5Given these limitations, we did not test the reliability of data, such as the data generated 

from the bitcoin network, but are providing some figures to provide context for the possible 

size of these markets.

6http://blockchain.info. (Date accessed May 1, 2013.)

7Due to data limitations, it is difficult to calculate the velocity, or the rate at which bitcoins 

are spent, and the number of transactions between unique users in a given time period.

8https://mtgox.com. (Date accessed May 1, 2013.) https://mtgox.com operates the largest 

bitcoin exchange. The site has daily and monthly limits on how many bitcoins may be 

exchanged back to U.S. dollars or other virtual or government-issued currencies. These 

limits may be raised if users provide additional documentation confirming their identity.
 

Page 9 GAO-13-516 Taxation of Virtual Economies and Currencies

• According to Linden Lab, creators of Second Life, residents 

exchanged more than US$150 million worth of Linden dollars within 

Second Life’s economy in the third quarter of 2010.

IRS is responsible for ensuring taxpayer compliance for all economic 

areas, including virtual economies and currencies. One mechanism that 

assists IRS in enforcing tax laws is information reporting, through which 

third parties report to IRS and taxpayers on certain taxpayer transactions. 

For example, subject to certain thresholds, third-party settlement 

organizations are required to report on Form 1099-K payments in 

settlement of third-party network transactions.9 A common example of a 

third-party settlement organization is an online auction-payment facilitator, 

which operates as an intermediary between buyers and sellers by 

transferring funds between their accounts in settlement of purchases. 

Another type of third-party information reporting is performed by barter 

exchanges, which, generally, are organizations that facilitate barter 

transactions among exchange members. Such barter exchanges are 

required to report on Form 1099-B each member’s barter transactions 

proceeds. Third-party information reporting is widely acknowledged to 

increase voluntary tax compliance, in part because taxpayers know that 

IRS is aware of their income.

Likewise, in its role in administering the tax code, IRS must implement the 

laws Congress enacts through detailed guidance. To accomplish this 

responsibility, IRS publishes several forms of guidance, such as 

regulations, revenue rulings and procedures, and notices. IRS also 

provides more informal guidance on its website based on factors such as 

perceived need, media coverage, or IRS staff identifying an emerging tax 

compliance issue. As outlined in IRS’s Taxpayer Assistance Blueprint and 

related reports, a key part of IRS’s strategy for preventing and minimizing 

noncompliance is to outreach to taxpayers to help them understand and 

meet their tax responsibilities. One of the guiding principles of this 

approach is to enhance IRS’s website so that it becomes the first choice 

of taxpayers for obtaining the information they need to comply.

 

9Third-party settlement organizations must file Form 1099-K if gross payments to a payee 

exceed $20,000 and there are more than 200 transactions with the payee in a given tax 

year.
 

Page 10 GAO-13-516 Taxation of Virtual Economies and Currencies

Transactions within virtual economies or using virtual currencies could 

produce taxable income in a number of ways depending on their specific 

facts and circumstances. U.S. tax laws and regulations generally require 

taxpayers to report and pay taxes on all income, regardless of the source 

from which the income was derived;10 there are no additional rules 

specific to virtual currencies or economies. For example, similar to cash 

transactions, there are no third-party reporting requirements specific to 

virtual economy or currency transactions, as there are with some other 

types of electronic funds transactions, such as with transactions 

conducted through third-party payment networks. Taxpayers are required 

to account for any taxable income, including income that is not subject to 

third-party information reporting. The following examples show how some 

taxpayers may incur a tax liability when using a virtual currency for the 

three types of virtual currency systems described in the background of 

this report. We discussed these examples with IRS officials, who agreed 

with how we characterized the potential tax implications.

• David plays an online game through which he is issued money that he 

can use to purchase properties within the game. These properties 

 

10For federal tax purposes, all income is taxable, although the tax code excludes some 

items from income, such as gifts or inheritances, subject to exceptions, while it allows 

other items to be deducted to reduce taxable income, subject to limitations and 

restrictions, such as trade or business expenses. 

Virtual Economy and 

Currency 

Transactions May Be 

Taxable If They 

Produce Income
 

Page 11 GAO-13-516 Taxation of Virtual Economies and Currencies

have no value outside the game and David cannot exchange his 

online money for U.S. dollars. David has not engaged in a taxable 

transaction.

• Ann plays an online game and amasses virtual tools that are valuable 

to her avatar. The online game does not allow users to directly 

exchange their virtual tools for U.S. dollars, but rather they can do so 

using a third-party, making this a hybrid system. Ann uses a thirdparty exchange not affiliated with the online game to coordinate the 

transfer of her virtual tools to another player in exchange for U.S. 

dollars. The transfer is conducted by the third-party exchange and 

payment is mediated by a third-party payment network. Ann may have 

earned taxable income from the sale of these virtual tools.
 

Page 12 GAO-13-516 Taxation of Virtual Economies and Currencies

• John is a resident of Second Life. He rents virtual property to other 

residents who pay him in Linden dollars. At the end of the year, John

exchanges his Linden dollars for U.S. dollars and realizes a profit. 

John may have earned taxable income from his activities in Second 

Life.

• Bill is a bitcoin miner. He successfully mines 25 bitcoins. Bill may 

have earned taxable income from his mining activities.

• Carol makes t-shirts and sells them over the Internet. She sells a tshirt to Bill, who pays her with bitcoins. Carol may have earned 

taxable income from the sale of the t-shirt.

IRS, tax experts, academics, and others have identified various tax 

compliance risks associated with virtual economies and currencies, 

including underreporting, mischaracterization, and evasion. These risks 

are not unique to virtual economies and currencies, as they also exist for 

other types of transactions, such as cash transactions, where there are 

not always clear records or third-party tracking and reporting of 

transactions. The tax compliance risks we identified for virtual economies 

and currencies are described below.

• Taxpayer lack of knowledge of tax requirements. Income is 

generally defined as any undeniable accessions to wealth, clearly 

Virtual Economies 

and Currencies Pose 

Various Tax 

Compliance Risks, but 

the Extent of 

Noncompliance Is 

Unknown 
 

Page 13 GAO-13-516 Taxation of Virtual Economies and Currencies

realized, and over which the taxpayers have complete dominion.11

The unsophisticated taxpayer may not properly identify income 

earned through virtual economies or currencies, such as virtual online 

game assets exchanged for real word currency, as taxable income. If 

taxpayers using virtual currencies turn to the Internet for tax help, they 

may find misinformation in the absence of clear guidance from IRS. 

For example, when we performed a simple Internet search for 

information on taxation of bitcoin transactions, we found a number of 

websites, wikis, and blogs that provided differing opinions on the tax 

treatment of bitcoins, including some that could lead taxpayers to 

believe that transacting in virtual currencies relieves them of their 

responsibilities to report and pay taxes.

• Uncertainty over how to characterize income. Even if taxpayers 

are aware that they may have a tax liability, they may be uncertain 

about the proper tax treatment of virtual transactions, according to tax 

experts, including academics and tax practitioners with whom we 

spoke. For example, characterization depends on whether the virtual 

economy activity or virtual currency unit is to be treated as property, 

barter, foreign currency, or a financial instrument. According to some 

experts with whom we spoke, some virtual currency transactions 

could be considered barter transactions, which may not be an obvious 

characterization to unsophisticated taxpayers.12 This characterization 

could result in noncompliance with requirements for reporting and 

paying tax on barter income.

• Uncertainty over how to calculate basis for gains. Income earned 

from virtual economy or currency transactions may not be taxable if it 

is equivalent to that from an occasional online garage sale, meaning 

occasional income from selling goods for less than their original 

purchase price. It may be difficult for individuals receiving income from 

virtual economies to determine their basis for calculating gains. For 

example, some online games require players to pay a monthly fee in 

exchange for use of the game and a monthly allowance of virtual 

currency. If a player then sells a virtual tool gained in the game for 

real money, calculating the basis for any taxable gain may be difficult 

for the unsophisticated taxpayer.

 

11Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955). 

1226 U.S.C. § 6045 addresses barter exchanges and barter transactions. 
 

Page 14 GAO-13-516 Taxation of Virtual Economies and Currencies

• Challenges with third-party reporting. Third-party information 

reporting requirements do not apply specifically to transactions using 

virtual economies or currencies. Virtual economy or currency 

transactions may be subject to third-party information reporting to the 

extent that these transactions involve the use of a third-party payment 

network to mediate the transaction and the taxpayer meets reporting 

threshold requirements.13 Because virtual economy and currency 

transactions are inherently difficult to track, including identifying the 

true identities of the parties to the transaction, third-party information 

reporting may be difficult or prohibitively burdensome for some virtual 

economy and currency issuers to administer.

• Evasion. Some taxpayers may use virtual economies and currencies 

as a way to evade taxes. Because transactions can be difficult to 

trace and many virtual economies and currencies offer some level of 

anonymity, taxpayers may use them to hide taxable income.

Because of the limited reliable data available on their size, it is difficult to 

determine how significant virtual economy and currency markets may be 

or how much tax revenue is at risk through their usage. Some experts 

with whom we spoke indicated that there is potential for growth in the use 

of virtual currencies. Additionally, the European Central Bank recently 

issued a report on virtual currencies, acknowledging their potential for 

future growth and interaction with the real economy.14 If the use of virtual 

economies and currencies expands, it can be expected that associated 

revenue at risk of tax noncompliance will grow.

 

1326 U.S.C. § 6050W and applicable regulations define third-party payment networks.

14European Central Bank, Virtual Currency Schemes (Frankfurt am Main, Germany: 

October 2012). 
 

Page 15 GAO-13-516 Taxation of Virtual Economies and Currencies

IRS has assessed the tax compliance risks from virtual economies and 

virtual currencies used within those economies, and developed a plan to 

address them in a manner consistent with internal control standards. 

Beginning in 2007, IRS’s Electronic Business and Emerging Issues 

(EBEI) policy group identified and surveyed internal and external 

information sources, gathered data on the industry, and collect trend 

information, among other efforts. EBEI determined that virtual economies 

presented opportunities for income underreporting and developed (1) a 

potential compliance strategy, including initiating a compliance 

improvement project to gather research data and analyze compliance 

trends, and (2) a potential action plan for specific compliance activities. 

According to IRS compliance officials, IRS ultimately decided not to 

pursue these actions in light of available IRS resources and other higher 

priority needs. Also, IRS did not find strong evidence of the potential for 

tax noncompliance related to virtual economies, such as the number of 

U.S. taxpayers involved in such activity or the amount of federal tax 

revenue at risk.

However, in November 2009, based on EBEI having determined the 

need, IRS posted information on its website on the tax consequences of 

virtual economy transactions. The web page points out that, in general, 

taxpayers can receive income in the form of money, property, or services 

from a virtual economy, and that if taxpayers receive more income than 

they spend, they may be required to report their gains as taxable income. 

The page further states that IRS has provided guidance on the tax 

treatment of issues similar to online gaming activities, including bartering, 

gambling, business, and hobby income, and provides links to IRS 

publications on those topics. IRS officials who were involved in issuing 

this guidance reported it cost less to make an online statement pointing 

taxpayers to existing guidance than it would have cost to develop and 

publish new guidance specific to virtual economies.

IRS has not assessed the tax compliance risks of open-flow virtual 

currencies developed and used outside of virtual economies. These types 

of currencies, generally, were introduced after IRS’s last review of 

compliance related to virtual economy transactions. According to IRS 

compliance officials, IRS would learn about tax compliance issues related 

to virtual currencies as it would any other tax compliance issue, such as 

IRS examiners identifying compliance problems during examinations or 

taxpayers requesting guidance on how to comply with certain tax 

requirements. To date, these processes have not resulted in IRS 

identifying virtual currencies used outside of virtual economies as a 

compliance risk that warrants specific attention.

IRS Has Provided 

Some Guidance on 

Tax Reporting 

Requirements for 

Virtual Economies but 

Not for Virtual 

Currencies Used 

Outside of Virtual 

Economies 
 

Page 16 GAO-13-516 Taxation of Virtual Economies and Currencies

Likewise, IRS has not issued guidance specific to virtual currencies used 

outside of virtual economies due to competing priorities and resource 

constraints, and because the use of virtual currencies is a relatively 

recent development that requires further consideration before guidance 

can be issued, according to IRS’s Office of Chief Counsel and compliance 

officials.15 As previously discussed, taxpayers may be unaware that 

income from transactions using this type of virtual currency may be 

taxable, or if they are aware, uncertain on how to characterize it. By not 

issuing guidance, IRS may be missing an opportunity to address these 

compliance risks and minimize their impact and the potential for 

noncompliance. Given the uncertain extent of noncompliance related to 

virtual currency transactions, formal guidance, such as regulations, 

revenue rulings, or revenue notices, may not be warranted at this time. 

According to officials from IRS’s Office of Chief Counsel, these types of 

guidance require extensive review within IRS and the Department of the 

Treasury and, in some cases, public comment, which add to the time and 

cost of development. However, IRS may be able to develop informal 

guidance, which, according to Chief Counsel officials, requires less 

extensive agency review and can be based on other existing guidance. 

As such, IRS can develop informal guidance in a more timely and less 

costly manner than formal guidance, according to the officials. An 

example of such informal guidance is the information IRS provides to 

taxpayers on its website on the tax consequences of virtual economy 

transactions. Posting such information to its website would be consistent 

with IRS’s strategy for preventing and minimizing taxpayers’ 

noncompliance by helping them understand and meet their tax 

responsibilities, as outlined in IRS’s Taxpayer Assistance Blueprint.

Virtual economies and the use of virtual currencies intended as 

alternatives to government-issued currencies are a recent phenomenon, 

and the extent to which their use results in tax noncompliance is 

unknown. Given this uncertainty, available funding, and other priorities, 

IRS made a reasoned decision not to implement a compliance approach 

specific to virtual economies and currencies. However, IRS did see value 

 

15Although IRS has not issued guidance, another Department of the Treasury agency, the 

Financial Crimes Enforcement Network, recently issued interpretive guidance clarifying 

the treatment of persons creating, obtaining, distributing, exchanging, accepting, or 

transmitting virtual currencies. However, such guidance does not discuss the tax 

treatment of virtual currency transactions. FIN-2013-G001

Conclusions 
 

Page 17 GAO-13-516 Taxation of Virtual Economies and Currencies

in providing taxpayers with information on the tax consequences of virtual 

economy transactions, a low-cost step to potentially mitigate some of the 

noncompliance risk associated with such transactions. The uncertainty 

about the extent virtual currencies are used in taxable transactions and 

any associated tax noncompliance means that costly compliance 

activities are not merited at this time. However, the fact that 

misinformation is circulating and the possibility of growth in the use of 

virtual currencies outside virtual economies suggest that it would be 

prudent to take low-cost steps, if available, to mitigate potential 

compliance risks. The type of information IRS provided about virtual 

economy transactions is one model.

To mitigate the risk of noncompliance from virtual currencies, the 

Commissioner of Internal Revenue should find relatively low-cost ways to 

provide information to taxpayers, such as the web statement IRS 

developed on virtual economies, on the basic tax reporting requirements 

for transactions using virtual currencies developed and used outside 

virtual economies.

We sent a draft of this report to the Acting Commissioner of Internal 

Revenue for comment. In written comments, reproduced in appendix I, 

IRS agreed with our recommendation and stated it would provide 

information to taxpayers on the basic tax reporting requirements for 

transactions involving virtual currencies by linking to existing relevant 

guidance. IRS noted that it was aware of the tax compliance risks 

associated with virtual currencies and was taking other steps, such as 

developing training resources for agents, to address them. IRS also 

provided technical comments on our draft report, which we incorporated, 

as appropriate.

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to interested congressional 

committees, the Secretary of the Treasury, the Acting Commissioner of 

Internal Revenue, and other interested parties. In addition, the report also 

will be available at no charge on the GAO website at http://www.gao.gov.

Recommendation for 

Executive Action

Agency Comments 

and Our Evaluation
 

Page 18 GAO-13-516 Taxation of Virtual Economies and Currencies

If you or your staff have any questions about this report, please contact 

me at (202) 512-9110 or whitej@gao.gov. Contact points for our Offices 

of Congressional Relations and Public Affairs may be found on the last 

page of this report. GAO staff who made key contributions to this report 

are listed in appendix II.

James R. White

Director, Tax Issues

Strategic Issues
Appendix I: Comments from the Internal 

Revenue Service

Page 19 GAO-13-516 Taxation of Virtual Economies and Currencies

Appendix I: Comments from the Internal 

Revenue Service
Appendix I: Comments from the Internal 

Revenue Service

Page 20 GAO-13-516 Taxation of Virtual Economies and Currencies
Appendix I: Comments from the Internal 

Revenue Service

Page 21 GAO-13-516 Taxation of Virtual Economies and Currencies
Appendix II: GAO Contact and Staff 

Acknowledgments

Page 22 GAO-13-516 Taxation of Virtual Economies and Currencies

James R. White, (202) 512-9110 or whitej@gao.gov

In addition to the contact named above, Jeff Arkin (Assistant Director), 

David Dornisch, Lois Hanshaw, Richard Hung, Ronald W. Jones, Donna 

Miller, Ed Nannenhorn, Danielle N. Novak, and Sabrina Streagle made 

key contributions to this report.

Appendix II: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments 

(451007)
The Government Accountability Office, the audit, evaluation, and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and 

policies; and provides analyses, recommendations, and other assistance 

to help Congress make informed oversight, policy, and funding decisions. 

GAO’s commitment to good government is reflected in its core values of 

accountability, integrity, and reliability.

The fastest and easiest way to obtain copies of GAO documents at no 

cost is through GAO’s website (http://www.gao.gov). Each weekday 

afternoon, GAO posts on its website newly released reports, testimony, 

and correspondence. To have GAO e-mail you a list of newly posted 

products, go to http://www.gao.gov and select “E-mail Updates.”

The price of each GAO publication reflects GAO’s actual cost of 

production and distribution and depends on the number of pages in the 

publication and whether the publication is printed in color or black and 

white. Pricing and ordering information is posted on GAO’s website, 

http://www.gao.gov/ordering.htm. 

Place orders by calling (202) 512-6000, toll free (866) 801-7077, or 

TDD (202) 512-2537. 

Orders may be paid for using American Express, Discover Card, 

MasterCard, Visa, check, or money order. Call for additional information.

Connect with GAO on Facebook, Flickr, Twitter, and YouTube. 

Subscribe to our RSS Feeds or E-mail Updates. Listen to our Podcasts. 

Visit GAO on the web at www.gao.gov. 

Contact:

Website: http://www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470

Katherine Siggerud, Managing Director, siggerudk@gao.gov, (202) 512-

4400, U.S. Government Accountability Office, 441 G Street NW, Room 

7125, Washington, DC 20548

Chuck Young, Managing Director, youngc1@gao.gov, (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, DC 20548

GAO’s Mission

Obtaining Copies of 

GAO Reports and 

Testimony 

Order by Phone

Connect with GAO

To Report Fraud, 

Waste, and Abuse in 

Federal Programs

Congressional 

Relations 

Public Affairs

Please Print on Recycled Paper.