KPMG Virtual Currency Point of View: Social Media Companies' 'Virtual Currency' Transactions Create Potential Cross-Border Tax Issues: KPMG

SANTA CLARA, Calif., Feb. 29, 2012 /PRNewswire/ -- Triggered by rising consumer demand for on-line games and virtual worlds for entertainment, government and tax authorities are eyeing the conversion of "virtual currency" by players to U.S. dollars and other currencies through on-line auction sites or social media companies.  

International Tax consultants Jim Carr and Jason Hoerner, both in KPMG LLP's Silicon Valley office, authored "Virtual Currency in Virtual Economies: Income Characterization Issues for Social Media Companies" in Tax Notes International and are being called upon by social media companies for counsel. 

"Social media companies should understand that the tax consequences of these conversions can have significant ramifications for international transactions," says Hoerner. "The characterization of these transactions for tax purposes also has direct implications for operating structures social media companies may select for non-U.S. activities."

Carr observes that "because of sparse tax guidance to date, social media companies engaging in cross-border transactions with consumers may be unsure whether and how their virtual currency transactions will be taxed," noting that analysts project a $14 billion global virtual trading market this year.

How income related to virtual currency is characterized for tax purposes is a key to assessing the tax consequences. To the extent that social media companies conduct activities through foreign corporations, Hoerner says, the characterization of income resulting from virtual currency will determine which tax rules are relevant.

Carr points out that "to reach an informed conclusion regarding characterization, social media companies should carefully consider the terms of service they offer players." For example, is virtual currency properly characterized for income tax purposes as property, a deposit, a software license, a service, or could it actually be treated in the same way as a foreign currency?  Each answer may carry different tax consequences.

"Understanding the potential characterization issues early can help companies develop their business plans in the context of the tax implications that may arise," Carr adds.

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SOURCE KPMG LLP