IRS Documents Shed Light on Fortnite Virtual Currency Controversy

December 28, 2023

In a release under the Freedom of Information Act (FOIA), the Internal Revenue Service (IRS) has released a set of documents pertaining to FOIA case 2021-01180. These documents, unveiled in December 2023, revolve around the IRS’s earlier stance on the virtual currency used in the popular video game Fortnite.

The initial FOIA request sought emails, decision papers, memos, and letters. These documents were expected to clarify the IRS’s position on Fortnite’s virtual currency and the subsequent removal of references to it from the IRS website.

The Controversy: Fortnite’s Virtual Currency and the IRS

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The controversy began when the IRS classified Fortnite’s in-game currency as a form of virtual currency that required reporting. This decision positioned the virtual earnings within the game on par with other digital assets like Bitcoin. The implications were significant, as it meant players might need to report their in-game transactions for tax purposes.

However, this stance by the IRS sparked confusion and debate among gamers, tax experts, and legal scholars. The primary concern was the practicality and rationale behind taxing virtual transactions in a gaming environment, where the currency typically cannot be converted back into real money.

Quiet Removal: The IRS’s Change of Stance

As the debate intensified, the IRS quietly removed references to Fortnite’s virtual currency from its website. This removal indicated a change in their position, but it was done without a formal announcement, leading to further speculation and uncertainty about the IRS’s policies on virtual currencies.

Inside the FOIA Release: IRS’s Internal Deliberations

The released documents under FOIA case 2021-01180 offer a rare glimpse into the IRS’s internal communications regarding this issue. The emails and memos reveal a scenario where the agency recognized its mistake in hastily classifying Fortnite’s virtual currency. The documents show how IRS officials grappled with formulating a coherent response to the public and the press.

These internal discussions highlight the complexities the IRS faced in defining and regulating virtual currencies, especially in the rapidly evolving digital and gaming landscapes. The documents also contain broader deliberations on virtual currencies, reflecting the agency’s ongoing efforts to adapt its policies to new financial technologies.

Document Overview

Overview of Documents: The documents primarily consist of internal communications within the IRS, discussions on virtual currencies, and the agency’s approach to handling the Fortnite virtual currency issue.
IRS’s Approach to Virtual Currencies: The documents reveal extensive discussions on the broader topic of virtual currencies, their regulatory and market environments, and the challenges they pose. There’s an emphasis on understanding the evolving nature of these currencies and their impact on tax regulations.
Fortnite Virtual Currency Issue: Specific references to Fortnite and its virtual currency primarily revolve around the IRS’s decision to classify it as a taxable entity and the subsequent removal of this classification from their website. The documents discuss the challenges and implications of this decision.
Internal Deliberations: There’s evidence of the IRS attempting to understand and navigate the complex nature of virtual currencies, including emails where officials discuss how to publicly address their stance and errors regarding Fortnite’s virtual currency.
Quotes and Specific References: The documents include various statements and discussions reflecting the IRS’s understanding and approach to virtual currencies. Due to the limited interaction time with the file, I couldn’t extract specific quotes, but the overall tone indicates a cautious and evolving approach to handling digital currencies.
Broader Discussions on Virtual Currencies: The documents also cover a wide range of topics related to virtual currencies, their legal implications, and the IRS’s role in regulating them.