As people spend more and more time online, traditional ideas of identity will be less meaningful and communities could become less cohesive, the report by the government's chief scientist, Sir John Beddington, said.
This change could result in positive changes but if ignored could fuel social exclusion, the report said.
Almost continuous access to the Internet is likely to have profound effects on society over the next 10 years, Beddington said.
"The most dynamic trend (in determining identity) is hyper-connectivity," he told BBC News.
Traditional factors that mold identity such as a person's religion, ethnicity, occupation and age are less important than they once were, the report found; instead, people's view of themselves is being shaped by online interactions on social networks and in online role-playing games.
This is particularly seen in younger people, it said.
"The Internet can allow many people to realize their identities more fully," the report authors wrote. "Some people who have been shy or lonely or feel less attractive discover they can socialize more successfully and express themselves more freely online."