Shuhei Yoshida, president of Sony's Worldwide Studios, said Sony had been working on the technology - called Project Morpheus - for three years.
"We believe VR will shape the future of games," said Mr Yoshida in a blog post.
The prototype will be made available to developers, but no commercial release date was given.
Project Morpheus is a head-mounted display with 1080p resolution and a 90 degree field of view.
It has sensors built into the unit that can track head orientation and movement, so that when a user's head moves, the image of the virtual reality world moves with it.
Sony's move into virtual reality follows a product released by crowd-sourced group Oculus Rift.
It unveiled its prototype headset Crystal Cove at this year's Consumer Electronics Show in Las Vegas.