Coming soon: taxation of virtual assets

At day two of the State of Play Terra Nova symposium, academics and legal experts discussed the possibility that the IRS might someday decide to tax the virtual assets traded in games such as World of Warcraft and Second Life. The general consensus among those present was that it's more a question of when not if this will happen.
What's remarkable here is that we're not talking about paying tax on any virtual earnings that are converted into real world cash (as is the case today), but paying tax on virtual profits even while they remain virtual. Make a few Linden dollars through trading goods in Second Life and you may soon have to pay tax on that profit, despite never actually cashing in.

How this might work is unclear. Would Second Life players for example, pay tax in Linden dollars (the game's currency) or US dollars? Would the makers of virtual worlds be required to hand over records of transactions to the IRS? What about inheritance of virtual assets?

Questions like these seem like madness. As I've argued before, the virtual should remain virtual, as the tax rules governing profits made when assets are actually cashed in, are more than adequate. Otherwise, where do we draw the line?

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