This is an interesting article: IRS taxation of online game virtual assets inevitable.

What is funny is that people seem to jump over all the wrong things in these discussions.  I am firmly of the belief that virtual items (including currency) will legally be equivalent to physical property in the not so distant future.  I think you can write all the crazy EULAs (End-User License Agreements) that you want saying that the company owns it, but one lawsuit will put all that into question.  If you spend 100 days of actual time – ie: 2400 hours – accumulating stuff in a game and the publisher takes it away, you are going to be mad.  Right now, if you aren’t a serious gamer you are probably thinking 100 days? that’s impossible.  But it’s not, I know tons of people that have well over 100 days (in the game – 2400+ hours) played in World of Warcraft. 

Technically Blizzard owns all the stuff you do, according to their EULA.  But there is a brisk market for WoW stuff (most of which is against the rules of the EULA):

• RMT (Real Money Trading):  This is buying game currency for real dollars.  Right now in WoW the exchange rate is roughly 7 gold per dollar.  (This can vary some by server and faction, which servers.  Gold can be transferred between factions on the same server [with a non-trivial percentage take by the system] but not between servers [unless you transfer a character for $25].) 
• OSCD (Out-Sourced Character Development):  This is hiring someone to play your character for you.  (I can again here all the non-gamers going “why the hell would you do that?”.)  In MMORPGs like WoW there are a lot of things that just take a lot of repetition to complete.  Like gold – anyone can get 20-50 gold an hour – but if your time is worth more than $5/hr you are better off to buy it.  Especially since it is boring as hell.  But say you want a new level 60 character built to your specifications – you can do that too.  There are plenty of services that will do this for you and they typically cost around $2/hr and basically have someone in China (or a similar location) play your character to accomplish whatever goals you want them to accomplish. 
• CRR (Character Resale and Recycling):  This is someone selling there character on eBay or IGE because they either quit the game (broke their crack addiction, got a girlfriend, had a nearly flunking out experience, etc.) or because they need some cash (some people build characters up, sell them, start over, etc.).  If you search for World of Warcraft charcters you’ll see a bunch going for anything from $50 to $3000. 

BTW, I made up the term OSCD and CRR since I haven’t seen much talk about this.  If there are terms already in use, let me know.

 All of these things would seem, at least to me, to indicate all this virtual stuff is worth real money to people.  I mean, how is this any different than owning a digital copy of a song you bought on iTunes?  That is a virtual asset too.  I paid for it because I wanted it, but have nothing physical to prove it.  I’m also at the mercy of Apple since their DRM traps me in their world (not unlike games).  So clearly, Apple is paying taxes on the sale of these virtual assets.

The same will happen in games, but there are two distinct differences:

• In RMT and OSCD most of the commerce is transacted overseas via various instant payment mechanisms (like PayPal).  The work is done overseas.  I’m not sure what there is for the U.S. to tax here.
• in CRR and very rare RMT cases (like people I know sometimes sell a few hundred gold, but most of the transactions are through farming services that accumulate large amounts of gold – again overseas) are small.  Most people aren’t selling a $500 character every month, it is usually a single transaction.  If it were taxed you could exclude the costs (subscribtion, probably broadband, maybe computer depreciation) from the income and you would probably get to $0 profit pretty quick.  ($15 month subscription, $35 month broadband = $50/month x 10 months = $500 and there aren’t many characters selling for $500 that don’t have ten months of time into them.)  So there isn’t much to tax there.  Besides if this were taxed they’d need to go chase the tons of other people who have eBay businesses that are shirking taxes – all of these things (including the sales of WoW related stuff) really should be taxed already, people just don’t report them in many cases.

I’m sure now this will become some big political issue now and we’ll have to read about it all the time.  Someone who is a big Second Life player will die and there will be some feud over their virtual estate and the IRS will get involved.  It will be interesting to see it play out.