Sim pickings: real taxes on virtual worlds.

IF YOU WERE planning to pay your World of Warcraft orcs in cash, you might want to rethink your plans. In a press release issued on October 17, Rep. Jim Saxton (R-N.J.), then chairman of the Joint Economic Committee, noted that "there is a concern that the IRS might step forward with regulations that start taxing transactions that occur within virtual economies."

It's hardly news that the Internet's virtual worlds, from vast multiplayer games like World of Warcraft to complex communities such as Second Life, include virtual money and virtual goods. It has been five years since the economist Edward Castronova concluded that EverQuest had an economy larger than India's or China's. That's not exactly an apples-to-apples comparison, but it's not an entirely unfair contrast either, given the extent to which people are willing to trade actual dollars, euros, or yen for virtual currencies and virtual products, from magic swords to imaginary real estate. The Australian Tax Office is already casting its eye on such exchanges, according to an October report in The Age.

Now the Joint Economic Committee is looking into whether and how to tax those transactions in the States. Dan Miller, chief economist for the committee, has told Reuters that the investigation would start with "a blank slate," but Rep. Saxton already says that it "would be a mistake" to treat income in World of Warcraft like earnings in the offline world. The committee's press release notes the difference between a transaction that generates actual dollars and a transaction that occurs entirely within a game world, saying such distinctions "should be addressed and resolved in a common-sense manner."

A draft report on the topic is expected soon. We'll see just how much common sense Congress has in store.