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Declaring Orc Loot On Your Tax Form

A new paper about online game economies such as World of Warcraft suggests ways to avoid losing your shirt, your ax, and your Talisman of Ephemeral Power.

Virtual treasures should be treated like fish when it comes to taxes: taxed upon sale rather than upon acquisition.

That's the position taken by Indiana Law School professor Leandra Lederman in her new paper, 'Stranger Than Fiction': Taxing Virtual Worlds, which delves into the tax consequences of online game economies.

"Even if virtual items constitute virtual property that participants own, drops should not be taxed on receipt because the effort involved to earn them makes them 'taken' property," Lederman writes. "Taken property, such as fish pulled from the ocean, is not taxed until it is sold."

Though many people have absolutely no interest trolls or their treasure, some 10 million people around the globe participate in online virtual worlds and accumulate potentially salable virtual wealth.

In 2006, the massively multiplayer online game market reached $1 billion in the West, according to a recently released study from Screen Digest, a market research firm. World of Warcraft, the most popular massively multiplayer online game, generated $471 million last year, a figure that doesn't include the gray-market sale of game accounts and items. By 2011, Screen Digest projects the massively multiplayer online game subscription market will exceed $1.5 billion.

Perhaps unsurprisingly given the amount of real revenue virtual worlds generate, the U.S. Joint Economic Committee of the U.S. Congress said last October that it would begin looking at the policy issues surrounding virtual worlds.

"Based on existing law, if an individual generates cash income in U.S. dollars from transactions in virtual economies, the question may arise whether a tax is due on that real-world income," the JEC said in a statement issued last year. "However, if the transaction takes place entirely within a virtual economy, then it seems there is no taxable event. Such distinctions should be addressed and resolved in a commonsense manner."

To date, officials like Rep. Jim Saxton (R-N.J.) have advocated a cautious, laissez faire approach. How long that will last remains open to question. If virtual currency, for instance, proves popular with organized crime -- Lederman suggests there's a "risk that intentionally commodified worlds could be used as the 21st century's equivalent of hiding funds offshore" -- the government's light touch may get heavier.

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