How Should We Tax Property In Virtual Worlds?

My colleague Tom Claburn has a clever and informative article on how virtual property should be taxed in online games and worlds like World of Warcraft and Second Life. Indiana law professor Leandra Lederman says virtual property should be taxed like fish -- when it's sold, not before.

Makes sense to me. Property in games and virtual worlds is financially worthless until it enters the real world. If I accumulate a stash of 60,000 steam-powered ukelele polishers in Second Life, I can't use them to pay my real-world mortgage or electric bill or buy mochas at Starbucks. I can sell them for Linden Dollars, but those are also worthless in the real world. The place to collect taxes is when those assets get converted to real-world dollars, when you sell your virtual property on eBay or convert your Linden Dollars to real-world cash.

My head hurts when I think about the kind of bureaucracy it would take to estimate the real-world value of virtual property, and I wouldn't be surprised to find setting up that bureaucracy would cost more than the tax revenue it would bring in.

But what happens when we start thinking about those 60,000 Second Life steam-powered ukelele polishers as assets with potential market value? Seems to me that they ought to be taxed the same way as any other intellectual property. Because that's what they are: Intellectual property, the same as a garage band's rights to their latest MP3 track, or my own employer's rights to the articles we publish, or Microsoft's ownership of the Windows source code. How is that stuff taxed?