If you slay an online dragon and receive virtual treasure that has "real world" value, the Internal Revenue Service might decide that you owe the government taxes on your "profit".
So if virtual loot can be sold for real money and therefore has real value, what's to stop the government from concluding that every time a fallen virtual monster gives up its prize, or a fistful of Linden dollars is traded for a virtual hair weave, a taxable event has occurred?
Don't ask the IRS. Pressed for an official opinion on the taxability of virtual trades, IRS spokesperson Nancy Mathis would say, via e-mail, only that "whether exchanges constitute bartering depends on the facts and circumstances of each case." As to whether that magic helmet won from a slain dragon is a taxable prize, the answer was similarly noncommittal. "[The] bottom line," Mathis wrote, "is this: You can receive income in the form of money, property, or services. Generally, your income is taxable unless it is specifically exempted by law."
Translation: The IRS is keeping its options open. And according to former IRS lawyer Bryan Camp, now a professor of tax law at Texas Tech, those options definitely include taxing virtual gold. "Section 61 of the Internal Revenue Code says that gross income is any income received from any source," says Camp. "And if someone in the IRS thinks that a [virtual-world] transaction represents the receipt of either cash or services or property, and that has a fair market value, then yes, that's going to be income."
I guess what would make the taxability of virtual "profit" strange is that the context within which this "wealth" is created is completely artificial and self-contained. Unlike, say, ore mined out of the ground, a virtual magic sword has no intrinsic usefulness aside from the virtual context in which it was won. The game company that controls that context could manipulate the scarcity or properties of that treasure at will, or even shut down the entire game overnight.
The value is illusory... but is it any more illusory than value attached to rare baseball cards? Those at least can't be as easily manipulated by their creators as can virtual items. Furthermore, when it comes to baseball cards at least the holders of the cards actually own them. Virtual treasure exists only within a game company's computer database, so who really owns that virtual magic sword? The player whose character currently controls its in-game use, or the game company that owns the database that holds the bytes that constitute the sword's material existence?