Taxing Second Life [update 1]

The new Reuters Second Life branch reports on a Congressional probe into games with virtual economies like Second Life and World of Warcraft. Massive amounts of money changes hands in these titles; Second Life users spend up to $500,000 in daily transactions. The U.S. government has caught the scent of money wafting up from the internet tubes and hopes to get its share.

Americans are already required to pay taxes on real-world earnings when they cash out of a game, but should they pay taxes on virtual, in-game profits? For example, citizens pay capital gains taxes on real-world asset sales -- profits from an investment over time -- but in-game capital gains policy and enforcement are unclear. Should you owe Linden Dollars to the U.S. government after selling Second Life property in-game, even if you don't cash-out to U.S. currency?

Should virtual worlds be governed by real-world laws, or are they becoming something closer to their own nations? If governments start taxing strictly in-game situations, will gamers deserve in-game social services and a virtual seat in Congress?

[Via Second Life Insider]

[Update 1: Thanks, Ish, for the capital gains lesson. Sorry for the mistake; the second paragraph is clarified.]

This article was originally published on Joystiq.