The legal definition of property has long since been extended to cover the intangible. Laws allowing all manner of intangible assets to be classed alongside regular physical property have existed now for more than a century; and where there are assets, there are taxes.
At the present time I know of four nations (and there are quite probably more) that consider the taxation of virtual assets and virtual currency to be proper and well-covered by existing law. Those are the USA, the UK, Australia and Sweden.
Sweden's the odd one out right now, as while they acknowledge the taxable status of virtual assets and currency, there isn't actually a mechanism for reporting those taxable items at the present time. Things are clearer, however, in the other three nations.
Two basic taxes apply to virtual assets. The first is basic income tax, which is due on any monies (in legal tender) that you might receive from the sales of virtual goods, services or currency. That's pretty obvious, of course. You're getting money, you get taxed.
The second tax that applies is capital gains tax. This is an extension of the income tax system which is usually charged when intangible assets are converted to cash (the term is 'realized'), but some countries apply the tax even when you haven't.
Capital gains tax is actually rather good for you compared to regular income tax, because values subjected to capital gains tax aren't then also income-taxed, and often the capital gains tax can work out quite a bit lower.
Of course, not every virtual asset is a taxable asset. In order for it to be taxable it must be a realizable asset. That is, you must be able to lawfully convert it to cash. So, any number of magic swords and World of Warcraft gold winds up automatically exempt. In Second Life, items that you have transfer permissions for would be realizable assets (and thus taxable, along with Linden Dollars), but no-transfer items fail the asset test and would be exempt.
If you're a US citizen, all of those virtual assets (realized or not) are supposed to be reported on your good friend, Form 1040, Schedule D and may be subject to Tax Withholding and Estimate Tax, per Publication 505.
UK residents may need to fill out some extra forms as a part of reporting their virtual assets. The HMRC has many categories of capital gains, virtual assets can fall into either personal or business assets depending on the exact circumstances. Your local HMRC office can help you identify exactly which forms you'll need.
In Australia, you won't need to fill out capital gains paperwork unless your loss or gain exceeds AUD$10,000 during the financial year, but you will want to keep records as the changes in value and the dates that they take place on are important to minimizing unnecessary taxation.
Taxes are, as Defoe intimated, an unpleasant and rather inevitable responsibility. They're also one that it is important to get right, as tax officials the world over are notorious for not having much sense of humor when it comes to missed payments and faulty reporting.
Do you know of any other countries where there are established protocols for reporting virtual assets other than the ones mentioned here?