No one spoils fun like the IRS

A few moons ago, we blogged about the strange development of virtual economies in massively multiplayer online games -- which are, it turns out, becoming real economies. It wasn't long after the release of the hugely popular Ultima Online that people were buying and selling virtual property — for real money. ("These days it's tough to tell the real from the virtual on eBay," we wrote. "There are auctions going for virtual items of furniture, clothes, jewelry and even money (100 million gold pieces for just $145 — now that's inflation!)"

Apparently, the IRS is reading our blog, because now they're looking into taxing such virtual economies. In games like Second Life, players can exchange real money for virtual scrip in the game, and vice versa, a kind of barter system that generates about $5 million in transactions per month.

Are there tax implications in numbers like that? You betcha. But the downside to levying taxes on such economies, according to economist Edward Castronova, is that most likely players will simply stop playing. "In a fantasy world, if you go in and start taxing, you would destroy it," he says. "Fantasy places need to be treated as fantasy places." (Hmm, can I declare my home office a "fantasy place?")