No one but their creators can be entirely sure of how much money is sloshing around in the economies of MMOGs and metaverses like World of Warcraft and Second Life, but given the sheer number of regular participants in both (and the brisk markets for in-game items using real world money) it’s certainly not pocket change. [image by Ravenelle]

That’s probably got a lot to do with why the United States IRS is being advised to start taxing virtual economies:

“Economic activities associated with virtual worlds may present an emerging area of noncompliance, in part, because the IRS has not issued guidance about whether and how taxpayers should report such activities,” Olson wrote in her report. She points out that almost all income is subject to tax—even prizes, winnings, and barter exchange. She also acknowledges, however, that tracking and reconstructing so many tiny transactions would be a huge burden, and that attempting to place a value on virtual transaction could present serious challenges.

No kidding; brief and silly scares about terrorist money laundering aside, the potential of black and grey economies lurking in the metaverse is pretty obvious. But considering how easy it seems to be for the meatspace megarich to slip through the net, is this going to prove too tough a nut for the IRS to crack?

For example, when does the money become taxable – when it leaves the virtual space in question, or as soon as it is earned by a citizen? What happens when exchanges operate between virtual worlds? Will the new offshores be based on server farms as opposed to Caribbean islands?