Julian Dibbell has an amusing essay on Dragon Slayers or Tax Evaders? in Legal Affairs.
"IF YOU HAVEN'T MISSPENT HOURS battling an Arctic Ogre Lord near an Ice Dungeon or been equally profligate spending time reading the published works of the Internal Revenue Service, you probably haven't wondered whether the United States government will someday tax your virtual winnings from games played over the Internet. The real question is, Why hasn't it happened already...
Because he wasn't in a position to offer a final word, however, Knight gave me a number for the IRS's Business and Specialty Tax Line. "Specialty" sounded about right, so I called and told my story to a telereceptionist, who routed me to a small-business specialist, who passed me along to a barter-income specialist, who identified herself as "Mrs. Clardy, badge number 7500416," and listened in silence to my query about virtual economics—and then put me on hold.
When Mrs. Clardy returned, she was a bureaucrat transformed. "We just had this little discussion," she said, almost giggling. "And it sounds to us like [the online trades you've described] would be—yes—Internet barter." Here she paused, whether to catch her breath or to let the conclusion sink in, I couldn't tell. "However," she went on, "there are no regs, there is no code, there are no rulings, to rely upon. This is our opinion."
Mrs. Clardy suggested I seek a more authoritative judgment. A "private letter ruling," she assured me, was the IRS's definitive opinion, in writing, on a particular taxpayer's situation. And a letter ruling in my case, she believed, would probably be the closest the IRS had ever come to an opinion on the status of virtual income.
"The ramifications are enormous," Mrs. Clardy exhorted. "Break new ground!"
WHY NOT? WELL, BECAUSE MRS. CLARDY had neglected to mention the $650 fee stipulated in the letter-ruling request instructions, or the tax lawyer I would have to hire to write the request with any effectiveness, or the six months I would have to wait for a final response. Even if none of these obstacles had stood in the way, I finally had to ask myself: Was this really the kind of ground I wanted to break?
Considering what the IRS had done with barter clubs, it seemed prudent not to be the game player who officially invited the agency to visit the world of MMOs and gave the feds the opening to tax virtual income. That decision might force game companies, as John Knight had put it, "to start sending out 1099s every time somebody gets a gold coin or a bag of grapes or a shiny emerald" in a game's virtual world.
It would certainly transform the thrill of the online quest into distress for the legions of players who couldn't afford to pay their new taxes, and would likely doom my fellow Frogloks, Vah Shir, and other characters to appalling fates."