We’ve seen the arrival of virtual worlds. The number of users in Second Life and World of Warcraft have exploded. Hundreds of thousands of dollars exchange hands on these services every day. And now the IRS wants their cut of it.

It’s not enough that, were one to cash out virtual dollars into real dollars, that the IRS will take a cut of that money. Now they may want to tax the virtual transactions themselves. So, for example, if you sell a bit of virtual property and make a profit in virtual dollars, then you would have to pay virtual taxes on that virtual profit.

Doesn’t sound fair to me. It’s a game! It’s played for fun! When did virtual reality become reality? When did taxing virtual assets become part of the game?

If virtual taxation comes into play, it appears that those assets will be taxed twice: once when the transaction takes place in the virtual world, and the second time when the player transfers virtual assets into real world assets.

I recently read an article about this over at Scientific American that addresses the issue of taxing in-game assets. Here are some of the things said by those they interviewed:

Game designer Sam Lewis said, “There’s just too much money floating around.” He did say, however, that he didn’t want the IRS knocking on anyone’s virtual door.

Dan Miller said, “I found that talking about this issue with some of the other economists on the committee, they are not really familiar with what a virtual economy is.” Did I mention that Dan Miller is the U.S. Congress’s senior economist for the Joint Economic Committee?

According to my brother, the interpretation of the quote above is this: “The sooner we can figure out what it is, the sooner we can tax it.”

Now, if there are that many people unaware of how these second worlds work, I’ll wager there are few people in the nation’s law-making bodies who know what they are talking about. This will inevitably lead to laws made by those who don’t understand what they’re doing.

I think it’s time that the virtual community send a virtual Smith to Washington. A virtual community should not be taxed without having had someone represent their case before lawmakers. Virtopia needs Senators and Congressmen.

And if they don’t get them? Well, I think they should form their own country and secede from the union; form their own constitution, elect their own president, and decide whether they want to be taxed or not.

Virtual nations. That’s a strange idea. Now that I mention it, it really scares me. What if a group of pedophiles or murderers decides to create their own virtual nation where they aren’t subject to the laws in which their computer resides. (This must be covered in a law somewhere–how else does the law convict these kind of people using the harddrives from their computers?)

So, on second thought, there really needs to be regulations on these things. But really, the taxation shouldn’t be inserted into a game, or else there will be people who form their own nations to avoid taxation. And forming online nations with their own laws just opens up a whole new can of worms.

But I think I’ll be fine with the virtual nations formed to avoid ridiculous taxes . . . so long as they don’t start enriching uranium.