Congress May Tax Virtual Income From Online Role-Playing Games

The Republican head of a U.S. congressional committee said it would be a mistake if the Internal Revenue Service introduced regulations to tax virtual economies such as "Second Life" and "World of Warcraft."

Rep. Jim Saxton of New Jersey, chairman of the Joint Economic Committee, confirmed on Tuesday a Reuters report that the committee was studying the public policy and tax issues related to virtual economies.

"There is a concern that the IRS might step forward with regulations that start taxing transactions that occur within virtual economies. This, I believe, would be a mistake," Saxton said in a statement released on Tuesday.

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"Second Life" is a virtual world on the Internet where some 900,000 users have signed up to create characters, buy property and interact with other players. Players spend around $350,000 a day on average, or about $130 million a year, and usage is growing in double-digit terms each month.

Players buy and sell goods and services using a virtual currency, known as "Linden Dollars." An online marketplace allows users to convert the currency into real U.S. dollars, enabling users to earn real money from their activities.

Saxton said such virtual economies have outpaced the law.

"The goal of the forthcoming Joint Economic Committee study is to help lawmakers understand the issues involved and head off any premature attempt to impose a tax on virtual economies," he said.

Under current law, Saxton said if a transaction takes place solely within a virtual world there is no "taxable event."

Dan Miller, chief economist for the Joint Economic Committee, said earlier this week that the committee's study would start with a blank slate and be completed by the end of the year.

"Second Life" has attracted the participation of such companies as Toyota (TM) and computer maker Sun Microsystems (SUNW).

Adidas and American Apparel sell clothes and accessories for people to dress their avatars (animated characters) and Starwood Hotels (HOT) has built a virtual version of "aloft," a new hotel chain it plans to open in the real world in 2008.