Taxing a virtual economy?

Taxing on virtual economy brought by Mankiw


And here is the original piece from Washington Post

"...LONDON (Reuters) - Users of online worlds such as Second Life and World of Warcraft transact millions of dollars worth of virtual goods and services every day, and these virtual economies are beginning to draw the attention of real-world authorities.

"Right now we're at the preliminary stages of looking at the issue and what kind of public policy questions virtual economies raise -- taxes, barter exchanges, property and wealth," said Dan Miller, senior economist for the Joint Economic Committee of the U.S. Congress.

"You could argue that to a certain degree the law has fallen (behind) because you can have a virtual asset and virtual capital gains, but there's no mechanism by which you're taxed on this stuff," he told Reuters in a telephone interview.

The increasing size and public profile of virtual economies, the largest of which have millions of users and gross domestic products that rival those of small countries, have made them increasingly difficult for lawmakers and regulators to ignore.

Second Life, for example, was specifically designed by San Francisco-based Linden Lab to have a free-flowing market economy. Its internal currency, the Linden dollar, can be converted into U.S. dollars through an open currency exchange, making it effectively "real" money..."

Well, given that Castranova's Terra Nova is the expert in this area we should check his blog out.

My thoughts, given my research on this topic in 2005, the taxes if imposed a whole new set of spillover effects in short terms, for ex. going back to an informal market such as before EQ's Station service. An informal structure as the payment transaction happened through any 3rd party based exchange marketplace and the actual transfer of the good inside the game at a specified place and time. Transaction costs and moral hazard problems apply there introducing risk premia and discounting items nonlinearly (e.g. due to a good's relative price) at a larger return than without those costs.