March 25, 2014 was a pretty interesting day for virtual currency and virtual reality!
It seems the IRS deems mined bitcoins (& Dogecoins!) to be income. So it seems pretty clear that Linden Dollars are a "convertible" virtual currency and should count as income too. I'm assuming professional goldfarmers should have to report loot drops too, since they're skilled at converting that virtual currency. But I'm still unclear about participants in primarily virtual, ludic economies -- e.g. MMORPG players who may occasionally sell or buy virtual property.
Language from the IRS follows -- full text is here.
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...Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like “real” currency -- i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance -- but it does not have legal tender status in any jurisdiction...
...Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency. Bitcoin is one example of a convertible virtual currency...
..Q-8: If I “mine” virtual currency, do I have income from mining? A-8: Yes, when you successfully “mine” it, the fair market value is income.
Q-9: Is an individual who “mines” virtual currency as a trade or business subject to self-employment tax? A-9: Yes...
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