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I spent Friday and Saturday at the joint State of Play / Terra Nova symposium at the New York Law School. There was a lot of interesting talk, but probably none more so than the panel on taxation and virtual worlds that was held Saturday morning. Dan Terdiman has an excellent wrap on CNet, though I feel like his take is slightly alarmist. To the tax lawyers at the symposium, taxation of virtual assets seemed only a matter of time. But to the emissary from the Joint Economic Committee of Congress, a gamer himself, the picture looked more grey. Either way, it was clear that the debate was slowly reaching higher levels of policymaking circles, and that it’s only a matter of time (and maybe not that much) before Congress or the IRS starts making rulings that directly affect players of online games and the residents of virtual worlds like Second Life.

“It doesn’t really matter what the Joint Economic Committee thinks about whether these things should be taxable in terms of writing or not writing a new law,” said Bryan Camp of Texas Tech University. “The law is already written.”

Dan Miller, from the Joint Economic Committee itself, which has been looking into tax issues related to virtual worlds, was more equivocal about Congress’s position. “I’m really here wearing two hats,” he said. “On the one hand I am a congressional staffer. But I’m also the Night Elf priest who works for Congress.”

“The first thing to make clear is that, contrary to what you may have read, the JEC is not seeking to impose a new tax on virtual economies,” he said. “If you look at our body of published work, you’ll find a very clear track record of supporting lower taxes and free markets. We are planning to do a study on virtual worlds, and he hope to have something published in the first part of next year.”

Miller said the JEC will look at “factual technical questions” such as what exactly makes s taxable event or transaction, and whether those events should be taxable in the case of virtual worlds: “We want to look at what makes good tax policy with regards to virtual worlds. There is some uncertainty with regards to the tax treatment of virtual worlds and virtual economies, though there is also some guidance that appears to suggest it is taxable.” As the panel noted, some “virtual” assets that had been ruled to be taxable — like frequent flyer miles — were later ruled not to be as a result of administrative headaches and industry pressure.

“Important policy questions remain unresolved, but congressional and IRS interest in this issue is simply a matter of time. Given a growth rate of 10 to 15 percent a month, the question is when, not is, Congress and the IRS start paying serious attention to virtual worlds,” Miller said. “It’s incumbent on us to take the initiative and set the terms and tone of the debate to that we shape tax policy toward virtual worlds in a favorable way, because if we just allow things to happen on their own, it could very well be that the IRS does it for us, and I don’t think the people in this room would be too happy about that.”

One thing Miller noted about the player community, though, was that the outrage of many players was not reaching the ears of policy makers. “If you think that message was received in Congress, it wasn’t,” Miller said.

Players and residents of virtual worlds have been complaining lately that their virtual assets might get taxed. But even preceding that complaint has been the demand for more control over their virtual assets.

“Be careful what you ask for,” said Texas Tech’s Camp, referring to players’ and residents’ demands for more certainty in the ownership of their virtual assets. “Players want more protection from irrational actions of game designers and more certainty over their assets in the game. Be careful, because taxes are always right around that corner.”

Most tax lawyers at the symposium were fairly confident that taxation was on its way. According to Camp, “all income, from whatever source derived” is taxable according to law. Even barter income is taxable, Camp said. Camp used the example of Kyle MacDonald, who traded up from one red paper clip to a house in a series of barter transactions. “That guy has massive tax issues,” he said.

According to Bill LaPiana of the NYLS, there are already a number of “real-world” precedents in which intangible property has been considered taxable, and there’s no reason to believe the same wouldn’t hold with reference to “virtual” goods.

In any case, cashing out virtual assets for real-world currency was pretty much universally taken among the panelists to be taxable.

So the debate rages on. While it isn’t quite drawing to a head, it’s certainly gathering steam in Washington. The panel raised many interesting questions. Would Congress perhaps rule transactions in massively multiplayer online games to be exempt from taxation, unless assets were cashed out? (I.e., in order to preserve such spaces as games.) Would lawmakers be able to tell a game-world like World of Warcraft apart from a functional world like Second Life? And what about more social worlds, like There.com and MTV’s Virtual Laguna Beach?

Is it time to cash out now?