When you play Everquest or Ultima Online and amass a small fortune in virtual chainmail and platinum pieces, you can, of course, go and sell it to another player for real-world cash. But what precisely are the tax implications of this? Have you created any value — and if so, how much of it do you owe to the IRS? What is it: Income? Capital gains? A gift?

Julian Dibbel, one of my favorite high-tech journalists, recently decided to find out. During the 2003-2004 tax year, he made $11,000 in real-world money by winning, buying and trading virtual items in Ultima Online. Then he tried to get the IRS to tell him precisely what part of the tax code would apply to virtual-world goods — and reported it as a story for Legal Affairs magazine. Much hilarity ensues, including this terrific exchange with John Knight, Dibbell’s local IRS official in South Bend, Ind.:

“O.K., so I got a fake jewel that’s worth 80 million points, gives me all kinds of invincibility,” said Knight, striving doggedly to nail down what I was talking about. “But I got two of them, or don’t want to play [anymore]. And I can go on eBay and sell my jewel to some other character?”

“Uh, yeah,” I confirmed.

Knight considered the facts and offered a nonbinding opinion: “That’s so weird.”

In the end, Dibbell doesn’t get a solid answer: The IRS suggests he pay a $650 fee to request a ruling on the issue, and he doesn’t really want to pay that fee. But eventually someone will, and it’ll make for a damn interesting ruling. With tens of millions of people now playing multiplayer games online, there’s a significant amount of tax revenue potentially locked up in these games.

(Thanks to Naureen for this one!)