The Internet allows many online gamers to have second lives in the virtual world; for others, it provides a place to sell virtual items for real money. Now the government has gotten in on the act and will begin taxing the profits on virtual currency transactions.

On October 28, the State Administration of Taxation (SAT) announced to impose a personal income tax of 20 percent on profits gained through virtual currency transactions. The measure, whose announcement was sent to local taxation bureaus, specifically takes aims at those who buy virtual currency from gamers and sell it to others at a mark-up.

Sales of virtual items have become the lifeline of many game operators in China who have followed the example of Shanda Interactive Entertainment Ltd. At the end of 2005, the Shanghai-based company started offering free in-house developed games, while charging gamers for equipment, clothing, armor, weapons and other magical items that their characters needed to play and win. Currently, China has a gaming population of 40 million, each spending nearly 400 yuan ($58.65) a year buying these virtual items.

The market for virtual asset trading has emerged as a submarket of online games distribution, whose revenue volume can match 80-90 percent of that of the prime market in China, said Zhang Pei'ao, Vice President of 5173.com, one of China's major virtual asset transaction platforms.

Statistics from iResearch Consulting Group show that China's virtual currency market is growing 15-20 percent annually, and several billion yuan worth of virtual money is traded in the market. The lucrative market has given rise to the business of gold farming where young game players typically work 12-hour shifts with only a lunch break to accumulate or "produce" virtual wealth, including virtual gold and equipment, by killing monsters.

Mei Yong, who owns a small gold farm in Beijing where three gamers usually work 10 hours a day for a monthly salary of 2,000-3,000 yuan ($293-440), said his farm's monthly harvest is about 10,000-15,000 yuan ($1,466-2,199). These gold farmers are the major suppliers of the market and conclude 50 percent of their transactions in private, or what is referred to as "dark gold," Mei said. Such untraceable private transactions have been a real headache for tax collectors, he said.

The Beijing Local Taxation Bureau implemented the policy with detailed stipulations on November 10. It requires that individuals go to the tax department to pay personal income tax within seven days after transactions. Those who can provide proof of the buying and selling prices of property must pay 20 percent of their profits. Those who cannot must pay 3 percent of the total value of their transactions.