I actually support the taxation in an appropriate manner. Which is to say when virtual currency is converted into real world currency. Until that point, no real world agency has any more right to tax my in game gold than they do to tax my yahtzee score.

If I make and sell items in Second Life, but all the money I make stays in world, then real world agencies have no rights to tax that currency exchange. It is simply out of their jurisdiction, and should remain so.

However, if I were to sell my Linden Dollars and convert it into real world money, then it becomes income, and should be treated as such.

For worlds with closed economies, where there is no (official or legal) way to convert in game currency to real currency, then taxation is absurd and should never take place. To even consider it is simply an act of greedily grabbing for money that they have no right to.