The UK should take a lead in deciding whether to tax virtual transactions, according to a tax specialist who is monitoring businesses' growing involvement in cyberspace.

David Nickson of KPMG urged the Treasury to take a "proactive approach" to the taxation of profits earned in online games, such as Second Life, a digital world in which participants can set up businesses and trade with other residents in Linden dollars. The government should assess the scope for tax planning and fraud, as well as considering the tax implications for virtual businesses, he said.