Not to split hairs about this too much, but from a legal standpoint, the practicalities of reporting are not at issue. You are correct about the home business write offs to a certain extent, but the law (IRC Sec. 61, or 26 USC 61) basically defines income as anything of value you receive from any source (heavily paraphrasing). There are certain exceptions, such as gifts or inheritances (that is why you don't have to declare Christmas or birthday gifts as income). But unless there are such statutory exemptions, virtual income that you have the right to exchange for real world money is reportable income, whether or not you actually receive it or turn around and spend it on other virtual items. It would be up to the recipient to claim those home business deductions and face the possibility of IRS audit to prove them.

Frankly, I don't think it is worth the potential hassle just for a game, which is why I plan to give Diablo 3 a miss until these issues are worked out, or until it is sold for extremely cheap on http://www.gog.com :)