Though their transactions may take place in a fully virtual world, Metaverse users will likely still face real-world tax liabilities.
Recently, we are seeing and reading this term – Metaverse, everywhere. This term has gained attention globally. Everyone now wants to know what is it and how it works? And most importantly whether metaverse assets will be taxed similarly to crypto assets? A metaverse is a network of 3D virtual worlds focused on social connection and it can be defined as a simulated digital environment that uses augmented reality (AR), virtual reality (VR), and blockchain, along with concepts from social media, to create spaces for rich user interaction mimicking the real world. At present, there is absolutely no guidance from the IRS or any other tax office about the tax implications of sales or earnings in the metaverse yet. Though their transactions may take place in a fully virtual world, Metaverse users will likely still face real-world tax liabilities. Taxes are incurred based on the physical location of the taxpayer.
At this point in time, nobody knows whether they’re just going to apply the same crypto tax rules, or whether people will get a new set of rules with specific metaverse property tax treatment, income treatment, and so on – as it happens in the real world. We only know that all sales transactions are presumed taxable in the states – unless there is a specific exemption. So, what tax could apply to metaverse income, metaverse properties, and more?
Metaverse NFTs Tax
Assets in the metaverse are tokenized as NFTs. And there is no legal guidance on how NFTs are taxed. Most tax experts however agree that NFTs can be thought of as a kind of art – digital art in fact. When you sell art in the real world – you will pay the top-end collectibles Capital Gains Tax of 28%.
Similarly, when you will sell your digital assets like property, clothing, or names from the metaverse – for fiat currency – you will supposedly have to pay 28% tax on any capital gain you make from the sale. But what about if you sell your NFT for crypto? Well, there’s guidance on this – sort of.
The IRS is clear that a crypto-to-crypto trade is seen as a sale and it’s subject to Capital Gains Tax. So, in a likely scenario of you selling your NFT for ETH – you’ll need to pay Capital Gains Tax on any profit you make. It’s not clear whether this would be the collectibles Capital Gains Tax rate or the standard short and long-term Capital Gains Tax rates.
Metaverse Income Tax
To make things worse – each metaverse has a currency, whether that’s SAND, MANA, or something else entirely. A lot of people are now making an income in-game. They can then, of course, sell or trade this currency out of the game, for fiat currency or another cryptocurrency.
Examples of ways to make money include things like completing quests, renting land, getting a job, or even – for a real Inception moment – playing a play to earn a game in the metaverse. There is actually a precedent that suggests income in the metaverse is taxable – but it’s complicated.
There are other unresolved questions concerning indirect tax in the metaverse. For example, when a plot of NFT real estate is purchased in the metaverse using a cryptocurrency, should this transaction be subject to VAT or is it a bartering transaction triggering an income-based (capital gains) tax? The Organization for Economic Cooperation and Development (OECD) is currently in the process of potentially creating a common crypto tax framework in an attempt to gain consensus among jurisdictions, but it remains to be seen how long this process will take and how many countries will eventually sign up. In the meantime, individual countries continue to take divergent tax positions, classifying assets in different ways and applying different tax treatments to transactions. This is adding a layer of complexity and risk for international businesses who must carefully navigate this fast-changing tax landscape.