Incorporating the Virtual World into Current Tax Policies: The Taxation of Metaverse
The metaverse has become a virtual world that millions of people now inhabit, with approximately 400 million active users worldwide. Its value has skyrocketed from $58.5 billion in 2021 to a projected $1.5 trillion by 2030, making it a significant contender in the global economy. However, with this rapid growth comes the challenge of incorporating the virtual economy into existing tax systems.
A recent research paper by Young Ran (Christine) Kim, a Harvard scholar from the Benjamin N. Cardozo School of Law, explores the potential approaches to taxing the metaverse. The paper argues that the metaverse should be considered as another business sector and therefore subject to existing tax systems.
There are several reasons why taxing the metaverse is necessary. Firstly, it aligns with well-established theories and perspectives on regulation. The activities in the metaverse, such as companies making profits, investments gaining returns, and people earning rewards, are similar to traditional money-making methods defined in tax codes. Additionally, governments have the right and duty to tax economic activities within their borders, and the metaverse should not be exempt from this.
Implementing a proper taxation system in the metaverse is also crucial for preventing it from becoming a tax haven where individuals can evade taxes by hiding assets or income. It would promote transparency and accountability within the metaverse’s financial markets. While progress has been made in bringing cryptocurrencies under tax policies globally, a broader approach is necessary for the metaverse.
To address the taxation of the metaverse, various aspects need to be considered. Firstly, earnings and profits in the metaverse, whether in the form of virtual goods or cryptocurrencies, should be subject to capital gains tax rules similar to those applied to existing digital assets. The valuation of these assets may require dynamic approaches to reflect their ever-changing nature.
Another consideration is the taxation of self-made or enhanced assets in the metaverse, such as personalized digital tokens or virtual weapons. These assets could give rise to a new category of imputed income, requiring valuation and tracking mechanisms to facilitate taxation.
Rewards obtained in the metaverse, such as loot drops, which have real-world value, should also be subject to taxation in certain scenarios. The digital tracking capabilities of the metaverse could enable immediate taxation of these rewards to ensure fairness and prevent tax evasion.
The treatment of unrealized gains in the metaverse poses a challenge. Currently, these gains are only taxed when they are realized, but this approach may not suit the fast-paced and fluid nature of virtual assets. Taxing these assets based on their market value at the end of each year could provide a more accurate reflection of an individual’s financial standing.
Determining where taxes should be collected in the metaverse is another complex issue. Potential strategies include using the location of servers, the base of platform owners, or tracking users’ internet addresses. However, these methods have limitations, and a flexible system that can accommodate digital nomads and individuals with multiple residences is necessary.
Enforcing tax rules in the metaverse requires careful consideration. One proposal is to place the responsibility on metaverse platforms to directly send taxes to tax authorities, reducing errors and tax evasion. Alternatively, tying tax collection to users’ place of residence can integrate seamlessly into the current tax filing process.
Building a robust tax structure for the metaverse is a challenging task that requires a versatile plan. It must identify the appropriate locations for tax collection and strengthen compliance mechanisms to mirror the dynamic nature of the metaverse itself. Ongoing efforts are needed to develop a fair and effective system that ensures a bright future for the digital frontier.
