How is the Metaverse Taxed?
The metaverse is the decentralized virtual reality being built, which isn’t too dissimilar from our own world. While the IRS hasn’t set up its virtual offices just yet, it’s certainly something they’re keeping an eye on. We’ve got everything you need to know about the Metaverse and Metaverse taxes.
Owning or trading virtual items (like NFTs or land) in metaverse platforms is similar to owning any other digital asset, so when you sell or dispose of them and make a profit, that’s usually a capital gains event.
Earning tokens in metaverse platforms (for example, from renting digital land, creating experiences, or being paid in the native token) tends to be treated as income, based on the value of those tokens when you receive them.
Even if tax authorities haven’t made specific rules for the metaverse, existing rules for cryptocurrencies, NFTs, and digital assets usually apply. It’s about interpreting those rules in your country.
What is the Metaverse?
In short: TBC. The phrase comes from “Snow Crash," a dystopian cyberpunk novel. EE seems to think it’s cursed augmented reality, Rita Ora, Microsoft wants us to log in to a virtual office, and who knows what Facebook (sorry, Meta) is up to.
At the moment, the Metaverse is best defined as a network of virtual worlds, like Decentraland, The Sandbox, Bloktopia, and more, focused on changing the way we communicate and interact with each other.
But what could it be one day? With no “owner” of properties and fewer barriers to entry, the possibilities are basically endless for crypto games. People are earning crypto in virtual worlds and selling it for fiat currency. In fact, in some instances, they’re earning thousands or even millions more than they would in the real world.
With all this money pouring in, you can bet tax offices around the world are figuring out how on earth to tackle the metaverse.
Wait, Metaverse money is real money?
Crypto fits perfectly into the Metaverse as a digital currency. Most metaverse games have their own cryptocurrency. For example, Dencentraland’s MANA or The Sandbox’s SAND.
Of course, because you can use these currencies in and outside the metaverse via crypto exchanges, the lines are starting to get a little blurry.
Metaverse assets are largely tokenized, so assets in games are NFTs and fungible tokens. What this means is that when you earn in the metaverse, you’re actually earning, or at least potentially earning. But where there’s money, eventually there will be taxes.
Metaverse taxes
We’ll start with the good news. 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.
So what do we know?
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?
Let’s tackle this one part at a time.
Metaverse NFTs Tax
Assets in the metaverse are tokenized as NFTs and NFTs are taxable.
You'll pay Capital Gains Tax on any profit you make as a result of disposing of an NFT by selling or trading it.
Metaverse Income Tax
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 sell or trade this currency out of the game for fiat currency or another cryptocurrency.
There is actually a precedent that suggests income in the metaverse is taxable.
Quite a while back, the game SecondLife exploded in popularity. SecondLife was a similar virtual reality concept where users could earn the in-game currency Lindens. Lindens isn’t a cryptocurrency. It’s a closed-loop virtual token and you can only spend or use Lindens in-game. But you can sell Lindens for USD on SecondLife’s exchange LindeX.
Linden Lab eventually started sending out 1099-MISC forms to SecondLife players (and the IRS) to anyone who made and sold more than $600 of Lindens in a single financial year and players did pay Income Tax on earnings.
The fact that currencies used in metaverses like The SandBox and Decentraland have so much more real-world use suggests they’re going to be subject to the same tax treatment. So, if you’re making an additional income through the metaverse, including regularly creating and selling NFTs, you may need to pay Income Tax on your earnings, even if it’s in crypto.
Some tax experts are trying to get ahead of the game and help taxpayers navigate the complex implications of metaverse taxes. Prager Metis has even set up a CPA firm in Decentraland, saying the metaverse office will serve as a resource for individuals and businesses in the metaverse looking for accounting and financial advisory services - including taxation.
