2022’s big buzzword - you’ve probably heard of the Metaverse... even if you don’t quite get what it is yet. 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 their 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.
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 - are 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? Who knows. Like any new technology and market - we don’t know what the Metaverse will eventually be. This is partly thanks to the decentralized movement.
With no “owner” of properties and fewer barriers to entry - the possibilities are basically endless. 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.
For example, in December, a plot of virtual real estate in The SandBox sold for $4.3 million to an Atari developer.
With all this money pouring in, you can bet tax offices around the world are figuring out how on earth to tackle the metaverse.
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 - the lines are starting to get a little blurry. For example, you can chuck your MANA tokens using Gemini Earn or you can sell your SAND tokens on Binance.
As well as this, metaverse assets are largely tokenized. This means that assets in the game - like land, clothes and even names - are NFTs. So many players are creating and selling digital assets and earning in crypto.
What this means is 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.
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.
A lot of this comes down to the fact that tax offices are constantly playing catch up. They - like most of us - don’t really know or understand what the metaverse is yet. They struggle to give clear guidance on crypto transactions, let alone the tax implications of someone selling an NFT of an in-game name.
We don’t know whether they’re just going to apply the same crypto tax rules, or whether we’ll get a new set of rules with specific metaverse property tax treatment, income treatment and so on - kind of like in the real world.
So what do we know at the minute?
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.
Assets in the metaverse are tokenized as NFTs. The IRS - and other tax offices - haven’t given us much guidance as to how NFTs are taxed yet.
Most tax experts however agree that NFTs can be thought of like a kind of art - digital art in fact.
When you sell art in the real world - you’ll pay the top-end collectibles Capital Gains Tax of 28%.
What this means is that potentially when you’re selling digital assets like property, clothing or names from the metaverse - for fiat currency - you’ll need 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 the more 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.
To further confuse things - 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 game… in the metaverse.
There is actually a precedent that suggests income in the metaverse is taxable - but it’s complicated.
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 suggest 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 have 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.