Metaverse’s Future is Questionable, But Why Not Tax It?

By  Lesia Dubenko 168 10 Sept 2023
Photo - Metaverse’s Future is Questionable, But Why Not Tax It?

If in doubt – just tax. That’s the approach promoted by some academics with regard to the metaverse.

It is not too popular; there are multiple problems involved; the whole endeavor might not be worth the effort. 

But is it a good enough reason to not tax people operating in the metaverse?

In her fresh paper dubbed “Taxing the Metaverse”, Young Ran (Christine) Kim, Professor of Law Federal with expertise in income tax, international tax, and taxation of business at Yeshiva University - Benjamin N. Cardozo School of Law, affirms that the answer is no.

Published by Georgetown Law Journal, the paper contains 57 pages of the author's lengthy contemplations. Mainly as to why the metaverse activities fall into the Haig-Simons definition of income, i.e. the algebraic sum of (1) the market value of rights exercised in consumption and (2) the change in the value of the store of property rights between the beginning and end of the period in question.

In her words, the metaverse offers an array of opportunities for making both regular and imputed income, receiving rewards, transacting, and accumulating wealth. 

Defining the metaverse as “any network of virtual worlds wherein participants engage in economic activity, including the ability to consume, create, trade, and accumulate digital items with real economic value”, she also explains what real economic value is. It is a value that can converted or at least valued in a currency that is subject to taxation. This includes both fiat and crypto.

So, how does one make money in the metaverse?

One of the examples that Young Ran (Christine) Kim uses is Fortnite where players purchase skins, weapons, and in-game currency. 

After having a discussion with herself about whether economic gains within the Metaverse should be taxed immediately upon receipt or deferred until realization or cash-out from the Metaverse, she opts for the former. 

Young Ran (Christine) Kim takes her taxation argument one step further, claiming that the metaverse could also become a tax haven without providing any firm evidence in support of that claim. Other than stating that because the metaverse isn’t confined to geographical borders, it becomes so-called “stateless income.”

Any challenges?

Although the paper is ambitious to say the least, already at the beginning of it she states that her endeavor to tax the metaverse isn’t fully unproblematic.

First, she admits that the level of participation in existing online virtual worlds such as Second Life, Decentraland, and The Sandbox is “lackluster.” Then she adds that there is, what she describes as a “tangible struggling” of the NFT and cryptocurrency following the FTX’s implosion. 

The volatility aspect must also be factored in, with Young Ran (Christine) Kim saying that “one need only look at the cryptocurrency market's 70% devaluation ($2 trillion loss) over the past year to see that digital assets are highly volatile.” 

As well as identifying the right tax jurisdiction. This means whether the individual should be taxed on the physical jurisdiction in which the taxpayer finds themselves in, “or should it be based on the location of the server hosting the metaverse the taxpayers games in?”

Finally, there’s the fact that the tax base is relatively small alongside “an even smaller number of taxable transactions”.

“The Metaverse is currently estimated to have 400 million active monthly users. The player base of three popular video games—Roblox, Minecraft, and Fortnite comprises approximately 90% of these users,” she says, adding that many of those players are kids.

This, however, does not put off Young Ran (Christine) Kim who believes that her present discussion is justified. Especially due to the “recent collapse of cryptocurrency markets, which are closely related to the Metaverse, introducing taxation may enhance transparency and regulatory monitoring.”

In the conclusion part, the author suggests that her initiative to tax the metaverse will ensure that the rich moguls of the world will not hide “within the invisible webs of the Metaverse”. And adds that it can also become a laboratory for experimenting with modern tax policies. 

“If combined with the ULTRA system, the Metaverse’s ability to track everything that occurs within its folds will mean that tax deferral will no longer be a necessary evil,” she writes. 

Do you agree that the Metaverse should be taxed? Tag us on Twitter to let us know. @NewsGagarin

Previously, Gagarin News reported that the SEC weighs in if NFTs are securities.