The creators envision the Metaverse—a fully formed digital world with virtual identities, families, possessions, and more—that will transform our global economy. The field is growing rapidly, with multiple platforms already offering interactive games, business opportunities and social experiences.
Barbados, for example, has long claimed that digital properties are part of sovereign land — and it was the first country to do so.
The island nation intends to create virtual embassies and consulates, develop services that could provide electronic visas, and build a "teleporter" that would allow users to transfer their avatars between worlds.
As the Metaverse develops further, it is time for governments to consider whether and how to tax the businesses or individuals involved, whether it is a transaction tax, income tax, or some other category.
The Nature of Work in the Metaverse
When it comes to income taxes, the first question to ask is what it means to work in the Metaverse.
Consider, for example, that a digital real estate agent is hired to select digital land that a client might be interested in purchasing. Her clients buy a plot of land and pay her a commission in cryptocurrency.
The broker's commission is income. In this case, the broker will report the amount of her commission as ordinary income on her tax return, depending on the market value of the cryptocurrency on the day the payment is received.
However, payments in the Metaverse are not limited to the form of cryptocurrencies. A similar question arises with "earn-to-play" video games, that is, whether what gamers earn counts as wages.
As an example, Axie Infinity is a game world where players can buy, sell, train, and fight NFT creatures called Axies. Axie Infinity includes several types of in-game currency, one of which is called the "Smooth Love Potion" (SLP), which is a token that players earn when they win battles. SLP tokens can be bought and sold on the open market with cryptocurrencies or fiat currencies.
Since Axie's in-game currency has real-world value, it stands to reason that tokens earned during gameplay need to be reported and taxed as ordinary income, with the amount determined by the player's market value on the day they are earned or claimed.
And, if a player converts her SLP tokens into cryptocurrency, or sells them for fiat currency, then this qualifies as capital gains income and the player is subject to short-term or long-term capital gains taxes. The same is true for Axie NFTs.
At this point, the question of whether exchanging cryptocurrencies for services or renting digital goods constitutes taxable income has been resolved. But what about paying with NFT? What if the broker's clients use the Bored Ape NFT as a commission? Some Bored Ape NFTs have been sold in the market for millions of dollars, while others are sold for very little.
How would one value it in order to determine income?
Can NFT payments be considered barter transactions?
The IRS has recognized cryptocurrencies as property, but has yet to issue similar guidance for NFTs — although NFTs would likely qualify as property as well.
Image source: Guoshi Express
Here again, take the broker as an example. If the commission for the broker’s services is NFT, can this be counted as a barter transaction?
Yes, but only if the broker and her client discuss the broker's service and the fair market value of NFT in advance (FMV: fair market value refers to the voluntary principle between the buyer and the seller, where the relevant knowledge and information on both sides are basically symmetrical. conditions, according to their own interests in the price determined in the public transaction) to reach an agreement.
Of course, the opposite could also be the case, where the FMV of the offered NFT is lower than that of the brokerage service. It would be better for a digital broker to demand compensation from her clients in cryptocurrency or fiat currency.
NFT Sales and Royalty Income
If a person mints and sells NFTs for a living, there is no doubt that proceeds from these sales constitute income. In this case, the NFT would be considered inventory and the creator would have to pay self-employment tax in addition to personal income tax.
However, the IRS has yet to issue guidance on the treatment of NFT royalty income. Therefore, if a person is actively involved in creating and selling NFTs, his royalty income is likely to be subject to self-employment tax.
NFT donations or auctions for charitable purposes are not considered taxable events if three criteria are met.
First, the act of donating the NFT lasts for more than one year; second, the NFT is donated to a 501(c)(3) organization; and third, the NFT is donated directly to the organization. However, with regards to auctions, if a creator first auctions an NFT and then donates the proceeds to an organization, he will receive capital gains income and be taxed accordingly based on how long the asset is held.
summary
The digital world offers a wealth of new experiences and income-generating opportunities for individuals as well as business entities. But how exactly should this income be taxed? It is not easy to think about it.
In the U.S., the IRS rarely issues guidance for taxpayers, which means that in addition to the guidance provided by the IRS, tax agents can only rely on their own knowledge and experience to plug the loopholes. Despite these flaws, though, the Metaverse promises to be an interesting digital universe.
Note: Discussions in this article are based on U.S. law
Internal Revenue Code (IRC) 501(c)(3) of the US Internal Revenue Code specifies six types of tax-exempt organizations: 1. Charitable Organization 2. Churches & Religious Organizations 3. Private Foundations-4. Political Organizations ( Political Organization)5. Educational organizations
6. Other Nonprofits
Source: forbes
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