- There are millions of transactions taking place in the metaverse every day across the globe
- The metaverse transactions are not taxed considering is rapidly growing
- How and where can taxation apply in the metaverse is a whole process that needs policies before implementation
It is obvious that revenues from metaverse deals will be sizable, regardless of how they are produced. According to recent studies, the market potential in the metaverse could generate over $1 trillion in yearly revenue. To successfully levy and collect tax resulting from these transactions, tax authorities will need the proper tools; otherwise, they run the risk of a sizable quantity of money falling into this fictitious tax gap.
The idea of the metaverse, which consists of flawlessly interconnected virtual worlds where people can play, reside, work, and transact business, might seem science fiction. A new tech era that has already given rise to numerous taxable events is being heralded by major tech firms like Microsoft and Meta realigning their plans to work toward a digital future.
Even when metaverse transactions occur, they produce value for the real-world natural people or legal entities involved in the transaction. These actual people and entities can (and ought to) be subject to current foreign tax laws. But the following tax issues must be correctly resolved:
Where will metaverse transactions get taxed?
Some people make the incorrect assumption that transactions taking place in the metaverse are exempt from taxation because no nation or tax body has jurisdiction over the virtual world. The key to determining the main taxing authority over a metaverse exchange (using current tax laws) is determining the tax residency of the parties to the transaction in the “real world.”
How can tax officials monitor metaverse transactions and gather the resulting tax?
Reporting will be the starting step for any tax authority. A structure for the automated sharing of data on crypto-assets is currently being discussed by the OECD. The technical proposals would mandate that a crypto-asset service provider (such as coin platform operators) provide a list of crypto-asset transactions along with key identifying information on their customers. This framework for the sharing of information may need to be expanded to include metaverse platform hosts in order to give tax authorities the data they need to tax transactions in the metaverse.
How do you choose a taxable transaction on metaverse?
Sometimes it will be easy to tell whether a transaction took place in the metaverse, especially if it is essentially just an online buy of ‘real world’ goods or services. Subject to any future modifications resulting from the implementation of the OECD’s proposals to handle the taxation of the digital economy (referred to as “pillar 1” and “pillar 2”), the tax treatment will adhere to established rules that apply to regular online transactions.
It may be less noticeable to the parties involved in situations where one virtual asset is exchanged for another (such as a non-fungible token (NFT) bought with cryptocurrency or another token), that (a) a “transaction” has occurred on which tax may arise, and (b) the price of that transaction for tax purposes.
This problem is being debated by numerous jurisdictions as they work to enact tax regulations specific to digital currency holdings. The development of an efficient tax policy that can be used in the metaverse will depend on having clear rules that define the tax status that applies to cryptocurrency transactions, including when and how the charges are computed.
According to auditing firm KPMG, tax policymakers around the world have tried to keep up with advances in crypto assets and their consequences for taxation in order to comprehend the significant macroeconomic implications of the market’s expansion. For the purpose of determining when taxable income has been produced, many tax authorities view crypto assets as a type of property, similar to stocks or bonds (e.g., in the United States and Australia with respect to cryptocurrency). However, due to the difficulty in determining the nature of the transactions or the connection to a taxable event, VAT concerns have largely gone unexplored. The continuously changing structure of crypto assets and their financial assets makes it difficult for tax policymakers to develop tax policies for them.
The global auditing firm states that it will be interesting to see whether tax authorities attempt to equate “real” trading with those market transactions taking place in a virtual space from a VAT and economic viewpoint given the rapid development of the metaverse.
The variety of goods and transaction types cannot be appropriately applied in a VAT context until we establish and then follow some fundamental principles. In order to prevent the metaverse from turning into the VAT multiverse of madness, policymakers will eventually need to approach the taxation of the metaverse holistically and globally.