Authorities should regulate and tax the Metaverse to avoid tax dodgers operating on the upcoming spatial communications platform, Christine Kim, Harvard Legal Scholar, said in a recent research paper.
According to the document “Taxing the Metaverse,” Kim argues that authorities should treat the Metaverse like “a laboratory” for exploring novel policy development.
Kim said,
“Governments can use the Metaverse as a laboratory for experimenting with cutting-edge policy, which may benefit broader audiences beyond tax policymakers interested in the Metaverse’s future”
She added that the finance sector should regulate the Metaverse under specified tax codes, adding,
“Because economic activity within the Metaverse satisfies the Haig-Simons and Glenshaw Glass definitions of income, its exclusion will create a tax haven”
The scholar wrote that the Metaverse’s digital activity monitoring activities could “track individual wealth,” allowing regulators to police the platform. Doing so could allow governments to tax income in real time, triggering sweeping changes across tax laws in the United States.
US tax laws in the Metaverse should tax financial activities like monetary withdrawals and purchases. She continued that “unrealized gains and income” could fall under this taxable financial activity.
However, enforcing US tax laws in the Metaverse could pose significant challenges, requiring metaverse platforms to withhold taxes. Conversely, the Internal Revenue Service (IRS) and other respective tax collection bureaucracies could force users to file taxes on their holdings in the virtual world.
Despite this, revenue collections from the Metaverse could allow lawmakers to receive funding for critical projects.
In her paper, she stated,
“Because economic activity within the Metaverse satisfies the Haig-Simons and Glenshaw Glass definitions of income, its exclusion will create a tax haven. Tax policy can also play an essential role in regulating the virtual economy. Furthermore, this emerging technology allows policymakers to modernize the tax system. The Metaverse’s ability to record all digital activity and track individual wealth can offer governments a unique opportunity to tax income immediately upon receipt and thus, overcome the traditional realization requirement and its incentive for tax deferral”
PwC and the Challenges of Metaverse Taxation
The news comes as many consultancy agencies, including PricewaterhouseCoopers (PwC), outline potential scenarios for monetising the metaverse.
According to a recent report from the Big Four consultancy, businesses were “struggling to make sense of transactions that have one foot in the virtual world and the other in the physical world.”
The company wrote,
“Not being able to apply effective tax policies could make it harder to take advantage of the opportunities opening up in the metaverse. It could also put your business at risk of tax disputes”
Citing theoretical scenarios such as purchasing online goods, using avatars, and shopping with cryptocurrency wallets in the virtual world, PwC listed several key taxable components.
These included:
- XR headsets
- Means of exchange
- Where the transactions take place
- The goods distributed in the Metaverse
These also involved customs duties, value-added taxes, and corporate income taxes across the supply chain, the report stated. Furthermore, research and development (R&D) tax credits could help metaverse companies innovate their solutions.
Concluding, PwC stated that metaverse tax regulations would involve engaging with companies to determine their plans. This would involve determining partnerships and business strategies to locate potential taxable incomes. Doing so would avoid future risks as governments begin enforcing policies.
Regarding the specific elements needed for taxation, PwC said,
“Be granular about all the elements that contribute to the metaverse presence from transaction flows to the location of key people and functions. This will enable you to determine how operations will be treated for tax purposes, how to manage potential risks (e.g. territorial tax claims or differing rules on NFTs) and your compliance demands (e.g. VAT registrations and filings)”
Finally, PwC recommends businesses trial sandboxed metaverse environments to determine where taxes would apply, operating in the limits of specific tax code jurisdictions.
Chaos out of Order: Global Authorities Lay Down the (Metaverse) Law
The news comes after a conversation at the VRARA Immerse Global Summit event, Metaverse 2.0, to discuss the massive complexities of Metaverse law. At the event, Alexia Bedat, Associate Lawyer, Klaris Law, explained how there was currently “no such thing as Metaverse law.”
Similar discussions over metaverse law have come from the Rose Law Group, a pioneer in the space. XR Today recently interviewed Jordan Rose, Founder and President, Rose Law Group to explore the potential pitfalls over intellectual properties (IPs) across the spatial communications platform.
Furthermore, industry professionals began to question the rule of law on digital assets, non-fungible tokens (NFTs), the blockchain, securities, and other assets under specific jurisdictions across virtual worlds.
For her, people should define their precise goals to connect with lawyers and advisers on their enquiries.
This would avoid challenges over trademarks, branding, and copyright laws for content creators. Her comments come just over a year before the proliferation of ChatGPT and other artificial intelligence (AI) programmes for metaverse services.
Also, major law enforcement agencies like INTERPOL have been trialling specific scenarios for policing the Metaverse. Through their efforts, they hope to ink a detailed framework for tackling metaverse crimes, money laundering, and other situations requiring police intervention.
Amid a tumultuous year in Web3 and cryptocurrencies, the industry has raised questions over the safety of digital assets. This comes after the collapse of crypto platform FTX, costing investors billions of dollars in investments, as well as the death rattle of stablecoin Terra/Luna.
Following the chaos, global organisations such as the European Union, Japan, Australia, China, the United Arab Emirates (UAE), the United States (USA), and others have begun developing complex frameworks for the Metaverse and connected worlds.
