The Metaverse is a virtual universe or a parallel digital reality in which human avatars will be present due to technological advancements. Anybody can shop, purchase, travel around, and theoretically do anything that one can do in real life in this environment. Many businesses are developing Metaverses for entertainment, education, and commerce.
The Metaverse includes the Digital Economy, and Blockchain plays a critical part in its growth. Organizations will also be able to sell products, services, or NFTs in this digital market. Blockchain technologies will be confirming all of these operations. Companies will require digital space to display their products or conduct events. The virtual land will be in that space.
Is there such a thing as genuine money in the metaverse?
As digital money, crypto fits well into the metaverse. Dencentraland’s MANA and The Sandbox’s SAND are two examples of metaverse games that have their own coin.
However, since these currencies may be used both within and outside the metaverse, the lines are beginning to blur. For example, you can invest your MANA tokens in a Celsius wallet and receive interest. And also sell your SAND tokens on Binance.
Furthermore, metaverse mostly tokenizes its assets. This means that in-game assets such as land, clothing, and even names are NFTs. Many people are generating and exchanging digital assets in order to profit from cryptocurrency.
Read: Understanding Crypto Taxes
Metaverse taxes
The good news is that the IRS or any other tax authority has yet to issue any guidelines on the tax consequences of sales or profits in the metaverse. Much of this stems from the fact that tax offices are always playing catch-up.
They, like most of us, have no genuine understanding of what the metaverse is. They have a hard time providing clear advice on crypto transactions. Let alone the tax consequences of selling an NFT of an in-game name. We don’t know if they will just use the same crypto compliance regulations, or if they will come up with a new set of rules with unique metaverse property tax treatment, income treatment, and so on, similar to the real world.
Unless there is a particular exception, all states are to tax all sales transactions. So, what kind of tax could apply to metaverse income, metaverse properties, and other things?
Metaverse vs NFT tax
NFTs usually tokenize assets in the metaverse. The IRS – and other taxing authorities – have yet to provide much advice on how NFTs are taxed. However, most tax experts believe that NFTs may be a form of art, namely digital art.
When you sell art in the real world, you will have to pay a 30 percent capital gains tax on top-end collectibles. This implies that if you sell digital assets like property, apparel, or names from the metaverse for fiat cash, you may be subject to a 30% capital gain tax.
But what if you exchange your NFT for cryptocurrency? There are, sort of, guidelines on this.
The IRS treats crypto-to-crypto exchange as a sale and therefore is liable to Capital Gains Tax. You’ll have to pay Capital Gains Tax on any profit you make if you sell your NFT for ETH.
It is unclear if this would be the collectible CGT rate or the usual short and long-term CGT rates.
Read: 5 Biggest Predictions About the Metaverse and Business
Metaverse income tax
in addition to the confusion, each metaverse has its own money, whether it’s SAND, MANA, or something else altogether. Many users are now earning money in-game. They may then sell or exchange this currency for fiat currency or another cryptocurrency outside of the game.
Completing quests, renting land, having a job, or even – for a true Inception moment – playing a play-to-earn game are all examples of methods to get money in a parallel universe. There is precedence that shows metaverse income tax, although the situation is tricky.
The idea that currencies used in metaverses have so much more real-world application suggests they will be taxed similarly. So, if you’re generating extra money in the metaverse, such as routinely creating and selling NFTs; you might have to pay income tax on it, even if it’s in crypto.
Some tax specialists are attempting to stay ahead of the curve by assisting taxpayers in navigating the complexities of metaverse taxes. Prager Metis has even established a CPA company in Decentraland. He claims that the metaverse office would be a resource for people and enterprises seeking accounting and financial advising services, including taxation.
Renting virtual land
Entities would require the land in the Metaverse to conduct events or run an e-commerce firm. You can get these virtual territories on the marketplace or rented from their owners.
Such rental income will not be taxed under the heading “income from home property,” because the first criteria for taxing rental income under this heading is that it must be obtained from house property. It implies there will be no standard deduction of 30%.
Such money will be taxed as income from other sources or business income, depending on the circumstances. The requirements for keeping books of accounts and having them audited will also apply.
Running an e-commerce store or holding an event
Any money earned by operating an e-commerce firm in the Metaverse is subject to taxation in the same manner that traditional business income is. All profits are entirely and exclusively in connection with such business and the taxpayer can deduct them. In the same way, if a resident person holds an event in Metaverse, the money will be taxed as either business income or residuary income (income from other sources), depending on the Metaverse and Real Estates.
Read: Metaverse and Real Estates; Why Investors are Buying Virtual Land
Sale of virtual land
A land in Metaverse is an NFT, as said before. As a result, the revenue derived from its transfer is taxable under Provision 115BBH of the Income-tax Act of 1961, assuming the government has designated this land as an NFT for the purposes of this section. However, unlike crypto assets, it is unclear why only informed NFTs will be deemed Virtual Digital Assets (VDAs).
The revenue derived from the transfer of VDAs is taxed at 30% plus surcharge and cess, according to Section 115BBH (1). Except for the cost of acquisition of the VDAs, if any, such revenue should be computed without deduction of any direct or indirect expense. Furthermore, any loss damages arising from the transfer of virtual land will not be allowed to be offset against other losses.
Final verdict
The metaverse, as well as the technology that underpins it, may provide substantial tax issues. However, they have the potential to provide tax practitioners with intriguing new tools, making it simpler to collect the proper tax at the right time and in another more efficient and cost-effective way for all parties concerned.
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