Taxing Income In The Metaverse

Metaverse virtual reality and internet futuristic streaming media symbol with VR technology and ... [+]getty

The Metaverse as envisioned by its creators — a fully formed digital world with virtual identities, homes, belongings and more — would transform our global economy. Development is growing quickly, as several platforms already are offering interactive games, business opportunities and social experiences.

For example, Barbados has been working to declare digital real estate as sovereign land, the first country to do so. The island nation intends to build virtual embassies and consulates, develop services to provide e-visas, and construct a “teleporter” that will allow users to transport their avatars between the various worlds.

These kinds of activities are only expected to grow, and now is the time for all governments — state, federal, and foreign — to think about if and how such ventures should be taxed, be they transaction taxes, income taxes, or any other categories.

The Nature of Work in the Metaverse

When it comes to income taxes, the first question that must be asked is what it means to work in the Metaverse. For example, consider the digital equivalent of an analog real estate broker. She is hired to select digital land parcels her client may be interested in purchasing. Her client purchases a parcel and pays the broker her commission in cryptocurrency.

Like her analog counterpart, the broker’s commission is income. In this case, the broker would report her commission as ordinary income on her federal and state tax returns, determined by the market value of the cryptocurrency on the day she is paid.

Yet payments to others can be made not just in cryptocurrency. Similar questions arise in the case of “play-to-earn” video games — that is, whether a gamer’s earnings count as wages.

For example, Axie Infinity is a gaming universe where players purchase, breed, train, and battle non-fungible token (NFT) critters called Axies. Axie Infinity contains several types of in-game currencies, one of which is “smooth love potion” (SLP), a token players earn for battle victories. Used to assist in breeding new Axies, the number of SLP tokens player earns varies with the strength of her gaming skills. SLP tokens can also be purchased and sold on the open market with either cryptocurrency or fiat money.

Since the Axie in-game currency has real-world value, it stands to reason that tokens earned during gameplay should be reported and taxed as ordinary income, determined by the market value of the token on the day the player earned or claimed it. And, as has been well-settled, if the gamer converts her SLP token into cryptocurrency or sells it in exchange for fiat money, it qualifies as capital gains income, subject to short- or long-term capital gains tax. The latter is also true for the Axie NFTs, which, like SLP tokens, can be converted to cryptocurrency or sold on the open market.

Thus, the issue of whether cryptocurrency payments in exchange for services or the rental of a digital commodity constitute taxable income is settled. The question concerning whether payments consisting solely of NFTs, however, remains open. For example, what if the broker’s client paid her with a Bored Ape NFT? Some Bored Ape NFTs have been sold for millions in the marketplace, while others have been sold for substantially less. How would one go about valuing such an NFT for purposes of determining income?

Another example of income, although not “work” in the traditional sense, is the case of a person who rents digital land. Like the broker, how would the digital landlord determine her rental income for the lease period if paid with an NFT?

Could NFT Payments Be Considered Barter Transactions?

The IRS has issued guidance that cryptocurrency is property, yet it has not issued similar guidance for NFTs, although it is likely that NFTs also qualify as property. Regarding our broker, could her receipt of an NFT in exchange for her services count as barter? Yes, but only if the broker and her client agreed beforehand that the fair market value of the broker’s services and the FMV of the NFT are equal.

This would also be true of the landlord and her renter — if the parties agree that the NFT’s FMV is equal to the FMV lease period, the exchange qualifies as barter, and in both cases, the broker and the landlord would report the value of the exchange as income. The problem, of course, lies in determining the FMV of the NFT.

In the broker’s case, if the FMV of the NFT is determined by comparing the prices of similar NFTs, it is possible that no barter could have occurred. People, businesses, and governments have paid hundreds of thousands of dollars or more for digital land, and it is almost a given that our broker’s commission is but a fraction of what the buyer paid for the digital asset.

Of course, the opposite could also be true — the FMV of the NFT offered is less than the FMV of the broker’s services. Overall, in the case of a digital broker, it seems she would be better off to demand compensation either in cryptocurrency or in fiat money.

Sourcing Income From Transactions Involving Digital Land

Expanding on the landlord and renter example to include buyers and sellers of digital land, a knotty question arises regarding the source of the landlord’s and seller’s income arising from the transactions. In the analog world, such income is sourced to the jurisdictions where the real property is located. Of course, in the digital world, that doesn’t make sense. So where should the landlord’s and the seller’s income from their digital land holdings be sourced?

One option is to source the income to the jurisdiction where the digital environment’s servers are located. A second option is to treat income from the digital land and the real property in the same manner — that is, to source the income to the jurisdiction where the landlord and seller physically reside. The second option carries greater logic than the first and remains so even if the digital environment is hosted in the cloud.

Similar questions arise when the digital land is purchased from or rented by the platforms themselves. Should the income be sourced to the jurisdiction where the platforms’ servers are located or where the platforms’ owners are physically located? Again, the second option carries greater logic.

What if the platform owners are outside the United States? If the platform owner acts as a landlord, and is qualified to do business here, it will have a registered U.S. address, and the rental payments will be sourced to the state where the address is located.

The same is true when the platform is acting as the seller of digital land — that is, the purchase price will be sourced accordingly. If neither the landlord nor the seller is doing business in the United States, the rental payments and the payment for the purchase should be sourced to the platform’s home jurisdiction.

Sales and Royalty Income From NFTs and NFT Donations

If a person is actively involved in creating and selling NFTs as a livelihood, there is no question that the proceeds from those sales constitute income. In this case, the NFTs would be considered inventory, and the creator would be subject to self-employment tax on his profits in addition to individual income tax. However, the IRS has not issued guidance on the tax treatment of royalty income from NFTs. In this case, if the person is actively involved in creating NFTs, his royalty income would more than likely be subject to self-employment taxes.

Donating or auctioning off NFTs for charitable purposes is not considered to be a taxable event if three criteria are met. First, the NFT donation is held for over a year; second, the NFT is donated to a section 501(c)(3) organization; and third, the NFT is donated directly to the organization. However, regarding auctions, if the creator auctions the NFT first and then donates the proceeds to the organization, he will incur capital gains income and be taxed accordingly, depending on the length of time the asset was held.

Conclusion

The digital world promises a plethora of new experiences and opportunities to generate income for individuals as well as business entities. However, determining how to tax that income will not necessarily be easy.

In the United States, the IRS has issued little taxpayer guidance, meaning that tax professionals, other than what guidance the IRS has provided, have little to rely on other than their own knowledge and experience to fill the holes. Despite these shortcomings, the Metaverse, even if it does not come to full realization, promises to be an interesting digital world, nonetheless.

I’ve been involved with state and local tax for over 30 years and have enjoyed watching the profession grow and come into its own.

Source: Taxing Income In The Metaverse

.

Related contents:

Maryland’s Digital Advertising Tax Defeated Lex Blog (Weblog)

23:02 Wed, 19 Oct
22:56 Wed, 19 Oct
19:12 Wed, 19 Oct
11:44 Wed, 19 Oct
08:36 Wed, 19 Oct
22:15 Tue, 18 Oct
19:13 Tue, 18 Oct
12:37 Tue, 18 Oct
04:26 Tue, 18 Oct
03:00 Tue, 18 Oct
20:34 Wed, 12 Oct
19:31 Wed, 12 Oct
00:07 Tue, 11 Oct
19:50 Mon, 10 Oct
19:48 Sun, 09 Oct
18:10 Sun, 09 Oct
15:37 Thu, 06 Oct
18:19 Tue, 04 Oct
15:17 Tue, 04 Oct
12:05 Tue, 04 Oct
07:32 Thu, 29 Sep
17:10 Wed, 28 Sep
11:38 Wed, 28 Sep
03:38 Tue, 27 Sep

16:37 Mon, 26 Sep

.

Marketing Programs To Buy:

.

10 Bold Actions In Positive Life     https://jvz3.com/c/202927/383942/
3D Pal Toons     https://jvz6.com/c/202927/381689/
4brandcommercial        https://jvz1.com/c/202927/375487
7 Minutes Kit      https://jvz8.com/c/202927/374505/
9 figure Success        https://jvz8.com/c/202927/384653/
Ad Raven      https://jvz4.com/c/202927/382796/
Ada leadz     https://jvz8.com/c/202927/376381
ADA Web      https://jvz3.com/c/202927/383751/
AdRaven       https://jvz3.com/c/202927/382851/
Adsense Machine      https://jvz2.com/c/202927/290487
Adtivate Agency      https://jvz3.com/c/202927/383706/
AdvertSuite     https://jvz1.com/c/202927/335011/
AdzHero     https://jvz2.com/c/202927/366972/
AffiliateMatic     https://jvz3.com/c/202927/381148/
Agency Client Finder    https://jvz3.com/c/202927/384619/
Agencyscale      https://jvz1.com/c/202927/383113/
AgencyScale      https://jvz4.com/c/202927/383111/
AIWA Commercial     https://jvz2.com/c/202927/365061
ALL-in-One HD Stock    https://jvz4.com/c/202927/381560
Animaxime    https://jvz2.com/c/202927/383307/
Appimize      https://jvz8.com/c/202927/370227
Appoint B Agency     https://jvz1.com/c/202927/384630/
Appointomatic      https://jvz6.com/c/202927/374258
Appowls    https://jvz4.com/c/202927/381231/
Art Of Living    https://jvz4.com/c/202927/382425/
Audiencetoolkit     https://jvz6.com/c/202927/302715
Audika    https://jvz1.com/c/202927/383635/
Aweber Crash Course     https://jvz6.com/c/202927/383057/
Backlinkindexer    https://jvz6.com/c/202927/88118
BettingMaster      https://jvz2.com/c/202927/387079/
BevTraders    http://www.bevtraders.com/?ref=arminham
Big Audio Club     https://jvz6.com/c/202927/380087/
BigAudio Club    https://jvz2.com/c/202927/380877/
Boost Optimism   https://jvz2.com/c/202927/380692/
BrandElevate   https://jvz4.com/c/202927/381807/
BrandElevate   https://jvzoo.com/c/202927/381812
Bybit     https://www.bybit.com/en-US/invite?ref=ALEXP
CanvaKitz    https://jvz4.com/c/202927/379051/
ChatterPal    https://jvz8.com/c/202927/324615
Clientfinda   https://jvz8.com/c/202927/370806
Clipsreel   https://jvz3.com/c/202927/372682
Commission smasher   https://jvz3.com/c/202927/376879
Content Gorilla   https://jvz2.com/c/202927/330783
Content Tool Kit   https://jvz3.com/c/202927/329145/
CourseAlly eLearning   https://jvz4.com/c/202927/384759/
CourseReel   https://jvz2.com/c/202927/355249
Courserious   https://jvz8.com/c/202927/360397/
Coursova   https://jvz1.com/c/202927/376527
Creaitecontent  https://jvz1.com/c/202927/376986
Credit Repair   https://jvz8.com/c/202927/377815/
Cryptokit    https://jvz8.com/c/202927/383809/
CryptoRocket    https://jvz6.com/c/202927/378113/
CryptoUnderworld     https://jvz8.com/c/202927/374345/
Dealcheck     https://dealcheck.io?fp_ref=armin16
DesignaSuite      https://jvz2.com/c/202927/297271
DesignBeast    https://jvz6.com/c/202927/371547
DevelopSelfEmpowerment     https://jvz6.com/c/202927/383094/
DFYContentClub     https://jvz6.com/c/202927/381337/
DFYSuite   https://jvz3.com/c/202927/381194/
Diabetes Guide    https://jvz2.com/c/202927/358870/
Diddly Pay’s    https://jvz2.com/c/202927/315596
Diet fitness diabetes   https://jvz1.com/c/202927/286851
Domainname    https://jvz6.com/c/202927/377005
Dominate Email   https://jvz4.com/c/202927/386980/
Dropshiply   https://jvz3.com/c/202927/383483/
DUX Forex Signals   https://jvz3.com/c/202927/128215/
EBook Agency    https://jvz2.com/c/202927/384573/
Ejaculation Total   https://jvz2.com/c/202927/75989/
Email Monetizer    https://jvz2.com/c/202927/386337/
EngagerMate  https://jvz8.com/c/202927/328172
EngageYard   https://jvz2.com/c/202927/383051/
Explaindio    https://jvz1.com/c/202927/123757/
Extreme Adz   https://jvz8.com/c/202927/379244/
Extreme Coupon  https://jvz1.com/c/202927/216101/
EZ Local Appointment  https://jvz2.com/c/202927/385180/
Ezy  https://jvz1.com/c/202927/381935/
Ezy MultiStores  https://jvzoo.com/c/202927/381935
Facebook Cash Machine   https://jvz4.com/c/202927/382333/
Facedrip  https://jvz1.com/c/202927/376325/
FaceSwap   https://jvz4.com/c/202927/381768/
Fade To Black   https://jvz2.com/c/202927/344541
Fanpage  https://jvz4.com/c/202927/144349
Fitness Nutrition   https://jvz4.com/c/202927/353334/
Followup Builder   https://jvz3.com/c/202927/386313/
Forex Atlatian   https://jvz8.com/c/202927/25069/
Forex Blizz   https://jvz8.com/c/202927/144577/
Forex Blue Stark  https://jvz3.com/c/202927/47481/
Forex expert   https://jvz1.com/c/202927/376877
Forex Hybrid Scalper    https://jvz6.com/c/202927/95037/
Forex Joustar   https://jvz6.com/c/202927/381617/
Forex Mastery   https://jvz2.com/c/202927/144621/
Forex Scouts   https://jvz6.com/c/202927/132677/
forrk  https://jvz1.com/c/202927/373449
FusionMT4    https://jvz2.com/c/202927/372523/
FX Goldminer  https://jvz1.com/c/202927/381439/
Galactic  https://jvz1.com/c/202927/188236/
Gaming job   https://jvz2.com/c/202927/184902  s
Genesis Mining   https://www.genesis-mining.com/a/2535466
Gluten free   https://jvz4.com/c/202927/296191
GMB Magic  https://jvz2.com/c/202927/377194
Graphic Alta  https://jvz2.com/c/202927/324492/
Heal Your Emptiness   https://jvz6.com/c/202927/384848/
High Converting Emails  https://jvz3.com/c/202927/386305/
Holistic Self-Care   https://jvz6.com/c/202927/387524/
HostLegends    https://jvz4.com/c/202927/384755/
Hostley Domain Creator   https://jvz1.com/c/202927/379223/
Human Synthesys Studio  https://jvz8.com/c/202927/367353/
ImageX   https://jvz6.com/c/202927/363237/
IMSyndicator  https://jvz1.com/c/202927/370769
Inboxr   https://jvz2.com/c/202927/312692
Insta Keyword    https://jvz6.com/c/202927/351606/
Instant Website   https://jvz2.com/c/202927/377557
InstantWebsiteBundle          https://jvz6.com/c/202927/377557
iTraffic X  https://jvz2.com/c/202927/320466
keysearch  https://jvz3.com/c/202927/194909
KlickCourse   https://jvz3.com/c/202927/385006/
Klippyo Kreators  https://jvz8.com/c/202927/327447
KoinCart   https://jvz2.com/c/202927/383555/
Leadvalet   https://jvz3.com/c/202927/385580/
Levidio Royal Podcasting   https://jvz6.com/c/202927/384025/
Linkable DFY   https://jvz6.com/c/202927/385873/
Linkomatic  https://jvz2.com/c/202927/380937/
LiteTrading   https://www.litefinance.com/?uid=929237543
Live Your Truth  https://jvz6.com/c/202927/379020
Living An Intentional Life    https://jvzoo.com/c/202927/382455
Living an International Life    https://jvz8.com/c/202927/382455/
Local Leader   https://jvz4.com/c/202927/383751/
Local Sites   https://jvz4.com/c/202927/380543/
LocalAgencyBox  https://jvz2.com/c/202927/359468
LocalCentric   https://jvz2.com/c/202927/379339/
LocalioAI    https://jvz6.com/c/202927/378310/
MarketAll      https://jvz2.com/c/202927/386971/
Marketingblocks     https://jvz6.com/c/202927/374934
MarketPresso   https://jvz2.com/c/202927/369837
Mat1 Simple Funnel   https://jvz2.com/c/202927/380197/
Maxslides  https://jvz8.com/c/202927/376842
Mech Forex Robot   https://jvz6.com/c/202927/383447/
MediaCloudPro   https://jvz2.com/c/202927/343635
Megasuite   https://jvz3.com/c/202927/383953/
Mobi First   https://jvz2.com/c/202927/353694/
Motion Kingdom Studio  https://jvz4.com/c/202927/383177/
Movid Animation  https://jvz6.com/c/202927/380385/
MT4Code System   https://jvz2.com/c/202927/376925
My Passive Income   https://jvz1.com/c/202927/384099/
MyMailIt   https://jvz3.com/c/202927/292919
MyTrafficJacker   https://jvz2.com/c/202927/353558
Next Drive  https://jvz4.com/c/202927/371095/
NichBox  https://jvz2.com/c/202927/370705/
Organic Life Guide  https://jvz8.com/c/202927/366872/
Pcommerce   https://jvz6.com/c/202927/372265/
Phemex  https://phemex.com/register-vt1?referralCode=D8HUS2
Photokit  https://jvz4.com/c/202927/373207/
PicsAds   https://jvz2.com/c/202927/385468/
PigMoneyMethod   https://jvz2.com/c/202927/377665/
PipStock   http://pipstockexchange.com/register?ref=204
Pitchdeck   https://jvz3.com/c/202927/347847/
Pixal  https://jvz2.com/c/202927/378775/
PixaStudio    https://jvz1.com/c/202927/373089/
Pixivid   https://jvz6.com/c/202927/385213/
PlanB Muscle Growth   https://jvz1.com/c/202927/36517/
PlayerNeos   https://jvz2.com/c/202927/376962
Podcast Advantage   https://jvz8.com/c/202927/379995/
Podcast Masterclass  https://jvz3.com/c/202927/379998/
PodKastr    https://jvz1.com/c/202927/369500/
Poplinks Funnel    https://jvz1.com/c/202927/368095/
Postradamus     https://jvz6.com/c/202927/108695
Power Reviews    https://jvz8.com/c/202927/384625/
Powrsuite   https://jvz1.com/c/202927/376361
PR Rage  https://jvz4.com/c/202927/343405
prime stocks   https://jvz8.com/c/202927/369164
Profile mate    https://jvz4.com/c/202927/358049
Promovidz   https://jvz8.com/c/202927/375692/
Push Button Traffic   https://jvz2.com/c/202927/301402
QR Verse   https://jvz3.com/c/202927/383865/
Quintex Capital     https://quintexcapital.com/?ref=arminham
Quit Smoking    https://jvz3.com/c/202927/359081/
QuizMatic   https://jvz6.com/c/202927/387116/
Reputor   https://jvz8.com/c/202927/380159/
ReVideo  https://jvzoo.com/c/202927/381761
ReviewReel   https://jvz6.com/c/202927/382663/
Rewriter   https://jvz4.com/c/202927/353373/
RSI SEO   https://jvz6.com/c/202927/384381/
Scriptdio   https://jvz4.com/c/202927/385387/
Seniors Income    https://jvz2.com/c/202927/383888/
Senuke  https://jvz6.com/c/202927/279944
ShopABot   https://jvz2.com/c/202927/291955
ShopFunnels   https://jvz3.com/c/202927/384069/
SocialAgency360   https://jvz1.com/c/202927/385357/
SociCake  https://jvz2.com/c/202927/321987
Socifeed   https://jvz6.com/c/202927/375706
SociJam  https://jvz2.com/c/202927/309649
Soronity  https://jvz6.com/c/202927/368736
SqribbleEbook   https://jvz6.com/c/202927/283867
Stackable Picture   https://jvz1.com/c/202927/385046/
Steven Alvey’s   https://jvz2.com/c/202927/351754
Stoodaio   https://jvz1.com/c/202927/372094
Storymate    https://jvz3.com/c/202927/320972
StreamPilot   https://jvz2.com/c/202927/385431/
Studioninja   https://jvz1.com/c/202927/374965
Sunday Freebie  https://jvz1.com/c/202927/267113/
Super backdrop   https://jvz8.com/c/202927/376524
Survai    https://jvz8.com/c/202927/380933/
Syndranker    https://jvz3.com/c/202927/378143/
Talkingfaces   https://jvz3.com/c/202927/375550
The Internet Marketing   https://jvz2.com/c/202927/289944
Tonai Voice Content   https://jvz8.com/c/202927/383119/
Toon Video Maker    https://jvz2.com/c/202927/357201
TrafficForU   https://jvz3.com/c/202927/381950/
Trendio  https://jvz3.com/c/202927/381003/
TubePal   https://jvz6.com/c/202927/379863/
Tubeserp   https://jvz3.com/c/202927/370472
TubeTargeter  https://jvz6.com/c/202927/377211
TuneMingo    https://jvz3.com/c/202927/386556/
TV Boss Fire  https://jvz6.com/c/202927/379480/
Ultrafunnels A.I   https://jvz2.com/c/202927/381129/
VIADZ Ad Template  https://jvz4.com/c/202927/379307/
Vidcentric   https://jvz4.com/c/202927/376095
Viddeyo    https://jvz6.com/c/202927/382326/
Videevolve   https://jvz4.com/c/202927/381011/
Video Campaignor      https://jvz4.com/c/202927/387058/
Video Games   https://jvz3.com/c/202927/184902/
VideoEnginePro     https://jvz2.com/c/202927/372916
VideoGameSuite    https://jvz3.com/c/202927/366537/
VideoRobot Enterprise   https://jvz8.com/c/202927/291061
VidKreate   https://jvz6.com/c/202927/386029/
VidMingo   https://jvz6.com/c/202927/378359/
VidRaffle   https://jvz2.com/c/202927/386840/
VidSnatcher    https://jvz3.com/c/202927/342585
VidVoicer    https://jvz1.com/c/202927/379983/
Vidzura   https://jvz4.com/c/202927/385754/
Viral dash   https://jvz6.com/c/202927/375959
Viral Quotes      https://jvz2.com/c/202927/386984/
VirtualReel   https://jvz8.com/c/202927/376849
Vocalic  https://jvz2.com/c/202927/383848/
VoiceBuddy    https://jvz1.com/c/202927/342854
WebCop  https://jvz4.com/c/202927/378683/
Webinarkit   https://jvz3.com/c/202927/383937/
Webprimo   https://jvz1.com/c/202927/379455/
WordPress Mastery   https://jvz1.com/c/202927/386249/
WowBackgraounds   https://jvz2.com/c/202927/381556/
WP GDPR    https://jvz8.com/c/202927/299907
WP Simulator    https://jvz3.com/c/202927/46987/
Writer Arc   https://jvz1.com/c/202927/386602/
writing job   https://jvz8.com/c/202927/213027
XBrain Forex   https://jvz3.com/c/202927/372305/
XFUNNELS   https://jvz2.com/c/202927/310335
Xinemax  https://jvz1.com/c/202927/381749/
YoDrive   https://jvz2.com/c/202927/384700/
YoSeller   https://jvz4.com/c/202927/387544/
Your 3DPal   https://jvz2.com/c/202927/381685/
YTSuite   https://jvzoo.com/c/202927/381179
Zappable    https://jvz1.com/c/202927/367328/

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: