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Will I have to pay taxes in the Metaverse?

Will I have to pay taxes in the Metaverse?

Transactions in the Metaverse come with real-life tax liabilities. 

In this guide, we’ll discuss everything we know (and don’t know) about how Metaverse transactions are taxed. We’ll also break down the biggest problem facing users who want to calculate their Metaverse tax liability. 

What is the Metaverse? 

Since the dawn of the computing age, technologists have dreamed that one day, humans would be able to live, trade, and transact in fully virtual worlds. 

Some call this network of virtual worlds ‘The Metaverse’ and say that in just a few years, humans will be spending more and more time immersed in these digital realms. 

At this point, the Metaverse is still a murky concept. Venture capitalist Matthew Ball states ‘Just as it was hard to envision in 1982 what the Internet of 2020 would be… we don’t really know how to describe the Metaverse.’ 

While it may be unclear how the Metaverse will look in a few years time, projects like The Sandbox and Decentraland are building virtual worlds today where inhabitants can interact with other users and transact in cryptocurrency. 

Do I have to pay taxes in the Metaverse? 

Though their transactions may take place in a fully virtual world, Metaverse users will likely still face real-world tax liabilities. Taxes are incurred based on the physical location of the taxpayer. 

How are transactions in the Metaverse taxed? 

While the IRS has issued no explicit guidance on how metaverse transactions are taxed, we can look at previous guidance to better understand how they may approach the issue. 

Virtual currencies that can be exchanged for real-world currencies are currently considered taxable. 

Cryptocurrencies and digital assets used in the Metaverse will likely fall under this category. For example, $ETH earned in the Metaverse will be considered taxable because the coins can be withdrawn from the project into a private wallet. 

In contrast, ‘closed-loop’ currencies that cannot be exchanged for real-world currencies are not considered taxable. The IRS stated that currencies like Fortnite’s V-Bux and Roblox’s Robux are not considered taxable since they are not convertible (cannot easily be converted into U.S. dollars). 

How is Metaverse income taxed? 

It’s likely that the Metaverse will give users the opportunity to earn new streams of income. Already, play-to-earn games like Axie Infinity give users the opportunity to earn income within virtual worlds. 

Currently, cryptocurrency income earned through play-to-earn games is taxed based on the asset’s fair market value at the time of receipt. 

How are Metaverse businesses taxed? 

In some cases, Metaverse activity carried on for the purpose of making a profit/as part of a livelihood may arise to a trade or business. For more information, read the IRS’s guidelines on what constitutes business activities

Any relevant expenses related to operating in the Metaverse in the course of trade can be written off as a business expense. Net profits that are earned by Metaverse businesses will be subject to income tax. 

If you’re operating a Metaverse business, you should consider keeping your personal and business wallets separate. This can make it easier to calculate your personal and business tax liabilities. 

How are Metaverse NFTs taxed? 

In the Metaverse, NFTs give users the opportunity to claim ownership of digital property. Already, Metaverse projects like Decentraland gives users the ability to buy digital land in the form of NFTs. 

At this time, tax experts agree that NFTs are subject to the same rules as other crypto-assets. 

Buying NFTs with cryptocurrency and selling NFTs are considered disposals subject to capital gains tax

In addition, some Metaverse NFTs may be considered collectibles and be subject to a 28% tax rate if they are sold after 12 months. This is the same tax rate applied to physical collectibles sold after 12 months, such as artworks and trading cards. 

However, it’s reasonable to assume that some Metaverse NFTs will not be considered collectibles. For example, NFT land plots likely won’t be considered part of a ‘collection’ nor an ‘artwork’.

For more information, check out our complete guide to NFT taxes

How can I keep track of my tax liability across virtual worlds? 

It’s likely that the Metaverse will create a whole host of tax issues for investors. 

At this time, it’s unclear whether Metaverse platforms will be required to provide 1099 forms to inform users and the IRS about tax liabilities. At the moment, investors will need to keep track of their own taxes. 

Cryptocurrency investors already have trouble keeping track of their tax capital gains and income across different exchanges and wallets. The Metaverse will increase the need for tools and resources to help investors keep track of their holdings and file their taxes. 

While the Metaverse is still in its beginning phases, our team is keeping a close eye on developments and related tax issues. CoinLedger regularly releases new integrations to make tracking and reporting taxes on crypto-assets across different dApps, exchanges, and wallets easier than ever. 

Want to stay on top of your Metaverse tax liability? Get started with a CoinLedger account today.

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