A Harvard scholar is calling for the prompt introduction of taxation on earnings generated within the Metaverse, aiming to bolster government revenue streams.
In a recent research paper titled “Taxation in the Metaverse,” legal scholar Christine Kim, a faculty member at Harvard and Yeshiva University, makes a compelling case for extending conventional tax principles to the rapidly expanding Metaverse.
Kim’s paper delves into the potential for wealth creation within the Metaverse’s ecosystem and argues that this phenomenon should fall within the scope of existing tax regulations.
She emphasizes that the economic activities within the Metaverse align with established tax principles such as the Haig-Simons and Glenshaw Glass definitions of income. She warns that failing to include these activities could transform the Metaverse into a tax haven.
Recent statistics indicate a surge in spending within the Metaverse, surpassing $120 billion, with projections suggesting it could reach an astonishing market value of $800 billion by 2024.
New Policy Approaches Through Metaverse Taxation
Kim highlights the digital nature of the Metaverse, enabling meticulous tracking of all activities and individual wealth. This characteristic, she suggests, allows governments to impose taxes on income immediately upon receipt, potentially revolutionizing the current U.S. tax law framework.
The paper also explores potential modifications to existing taxation methods. Kim proposes that Metaverse users in the U.S. could be subject to immediate taxation upon earning gains, including unrealized gains and income retained within the Metaverse.
However, this proposal raises enforcement concerns. Kim outlines two viable strategies for enforcing tax regulations within the Metaverse. The first method involves individual platforms withholding taxes on behalf of their users.
The second, less favored approach, relies on residence taxation. In this scenario, platforms would transmit tax details to users, who would then be responsible for fulfilling their tax obligations independently.
Kim also speculates that Metaverse taxation could open up new avenues for policymakers, even those with limited interest in web3 and Metaverse technologies.
U.S. Government’s Recent Actions on Crypto Taxation
In related developments, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) have unveiled proposed regulations pertaining to the sale and exchange of digital assets by brokers.
These proposals, aimed at combating tax evasion, mandate that brokers adhere to heightened reporting requirements, similar to those imposed on other securities and financial investments. Public feedback on these proposals is solicited until October 30.
Earlier this year, on March 21, the IRS sought public input on the taxation of non-fungible tokens (NFTs), exploring the possibility of categorizing them as “collectibles.” Such a classification could potentially subject long-term investors to a higher tax rate of 28%, instead of the customary 20%.
However, the consultation concluded in June without subsequent updates.