Harvard legal scholar Christine Kim called on governments to immediately tax all income and wealth made in the metaverse, even unrealized gains. In a new research paper, Kim argues that failure to do so would turn the metaverse into a “tax haven.”
Kim, who is also a professor of law at Yeshiva University, believes that the metaverse can be a testing ground for “cutting-edge” tax policies. In her paper titled “Taxing the Metaverse,” Kim says virtual worlds offer users a unique way to earn income solely within their digital borders.
Taxing the metaverse
For the Harvard guru, metaverse economic activities such as minting an NFT, trading crypto assets, value appreciation of virtual property, event organization, gaming, and other services meet the standard definition of what constitutes taxable income.
“Because economic activity within the metaverse satisfies the Haig-Simons and Glenshaw Glass definitions of income, its exclusion will create a tax haven,” Kim notes in her research paper, which was published on Aug. 31.
The theory says that all income, regardless of source, should be under proper tax jurisdiction: “Gains or increases in wealth over a particular period, regardless of whether spent on consumption or saved.”
Kim argues that tax policy can give governments extraordinary power to track activity in the virtual economy in real time, allowing 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,” she said.
Kim says taxes should be applied immediately upon receiving gains, even if those gains are unrealized and remain in the metaverse. It means people would have to pay tax on the value of their metaverse assets, regardless of whether they made a profit.
“Immediate taxation, such as a mark-to-market system, would be a more efficient and fairer approach so long as it could overcome intrinsic valuation and liquidity problems,” she explained.
Currently, people in the U.S. are only taxed on their income when they actually receive it or when they do something that triggers a taxable event, such as making a withdrawal from a savings account.
Spending in the metaverse reached more than $120 billion at the end of 2022, with over $500 million used to buy virtual real estate, according to data from Metav.rs. The report says over 400 million people actively use the metaverse each month.
By 2024, the global market value of the metaverse is estimated to reach $800 billion, led by the likes of Roblox, the biggest virtual world in the metaverse, Fortnite, and Meta Platforms, the company previously known as Facebook.
Metaverse is uncharted territory
For Christine Kim, the decentralized nature of virtual worlds makes the proposed tax difficult to enforce. It would require tracking the value of metaverse assets in real time. She suggests two ways of collecting tax in the metaverse: platform withholding and user self-reporting.
Kim thinks it would be best if platforms collected taxes on behalf of users rather than having people report their own taxes, as that makes it easier for governments to receive the tax. But she worries that some users may object to the plan due to their distrust of governments.
“Imposing a tax on the metaverse is uncharted territory with questions of varying complexity,” she admits. “There is neither a clear rule nor a full-fledged discussion on taxing income and wealth within the metaverse.”
While the metaverse is a new and unfamiliar concept to many lawmakers, the Harvard legal expert believes applying real-world principles could be a way to introduce them to how the metaverse works and the scale of economic value that is being generated.
“The metaverse can be a laboratory for experimenting. It has the potential to simulate scenarios that are unlikely to ever occur in the physical world,” Kim said.
Taxing the metaverse is a subject that is likely going to be a long and complex debate as more virtual worlds develop. Kim’s research lays out an early framework for future discussions, but the proposal to tax the metaverse, including unrealized gains, is already eliciting derision.
Ah, yes, let's make sure we don't miss out on taxing those virtual properties in the metaverse. We can't have a tax haven there, of all places! 😂 Who needs tangible assets anyway? #VirtualWealthProblems #MetaverseTaxDrama
— 🤖@DropAutomaton🎯 Aim high, follow me! (@ShaneOrr13) September 4, 2023
The metaverse may be thought of as the vision of a post-physical world wherein life is lived virtually on the internet: “a single, shared, immersive, persistent, 3D virtual space” where humans experience life in ways they could not in the real world.