Tax the Metaverse Calls Gain Momentum Following Scholarly Research

The Metaverse Offers New Possibilities for Tax Policy Experimentation

A key reason the metaverse has ignited such interest around taxation is its potential to closely track all transactions and measure individual gains. This gives tax authorities an unprecedented ability to monitor economic activity and accumulate tax revenue in real time.

Kim advocates moving from a system of taxing only realized income and capital gains to one that taxes unrealized gains as they occur. The transparency of the metaverse would facilitate this shift. She argues this approach could make the metaverse a test environment for envisioning the future direction of tax policy.

A major consideration is how to go about collecting taxes in decentralized digital worlds. Kim discusses two potential approaches: requiring platforms to withhold taxes on transactions or having users file taxes directly based on transaction records they receive.

Kim expresses a preference for the withholding model, while acknowledging users may object to platforms taking a direct role in tax collection. Resistance could arise from those participating in the metaverse specifically to exchange value outside the traditional financial system.

New Opportunities to Engage Policymakers Through Metaverse Tax Reforms

While the metaverse is a novel concept to many lawmakers, Kim suggests tax policy could represent a more familiar entry point. Applying real-world tax principles to metaverse activity can ground the concept for policymakers, as well as highlight the scale of economic value being generated.

The focus on metaverse taxation may also compel policymakers to deepen their understanding of Web3 technologies that could disrupt existing legal frameworks. 

“The Metaverse can be a laboratory for experimenting,” she suggests. “It has the potential to simulate scenarios that are unlikely to ever occur in the physical world.”

Lawmakers not directly engaged with blockchain technology may also see value in exploring how these tools can transform approaches to taxation.

The Evolving Debate Around Taxing Virtual Worlds

This academic exploration of taxing the metaverse represents just the beginning of what will likely be an extensive debate. While Kim lays out an early framework, the discussion will grow more complex as the number of metaverse platforms increases.

Open questions include how to handle issues like tax avoidance through users spreading assets across different virtual worlds. Enforcement cooperation between platforms may prove necessary.

Additionally, comprehensive taxation will require establishing clear guidelines around how to value newly created metaverse assets that have no physical counterpart.

However, implementing real-time taxation of unrealized gains could also face backlash, as it represents a major departure from the status quo. Critics argue it would create unnecessary tax burdens and friction that could stifle economic activity.