As envisioned by its founders, the Metaverse—a fully realized digital environment with virtual identities, houses, and possessions—would revolutionize the global economy. Multiple platforms offer social, commercial, and interactive games, showing rapid expansion.
Barbados is the first nation to seek digital real estate sovereignty. The island government plans virtual embassies and consulates, e-visa services, and a “teleporter” to move avatars between realms.
All governments—state, federal, and foreign—should explore taxing these activities, whether through transaction taxes, income taxes, or other methods.
Metaverse Work
Income taxes begin with the Metaverse’s definition of labour. Take a digital real estate broker. She finds digital land properties for her customer. Bitcoin pays the broker’s commission.
Like her analog predecessor, the broker’s commission generates revenue. The broker declared her commission as normal income on her federal and state tax returns based on the cryptocurrency’s market value on the day she was paid.
Non-cryptocurrency payments are available. In “play-to-earn” video games, gamers’ earnings may be wages.
In Axie Infinity, players breed, train, and fight non-fungible token (NFT) Axies. Battles earn “smooth love potion” (SLP) in Axie Infinity. Players acquire SLP tokens based on their gaming skills to help breed new Axies. SLP tokens can be bought and traded with cryptocurrency or fiat currency.
The market value of Axie tokens gained during games should be reported and taxed as ordinary income. As is generally known, a gamer who converts her SLP token into cryptocurrency or sells it for fiat cash incurs short- or long-term capital gains tax. Axie NFTs can be exchanged for cryptocurrency or sold like SLP tokens.
Cryptocurrency payments for services or digital goods are now taxable income. Unanswered is whether NFT payments predominate. What if the broker’s client paid with a Bored Ape NFT? Some Bored Ape NFTs sell for millions, while others sell for less. How would one value a non-taxable transfer for income?
Another person who makes money without “working” is a digital land renter. If paid with an NFT, how would the digital landlord, like the broker, compute her lease-term rental income?
NFT transactions—barter?
NFTs may be property, even though the IRS has not set criteria. Is our broker’s NFT barter? Yes, but only if the broker and her customer agree beforehand that the broker’s services and the NFT’s FMV are the same.
If the parties agree that the NFT’s FMV equals the FMV lease period, the transaction is barter and the broker and landlord record the exchange’s value as income. Estimating NFT FMV is challenging.
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