Harvard scholar calls for prompt taxation of metaverse earnings

A Harvard scholar argues that the authorities should swiftly introduce taxation on Metaverse earnings to potentially enhance governmental revenue streams.

In a recent research paper titled “Taxing the Metaverse”, Harvard legal scholar and Yeshiva University law professor Christine Kim has put forth a compelling argument advocating for extending traditional tax principles to the burgeoning metaverse.

The paper explores the metaverse’s capacity to foster wealth creation within its ecosystem, a phenomenon that she believes should be brought under the purview of existing tax codes.

She further notes that the economic activities within the metaverse align with the established Haig-Simons and Glenshaw Glass definitions of income, warning that excluding it could transform the metaverse into a tax haven.

Recent statistics reveal a surge in metaverse spending, which has already eclipsed $120 billion. Projections indicate that it might escalate to a staggering market value of $800 billion by 2024.

New policy avenues through metaverse taxation

Kim emphasizes that the metaverse’s digital nature, which allows for the meticulous recording of all activities and individual wealth tracking, allows governments to impose taxes on income immediately upon receipt. This approach, she suggests, could revolutionize the existing US tax law framework.

The paper also sheds light on the potential modifications to the current taxation methods. As per Kim’s suggestions, metaverse users in the US could be taxed immediately upon accruing gains, encompassing even unrealized gains and income that remain within the metaverse.

However, this proposition brings to the fore the critical issue of enforcement. Kim delineates two viable strategies for enforcing tax regulations in the metaverse. The primary method entails the individual platforms withholding taxes on behalf of their users. 

The alternative, which Kim deems less favorable, involves residence taxation, where platforms would be responsible for dispatching tax details to users, who would then be required to fulfill their tax obligations independently.

Furthermore, Kim posits that the taxation of the metaverse could potentially unlock new avenues for policymakers, including those who have shown little interest in web3 and metaverse technologies. 

US government’s recent moves in crypto taxation

In related developments, the US Department of the Treasury and the Internal Revenue Service (IRS) unveiled proposed regulations concerning the sale and exchange of digital assets by brokers.

These proposals, aimed at curbing tax evasion, mandate brokers adhere to enhanced reporting requirements like those imposed on other securities and financial investments. The public is invited to comment on these proposals until Oct. 30.

Earlier this year, on March 21, the IRS sought public opinions on the taxation of non-fungible tokens (NFTs), exploring the possibility of categorizing them as “collectibles”. This classification could potentially subject long-term investors to a heightened tax rate of 28% instead of the customary 20%.

However, the consultation concluded in June with no subsequent updates.