Tax the Metaverse Calls Gain Momentum Following Scholarly Research

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    A new research paper by Harvard law scholar Christine Kim argues that the same taxation principles that apply to income in the physical world should apply to the Metaverse.

    Yeshiva University law professor Christine Kim explained the rationale for taxing the Metaverse in her recent paper “It puts a burden on the Metaverse.” She argues that Metaverse activities such as trading virtual assets, selling digital products, and providing services meet the standard definition of taxable income.

    “Economic activity within the metaverse meets the Haig Simons and Glenshaw-Glass definitions of income, so removing it creates a tax haven,” she writes in her research paper.

    The Metaverse Brings New Possibilities for Tax Policy Experimentation

    A key reason the Metaverse has attracted so much interest in taxation is its potential to closely track all transactions and measure individual profits. This will give tax authorities unprecedented ability to monitor economic activity and accumulate tax revenues in real time.

    From a system that taxed only realized income and capital gains, Mr. Kim Tax on unrealized profits every time they happen. The transparency of the metaverse facilitates this change. She argues that this approach could make the Metaverse a testing environment for envisioning future tax policy directions.

    A major consideration is how taxes are collected in a decentralized digital world. Kim describes his two possible approaches, either requiring the platform to withhold taxes on transactions or having users directly report taxes based on the transaction records they receive.

    Kim acknowledges that users may object to the platform being directly involved in tax collection, but expresses a preference for the withholding model. Resistance may arise, especially from those participating in the metaverse to exchange value outside the traditional financial system.

    New Opportunities to Engage with Policy Makers Through Metaverse Tax Reform

    While the metaverse is a new concept to many lawmakers, Kim suggests tax policy could be a more accessible entry point. Applying real-world tax principles to Metaverse activity not only helps policymakers cement the concept, but also emphasizes the scale of the economic value generated.

    The focus on metaverse taxation may also force policy makers to better understand Web3 technologies that could disrupt existing legal frameworks.

    “The metaverse can be a laboratory for experimentation,” she suggests. “It could potentially simulate scenarios that are unlikely to occur in the physical world.”

    Lawmakers not directly involved in blockchain technology may also find it valuable to explore how these tools could transform approaches to taxation.

    An Evolving Debate Over Burdens on Virtual Worlds

    This academic exploration of taxing the metaverse is perhaps just the beginning of a far-reaching debate. Kim presents an early framework, but the metaverse discussion will become more complex as the number of his platforms grows.

    Open questions include how users will address issues such as tax avoidance by distributing their assets across different virtual worlds. Inter-platform policing cooperation may be required.

    Additionally, aggregate taxation should establish clear guidelines on how to value newly created metaverse assets that do not have physical counterparts.

    However, the introduction of real-time taxation on unrealized gains represents a major departure from the status quo and could face a backlash.critics argue create unnecessary tax burden and friction It could curb economic activity.

    Due to the lack of predictable liquidity in the metaverse market, users may struggle to pay taxes on profits not yet realized from withdrawals. And participants drawn to the Metaverse, especially because of its decentralized nature, may object to this degree of financial oversight.

    As the Metaverse platform considers how best to integrate tax compliance, it must weigh the benefits of upfront revenue collection against the concerns that discourage user participation. Real-time taxation of unrealized profits may be impractical in the physical world, but it could be a viable model in the virtual economy. Lawmakers have much to learn from this glimpse into the future of taxes.


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