Is there tax in the Metaverse? Koinly exploresFeb 28, 2023
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Digital world, digital assets…. real taxes? We’re teaming up with our partner Koinly to look at the potential tax implications of the metaverse.
Virtual world, real taxes?
From Decentraland to The Sandbox to Sorare – the metaverse is here to stay.
While the various worlds on offer might be virtual – the cash involved is very much real. Virtual real estate boomed throughout 2022, with record sales of $4.3 million for a plot in The Sandbox and $2.4 million in Dencetraland respectively.
As well as this, sales of metaverse goods, like clothing, soared. Many creators earned thousands in native tokens, which could then be sold for fiat currencies.
With all this money pouring in, you can bet tax offices around the world are paying attention.
Wait – it’s real money?
Just like countries need fiat currencies, metaverses need native currencies – and crypto fits the bill. Decentraland has MANA, The Sandbox has SAND, Axie Infinity has AXS, and so on.
This isn’t a new concept by any means - many games bordering on the metaverse but lacking the decentralized blockchain technology like Roblux and Second Life have their own in-game currencies.
But the key difference is you can use these currencies like MANA and SAND in and outside the metaverse. For example, you can stake MANA tokens on Binance or sell your SAND tokens on Coinbase for USD.
As well as this, metaverse assets are generally NFTs, including land, clothes, and even names. Many players are creating and selling digital assets on marketplaces and earning crypto.
What all this means is that earning in the metaverse potentially has real-world implications for your tax bill.
What’s the guidance from tax offices?
Tax offices haven’t quite caught up with the metaverse yet. The vast majority of tax offices around the world including the IRS, the ATO, HMRC, and more haven’t yet issued any guidance about the potential tax implications of sales of NFTs or earning crypto in the metaverse… yet.
But a lack of guidance doesn’t always mean a lack of tax liability.
There is plenty of existing guidance around the taxation of crypto assets - including NFTs… and these rules might apply to your metaverse transactions too.
Let’s take a quick look at the current general guidance on crypto assets. It’s important to note, this varies from country to country (potentially significantly). You can learn more in Koinly’s crypto tax guides. For ease, we’ll be focusing on the IRS guidance.
Assets in the metaverse are tokenized as NFTs. The IRS has recently tweaked its existing cryptocurrency tax guidance to include NFTs as digital assets. This potentially includes your metaverse NFTs as well.
The current rules on digital assets from the IRS are that any disposal of an asset triggers a potentially taxable event. Disposals include:
- Selling digital assets for USD or other fiat currencies.
- Trading one digital asset for another - including crypto for NFTs and vice versa.
- Spending digital assets on goods or services.
So if you dispose of an NFT by selling it in a marketplace, or trading it for another NFT, you may have a taxable transaction. You’ll need to calculate a capital gain or loss by subtracting your cost base (what the asset cost you plus any allowable fees) from your sale price, or the fair market value of the asset on the day you disposed of it.
If you have a capital gain, you’ll pay either short-term Capital Gains Tax or long-term Capital Gains Tax depending on how long you held the asset for. If you held it for less than a year, your short-term Capital Gains Tax rate is the same as your Federal Income Tax rate, so between 10% to 37%. If you held it for more than a year, your long-term Capital Gains Tax rate will be up to 20%, depending on how much you earn.
To further confuse things, if you’re selling NFTs on a marketplace and earning an income - even if that’s in in-game currency - this may have different tax implications. Much like an artist selling paintings for a living, there’s the potential that your earnings will be viewed as additional income instead of the disposal of capital assets, and therefore you’ll pay Income Tax upon receipt.
That’s not the only potential Income Tax implication in the metaverse either.
Play to earn taxes
Selling tokenized assets isn’t the only way to earn in the metaverse. Many metaverses offer means to make an income in the native currency in-game, for example, completing quests, renting land, or getting a job.
As well as this, there’s a growing number of play-to-earn games like Axie Infinity, Splinterlands, Gods Unchained, and so on, where players earn tokens simply for engagement with the game. In fact, there are even play-to-earn games within metaverses like Decentraland and The Sandbox.
Unsurprisingly, the IRS and other tax offices have not yet issued any guidance on the potential tax implications of play to earn income or income in the metaverse. But this doesn’t mean it's not taxable.
If we look at the general guidance on when the IRS may view crypto assets as additional income, this includes:
- Airdrops - even including those from a hard fork
- Mining rewards
- Receiving crypto in exchange for services
As well as this, although there isn’t specific guidance on staking rewards, tax professionals generally agree these should be treated as income upon receipt. As you can see, a lot of the time you’re seen to be earning new tokens, it’s going to be viewed as additional income and subject to Income Tax upon receipt, based on the fair market value of the tokens on the day you received them.
With this view in mind, your play-to-earn earnings or your in-game income is potentially going to be viewed in the same manner.
There’s also some precedent for this from the game Second Life. Although nowhere near as expansive as the metaverse, players in Second Life could earn an in-game currency known as Lindens. Lindens was a closed-loop virtual token, which could only be redeemed in-game, but it could be sold for USD on LindeX - the Second Life marketplace.
When the game exploded in popularity, the company behind the game - Linden Lab - eventually began issuing 1099-MISC forms to Second Life players who earned and sold more than $600 in Lindens in a single financial year. 1099-MISC forms are used for reporting additional income, and when you receive one, an identical copy goes to the IRS.
With this in mind, and considering the fact that native tokens in the metaverse are far more readily converted to fiat currencies, there’s a strong possibility that tokens earned in metaverses or from play-to-earn games may be subject to Income Tax upon receipt.
How to calculate, report and file your crypto taxes
If you’re an active investor with a variety of sources of additional income from crypto - as well as disposals of crypto to convert that income to cash - crypto taxes take time… and lots of it.
You’ll need to identify your cost base, or the fair market value of your crypto at the time you received it for any income, and calculate your subsequent capital gains and losses each time you disposed of crypto by selling, swapping, or spending it. Worse still, some tax offices like the IRS want you to include every single disposal of digital assets in your tax return.
Fortunately, that’s where our partner Koinly comes in. Save yourself hours of pain, use Koinly crypto tax calculator, and follow these 5 easy steps to file your crypto taxes instead:
- Connect all your wallets, exchanges, and blockchains to Koinly. You can do this automatically via API or by importing CSV files of your transaction history. Koinly supports more than 700 integrations, and you can even connect using your UD domain.
- Grab a coffee and let Koinly do its stuff. Koinly will collate your entire crypto transaction history and identify which transactions are taxable and which aren’t. Then it’ll calculate your cost basis, capital gains or losses, and the fair market value of any crypto income on the day you received it.
- Download your crypto tax report. Download the tax report you need, when you need it. Koinly can generate a huge variety of reports for tax offices around the world including the IRS, HMRC, the ATO, the CRA, and more.
- Use your crypto tax report to file your preferred way. Hand your reports over to your accountant, upload your crypto tax report to your tax app, or file by post. The choices are endless.
- Relax - you’re done for another year.
Get an exclusive 30% discount on your Koinly crypto tax report when you sign up to Koinly using code UD30.
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