On integrated digital platforms that combine virtual and augmented reality with blockchain technology, users can connect with other users through their avatars while visiting virtual places, conducting business, and trading virtual and non-virtual goods and services. So will transactions in the metaverse be subject to VAT as they are in the real world?
Since the pandemic, digital events have become increasingly popular in the e-commerce industry. Undoubtedly, it is much easier to give participants access to an online portal with a few clicks than to organize a face-to-face event. However, in this case, the tax rules for virtual events can be a bit complicated. Attendance at these events from the UK or EU will result in a tax liability in each of these countries. In such a scenario, the EU Import One Stop Shop (IOSS) (B2C) tax system for virtual tour operators whose value does not exceed 150 euros, especially sales, could come to the fore. In other words, IOSS rules can also apply to events, conferences, and online courses that take place in the metaverse. If customers pay admission to events in the digital environment (B2C), a tax must be levied depending on the tax rate at the participant’s location.
With this issue coming to the fore in Turkey, the question arises as to the birth of VAT and, if it arises, by whom/how will it be paid? According to the current legal conditions in Turkey, the supply of goods to Turkey in the course of commercial activities or contractual work, as well as the importation of goods or services entering and benefiting from Turkey fall within the scope of VAT. Transactions and activities conducted on Metaverse Platforms may be considered services.
Are virtual product sales taxable on Metaverse?
Gartner, a technology research firm, states that 30% of companies worldwide will sell goods and services in the metaverse
until 2026. It envisions a future where digital reality will increase B2C interactions. But will virtual shop windows soon overtake e-commerce providers with their virtual products? A set of rules for the worldwide taxation of virtual goods has not yet been established. However, virtual reality gaming platform Second Life has announced that it will begin collecting sales tax on in-platform purchases after March 31, 2022, specifically citing the Supreme Court’s Wayfair sales tax case. However, the platform stated that users will be charged sales tax depending on their location. In this announcement, Second Life’s parent company, Linden Labs, also clarified that recurring billing items such as premium subscriptions and mortgages will be taxed by their US users. It was also stated that the amount of tax to be charged would be clearly stated on the receipt or invoice. Although individual US tax fees vary by tax jurisdiction and some states have lower sales tax rates than others, Linden Labs has announced that it will use an automated system for this. This system is provided by a third party who determines the correct tax for each user and keeps up to date with tax laws. In this application, four states in the US, Delaware, Montana, New Hampshire, and Oregon, do not collect sales tax; Sales tax can be as high as 10% in the states of Seattle, Chicago, Los Angeles and Oakland, California.
According to experts, no comment has yet been received from the Internal Revenue Service (IRS) or any other tax authority in the United States on the tax implications of sales or profits made in the Metaverse. However, just like in the real world, Metaverse users still have to pay taxes even if they conduct their transactions entirely online. It is therefore assumed that all sales transactions are taxable in the states unless a specific exemption exists.
What about income tax?
A corporation that purchases or leases virtual real estate in the Metaverse in exchange for cryptocurrency will receive a taxable gain in cryptocurrency, subject to the tax laws of the jurisdiction in which the corporation is a taxpayer. So if the company develops its NFTs and decides to sell them on a Metaverse platform (e.g. a fashion company that sells unique clothing that can be worn by an avatar), the profits from increasing the value of that NFT will also be taxed together. In this case, however, the question arises as to whether income tax is payable at the time the virtual transaction is carried out or at the time the cryptocurrency is converted into euros or dollars. It can even be taxable annually depending on the value at a certain point in the year or the average value throughout the year. Depending on where the company is a taxpayer, it is clear whether there is a taxable turnover. Another question is whether a digital currency will be taxed.
Some states tax profits from bitcoin, but is income from Decentraland’s MANA tokens taxed as well? In order to answer all these questions, it is very important to understand the legal status of avatars, what digital currencies are used in the metaverse, how metaverse platforms work and different aspects of the virtual world. For this reason, when creating a crypto governance framework by experts, the structure of Metaverse platforms should take precedence over taxation.
As virtual worlds evolve and corporate advancement opportunities increase, taxation processes are likely to follow. It is foreseeable that commercial activity in the Metaverse will also have a significant impact on the earnings of international companies. In particular, the expectation that the metaverse’s popularity will expand to the e-commerce sector in the coming years raises questions about what tax types and items will appear in the metaverse. There is currently no clear opinion as to whether the taxation process will be real-world like or whether a separate type of tax will be created for Metaverse platforms. However, with regard to tax liabilities, all Metaverse platforms must comply with tax laws globally and locally.
*This article was originally published in Harvard Business Review Türkiye on April 19, 2023. Please Click here for the original article in Turkish
The content of this article is intended to provide a general guide to the topic. Professional advice should be sought as to your specific circumstances.