A law professor argues the metaverse should be taxed, because much of the activity that takes place in the virtual world “satisfies” academic definitions of income.
Professor Young Ran (Christine) Kim, a law professor at Yeshiva University in New York, penned a research paper arguing that economic activity in the metaverse meets two cornerstone definitions of “income” as laid down by economists.
The first is the Haig-Simons’ definition of income, and the second is the Glenshaw Glass income. Let’s dive in.
What exactly constitutes “income”?
The Haig-Simons income includes “gains or increases in wealth over a particular period regardless of whether spent on consumption or saved.”
On the other hand, the Glenshaw Glass income focuses on what we know as gross income. Payments that are “undeniable accessions to wealth, clearly realised, and over which taxpayers have complete dominion” are considered gross income, and therefore taxable.
Professor Kim argues that metaverse worlds, including Meta’s Horizon Worlds, Second Life, Roblox, Minecraft, and so on, have significant economic activity where participants engage in “the ability to consume, create, trade, and accumulate digital items with real economic value.”
Such economic activity generates in-game currency that can be legally converted – or at least, valued – to a taxable real-life currency such as crypto or US dollars. There have been news reports of players making a fortune and becoming millionaires in real-life thanks to Second Life. For Roblox, users are allowed to ‘cash out’ their in-game currency, ‘Robux’ to real-life US dollars – there’s even a fluctuating exchange rate for Robux and US dollars.
Therefore, according to Kim, users are earning income and accumulating wealth in a way that’s not so different to how people earn money in real life, which is why the metaverse should be taxed.
Harry Dell, an NSW-based lawyer specialising in crypto tax, tells The Chainsaw that while the idea of taxing the metaverse may seem unique, “it doesn’t change the fundamentals of people having to pay tax on income and capital gains.”
“[That a tax obligation arises whenever there is money earned] is a relatively resilient definition,” he says.
Problems with taxing the metaverse
The main issue with taxing metaverse worlds, however, is that the majority of players in those worlds are minors. Children engaging in what could constitute economic activity on Roblox are mostly still unable to earn a real-life income. So, who would be paying the tax should it be implemented?
Harry Dell also shares with The Chainsaw that existing tax obligations by tech corporations already somewhat cover what’s being proposed.
“For example, Alibaba and Amazon have tax obligations all around the world on behalf of users. So, it’s not so strange to force the facilitators of sales into paying tax on behalf of other people,” he says.
“If you are just playing the game and buying a few items so you can enjoy it, there’s generally no tax to think about. But when it starts to get commercial or when you are running a business with a substantial profit like an enterprise, tax obligations arise,” he explains.
What should be taxed
The metaverse is a large, expansive universe. So, what exactly should be taxed? Professor Kim lays out several types of player moves that could be viewed as income-earning activity.
First and foremost, any activity where the player makes an earning or profit. For example, buying or selling land in virtual worlds like Roblox or Decentraland.
Next, self-created or produced assets. Some virtual worlds like Roblox and Minecraft allow fans to create their own in-game items – like skins and weapons – and sell to other players. This could be viewed as “imputed income”, i.e. income that an individual earns outside of their salary or wage.
Professor Kim likens the sale or purchase of self-created in-game assets to baking cookies at home or harvesting apples at one’s backyard. “Whenever a person performs services for one’s own benefit or produces goods for one’s own consumption, the person has an economic gain equal to the amount the person saves by not having to pay someone else to provide the services or goods,” she explains.
“NFTs, loot drops, intra-metaverse exchanges, inter-metaverse exchanges, and cash-for-virtual-goods exchanges” should thus also be taxed.
What happens if the metaverse goes “untaxed”?
Tax revenue is a mammoth source of income for governments. The global metaverse market is projected to reach US$800 billion (AU$1.52 billion) in 2024, according to Bloomberg Intelligence.
Of course, governments lose substantial revenue if virtual worlds are overlooked as taxable entities. Professor Kim’s paper asserts that a “tax haven” could also arise as a result. However, as the metaverse is an open, borderless virtual world, figuring out how to tax players is extremely difficult as it remains uncharted territory.
“There’s a whole new possibility here to be explored… we are actually dealing with similar kinds of questions with space law. Let’s say you go into space and earn income from mining on Mars, where is that tax?”
“… it’s not an easy area, so putting in global tax agreements [in the metaverse] could take decades,” Dell adds.
Here’s one thing to note for metaverse gamers in Australia who are looking to build a business with Roblox: even when a method is worked out for taxing people for money earned, the first $18,200 people earn in Australia is tax free. So, it would only apply to people who are earning more than $18,201.
