In 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, doing business, and trading virtual and non-virtual goods and services. So, will transactions in the metaverse be subject to VAT as in the real world? 

Since the pandemic, digital events have become more popular in the e-commerce industry. Undoubtedly, it becomes much easier to provide attendees with access to an online portal with a few clicks than to organize a face-to-face event. However, in this case, the tax rules of virtual events may be a bit complicated. When it comes to participation in these events from the UK or the EU, tax liability arises in each of these countries. In such a scenario, the EU's Import One Stop Shop (IOSS) tax system (B2C) may come to the fore for virtual event organizers whose value does not exceed 150 Euros, in particular sales. In other words, IOSS rules can also apply to events, conferences, and online courses held in the metaverse. If customers pay an entrance fee (B2C) at events held in the digital environment, tax should be charged depending on the tax rate in the participant's location.

When this issue comes to the fore in Turkey, the question of the birth of VAT and, if it arises, by whom/how will it be paid? Under the current legal conditions in Turkey, the delivery of goods in Turkey within the scope of commercial activities or works done by contract, and the import of goods or services made towards and benefited from in Turkey are included in the scope of VAT. Transactions and activities performed on Metaverse platforms can be considered services.

Are virtual product sales taxable on Metaverse?

Gartner, a technology research company, states that 30% of the world's companies will sell goods and services in the metaverse by 2026. It envisions a future where digital reality will increase B2C interactions. But will virtual showcases soon surpass e-commerce vendors with their virtual products? A set of rules regarding the taxation of virtual goods worldwide has not yet been determined. However, virtual reality gaming platform Second Life has announced that they will collect sales tax from in-platform purchases after March 31, 2022, specifically referring to the Supreme Court's Wayfair Sales Tax case. However, the platform stated that users will be charged a sales tax based on their location. In this announcement, Second Life's parent company, Linden Labs, also clarified that recurring billing items such as premium subscriptions and land charges will be taxed from its US users. It was also stated that the amount of tax to be collected will be clearly stated on the receipt or invoice. Although individual tax fees in the US 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 will be provided by a third party that will determine the correct tax for each user and will keep up to date with tax laws. In this application, four states in the USA, Delaware, Montana, New Hampshire, and Oregon do not charge sales tax; In the states of Seattle, Chicago, Los Angeles, and Oakland, California, sales taxes can total up to 10%.

According to experts, no comment has yet been received from the Internal Revenue Service (IRS) or any other tax authority in the United States regarding the tax implications of sales or profits made in the metaverse. However, metaverse users will still be liable to pay taxes, as in the real world, even if they do their transactions entirely online. It is therefore assumed that all sales transactions in the states will be taxable unless there is a specific exemption.

What about income tax?

A company that buys or leases virtual real estate in the metaverse in exchange for cryptocurrencies will receive a taxable profit in cryptocurrency, subject to the tax laws of the jurisdiction in which the company is a taxpayer. So, if the company develops its NFTs and decides to sell them on a metaverse platform (such as a fashion company selling unique clothing that can be worn by an avatar), the gains from the increase in the value of that NFT will also be taxed together. However, in this case, questions arise as to whether the taxation on earnings will occur at the moment the virtual transaction is executed or when the cryptocurrency is converted to euros or dollars. It may even be taxable annually according to the value at a certain moment during the year or the average value throughout the year. Depending on where the business is a taxpayer, it will be clear whether a taxable transaction will arise. Another issue is whether any digital currency will be taxed.

Some state tax profits from bitcoin, but will income from Decentraland's MANA tokens be taxed as well? To answer all these questions, it is very important to understand the legal status of avatars, which 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 tax framework by experts, the structure of metaverse platforms should be prioritized instead of taxation.

Conclusion

As virtual worlds evolve and opportunities for advancement with businesses increase probable taxation processes will follow. It is foreseen that the commercial activity in the Metaverse will also have significant effects in terms of earnings for international businesses. In particular, the expectation that the popularity of the metaverse will spread to the e-commerce sector in the coming years brings questions about which tax types and items will appear in the metaverse. Currently, there is no clear opinion on whether the taxation process will proceed as in the real world or whether a separate tax type will be created for metaverse platforms. However, in terms of tax liabilities, all metaverse platforms must follow tax legislation globally and locally.

*This article has been originally published on Harvard Business Review Türkiye on April 19, 2023. Please click here for the original article in Turkish