Harvard legal scholar and Yeshiva University law professor, Christine Kim, has recently published a research paper exploring the taxation of the metaverse. In her paper, titled “Taxing the Metaverse,” Kim argues that the metaverse, with its ability to create and build wealth within its ecosystem, should be regulated under tax code.
According to Kim, the economic activity within the metaverse meets the definitions of income outlined by the Haig-Simons and Glenshaw Glass principles. She believes that excluding the metaverse from taxation would create a tax haven. The metaverse’s capability to record digital activity and track individual wealth provides governments with the means to track and tax income immediately upon receipt. Kim suggests that this could potentially disrupt the existing status quo of United States tax law.
Kim goes on to propose changes to how taxes are realized in relation to the metaverse. Currently, metaverse users in the U.S. are taxed upon realization or engaging in a taxable event, such as a withdrawal. However, under Kim’s recommendations, taxation would occur immediately upon receiving gains, including unrealized gains and income, even if they remain within the metaverse.
The paper also considers the enforcement of tax law within the metaverse. Kim outlines two plausible methods for ensuring compliance. The first involves individual platforms withholding taxes on behalf of users. The second, known as residence taxation, relies on platforms sending tax information to users who would then file and pay their own tax obligations. Kim identifies the former as the preferred method of enforcement.
Beyond taxation, Kim sees the metaverse as an opportunity for lawmakers to experiment with cutting-edge policy. She suggests that the metaverse can serve as a laboratory, simulating scenarios unlikely to occur in the physical world. This provides lawmakers, even those who may not typically be interested in Web3 and metaverse technology, with a unique opportunity to explore and test new policies.
In summary, Kim’s research paper emphasizes the need to tax and regulate the metaverse. She argues that the metaverse’s wealth creation potential and its ability to track individual wealth necessitate its inclusion in tax laws. Furthermore, Kim suggests that taxing the metaverse not only serves as a means of generating revenue, but also presents an opportunity for lawmakers to experiment with innovative policy-making in a virtual realm.
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