Tech companies tout the “metaverse” as the next global marketplace, with cryptocurrency and non-fungible tokens (NFTs) lighting the way for the average investor. In this field, income taxes, sales taxes and other levies are a bold new topic largely devoid of official guidance.
But “the same business practices in the real world ultimately apply to businesses and transactions,” said Jerry Eitel, a CPA and new chief metaverse officer (CMVO) of Prager Metis CPAs in New York. “Payments with any of these assets will result in gains or losses from the original basis compared to the fair market value at the time these assets are used to pay a vendor.”
The metaverse is a digital environment comprising social media, online gaming and virtual reality that's usually accessed with technology ranging from virtual reality goggles and gloves to a common smartphone. Cryptocurrency and NFTs, which are distinctive digital assets that often denote ownership of such collectibles as sports cards or artwork, are part of the metaverse.
Real localities are establishing virtual versions of themselves on the metaverse. Seoul did so late last year, around the time Barbados said it plans to open an embassy in the metaverse. The trend could, observers say, eventually could ignite international treaty debates in the real world.
“There is more [than] buying and selling crypto and NFTs in the metaverse. The main additional asset that I see is community, which translates to an expansion of a company’s or person’s brand or IP,” Eitel said. “For example, some well-known brands have gotten into virtual wearables, and well-known performers have literally created their own mini-metaverses: an expansion of customer base, new income streams and fostering brand loyalty. In addition, startups with a small following can gain serious traction. The same can be true for emerging artists.
“There are issues as to whether an NFT might be considered a security,” Eitel said. “If an artist creates NFTs, those are taxed as ordinary income when sold. Therefore, NFTS can be taxed at ordinary, capital or collectible rates.”
“Investing in metaverse assets is like buying and selling property and are treated as capital assets,” he added.
On the heels of the IRS adding a direct question about crypto prominently on the Form 1040 return, the federal government continues focusing its attention on digital currency. President Joe Biden recently signed an executive order addressing cybersecurity and other issues as the U.S. explores creating a digital currency for its central bank. Treasury Secretary Janet Yellen has promised fraud protections like those on non-virtual assets.
“Taxpayers should receive the same type of tax reporting on digital asset transactions that they receive for transactions in stocks and bonds,” she said recently.
The Treasury Department has also clarified that brokers of digital assets are under the same tax-reporting requirements as brokers of conventional assets.