Taxing the Metaverse

• Pages: 787-839
• Date: 01 April 2024
• Published date: 01 April 2024
• Author: Young Ran (Christine) Kim

Taxing the Metaverse

YOUNG RAN (CHRISTINE) KIM*

The buzz surrounding the Metaverse has been growing steadily for the

past couple of years, but the tax implications of this novel ecosystem

remain fuzzy to most tax scholars. Such uncertainty is concerning, given

the potential and momentum of this emerging technology. Although the

Metaverse evolved from online video games focused only on user con-

sumption, it now allows users to produce income and accumulate wealth

entirely within the Metaverse. Current law seems to defer taxation of

such until a realization or cash-out event. This Article challenges this

approach and offers novel arguments justifying Metaverse taxation.

Because economic activity within the Metaverse satisf‌ies the Haig–

Simons and Glenshaw Glass def‌initions of income, its exclusion will cre-

ate a tax haven. Tax policy can also play an essential role in regulating

the virtual economy. Furthermore, this emerging technology allows poli-

cymakers to modernize the tax system. The Metaverse’s ability to record

all digital activity and track individual wealth can offer governments a

unique opportunity to tax income immediately upon receipt and thus

overcome the traditional realization requirement and its incentive for tax

deferral. Immediate taxation, such as a mark-to-market system, would be

a more eff‌icient and fairer approach so long as it could overcome intrin-

sic valuation and liquidity problems.

Therefore, this Article proposes that income and wealth within the

Metaverse should be subject to immediate taxation. As support, it consid-

ers the tax implications of self-created virtual assets (like non-fungible

tokens (NFTs)), loot drops, intra-metaverse exchanges, inter-metaverse

exchanges, and cash-for-virtual-goods exchanges. It also endorses the

proposal for Unliquidated Tax Reserve Accounts (ULTRAs) as a way to

implement mark-to-market taxation that resolves the valuation and li-

quidity issues of immediate taxation. Finally, it demonstrates that gov-

ernments can use the Metaverse as a laboratory for experimenting with

* Professor of Law, Benjamin N. Cardozo School of Law, Yeshiva University. © 2024, Young Ran

(Christine) Kim. For helpful comments, I am grateful to Reuven Avi-Yonah, Eric Chason, Brian Galle,

David Gamage, Ariel Jurow Kleiman, Leandra Lederman, Mark Lemley, Michael Love, Omri Marian,

Henry Ordower, Shayak Sarkar, and Daniel Shaviro, as well as the participants of the UCLA Tax Law

and Public Finance Colloquium, Indiana University Maurer School of Law Tax Policy Workshop,

Columbia Tax Policy Colloquium, NYU School of Law Tax Policy and Public Finance Colloquium,

William & Mary Law School Faculty Colloquium, Cambridge University Tax Research Network

Conference, Cardozo Law School Faculty Workshop, Saint Louis University School of Law Faculty

Workshop, Michigan State University College of Law Faculty Workshop, Sixth Annual Junior Faculty

Forum for Law and STEM (Stanford Law School), UC Irvine Law 5th Annual Tax Symposium,

Association of Mid-Career Tax Law Professors Conference, Critical Tax Conference, and BYU Winter

Deals Conference. Camden Crystal, Maurice Elbaz, J. Garrett Huntington, and Rebecca Kreiser

provided excellent research assistance.

787

cutting-edge policy, which may benef‌it broader audiences beyond tax

policymakers interested in the Metaverse’s future.

TABLE OF CONTENTS

INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 789

I. DEFINING THE METAVERSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 798

A. VIRTUAL ECONOMY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 798

B. ECONOMIC ACTIVITIES IN THE METAVERSE. . . . . . . . . . . . . . . . . . . . . 800

II. SHOULD THE METAVERSE BE TAXED? . . . . . . . . . . . . . . . . . . . . . . . . 802

A. CHALLENGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 802

1. Size............................................... 802

2. Volatility .......................................... 803

B. RATIONALES FOR TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 805

1. Theoretical Reasons ................................ 805

2. Regulatory Reasons................................. 807

III. TAX BASE: WHAT TO TAX? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 810

A. EARNINGS AND PROFITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 810

B. SELF-CREATED OR PRODUCED ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . 812

1. Imputed Income .................................... 812

2. Clarifying Creation in the Metaverse .................. 814

C. REWARDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 815

D. GAINS DERIVED FROM THE VIRTUAL ASSETS . . . . . . . . . . . . . . . . . . . 817

IV. TIMING: WHEN TO TAX? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 820

A. THREE PARADIGM CASES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 821

1. Income Within a Single Ecosystem ................... 821

2. Exchanges Between Ecosystems...................... 822

3. Cashing Out to the Real World ....................... 823

B. POLICY DEBATES ON REALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 824

788 THE GEORGETOWN LAW JOURNAL [Vol. 112:787

C. MARK-TO-MARKET TAXATION IN THE METAVERSE . . . . . . . . . . . . . . . 826

1. In Support of Mark-to-Market Taxation................ 826

2. ULTRAs: A Method for Mark-to-Market Taxation ...... 829

3. Applying the ULTRA System to the Metaverse . . . . . . . . . 832

V. COMPLIANCE: HOW TO TAX? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 834

A. TAX JURISDICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 834

1. Source Taxation: Using the Server as a Proxy. . . . . . . . . . . 835

2. Residence Taxation ................................. 836

B. ENFORCEMENT MECHANISM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 837

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 838

INTRODUCTION

On October 28, 2021, Facebook rebranded to Meta and declared that its long-

term goal was to “bring the [M]etaverse to life and help people connect, f‌ind com-

munities and grow businesses.”

1

Introducing Meta: A Social Technology Company, META (Oct. 28, 2021), https://about.fb.com/

news/2021/10/facebook-company-is-now-meta/ [https://perma.cc/9LJD-QEXV].

This bold announcement brought the term

“Metaverse” into the collective public consciousness.

2

The term “Metaverse” is not in fact new or created by Meta but originated in the science f‌iction novel

Snow Crash. See, e.g., Charles R. Macedo, Douglas A. Miro & Thomas Hart, The Metaverse: From Science

Fiction to Commercial Reality—Protecting Intellectual Property in the Virtual Landscape, NYSBA BRIGHT

IDEAS, Spring–Summer 2022, at 13, 13 (“The term ‘Metaverse’ itself comes from author Neal Stephenson’s

1992 novel Snow Crash, which describes it as an immersive world.”); Google Search Requests for Keyword

“Metaverse” from January 1, 2004 to February 8, 2023, GOOGLE TRENDS, https://trends.google.com/trends/

explore?date=2004-01-01%202023-02-08&geo=US&q=metaverse [https://perma.cc/4ADM-K4CB] (last

visited Mar. 11, 2024) (suggesting interest in the term “Metaverse” spiked on the date Facebook rebranded to

Meta).

Although academics

struggle to provide a standard def‌inition,

3

See Josef Erl & Matthias Bastian, Here Are 10 Metaverse Def‌initions, Take Your Pick, MIXED

(Sept. 3, 2022), https://mixed-news.com/en/here-are-10-metaverse-def‌initions-take-your-pick/ [https://

perma.cc/RY3J-RCRG].

the Metaverse is commonly understood

as “an expansive network of digital spaces, including immersive 3D experiences

in augmented, virtual, and mixed reality, that are interconnected and interoper-

able so you can easily move between them, and in which you can create and

explore with other people who aren’t in the same physical space as you.”

4

LAU CHRISTENSEN & ALEX ROBINSON, THE POTENTIAL GLOBAL ECONOMIC IMPACT OF THE

METAVERSE 5 (2022), https://www.analysisgroup.com/globalassets/insights/publishing/2022-the-potential-

global-economic-impact-of-the-metaverse.pdf [https://perma.cc/C27H-GSZ5].

Any

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