How the Metaverse and Web3 creating Real Tax Issues
The metaverse is currently perceived as a hub for economic activities when fully functional. However, a taxation system will be there, like in a real-world scenario.
What is the Metaverse? How does it work?
The metaverse is like a virtual universe created by seamlessly linking virtual worlds where individuals can live, play, work or even do business. Now as weird as it may seem for anyone uninformed of this field, it is no new concept, as they already existed in embryonic concepts like Second Life (2003). Most of the required technologies are already in use, and major tech corporations like Meta and Microsoft are joining hands in making it all possible. The biggest challenge is making the technologies available to all, which might take 5–10 years.
Be it an education or work setting, visiting a doctor, attending a concert or show, or taking part in a commercial transaction, everything will be in the metaverse, in the comfort of your home. According to research, the global Metaverse market value is $47.48B in 2022, which is set to go as high as $678.7B by 2030.
What are a Web3 and Blockchains?
Web3 is the 3rd stage in the progressive development of the World Wide Web. It is highly distinct from the previous Web2.0 version as it is now decentralized and interoperable. It mainly concerns blockchain technology and concepts, including digital identity, smart contracts, and decentralized applications (dApps). Web3, with its AI capabilities, has already given rise to digital assets like cryptocurrencies and NFTs.
How do they work, hand-in-hand?
In Web3, the metaverse has come with the primary goal of generating experiences and establishing new systems of ownership and finance. This can be achieved through NFTs and can serve as products or services, which in turn can be bought and sold with cryptocurrencies via blockchains. In that regard, some of the defining features of the metaverse may be creating a robust economy, interoperability, persistence, continuous life events, and uncapped user count.
These initiatives have created an opportunity for people worldwide to work together on new businesses, creating a set of personalized rules and regulations. Since they are Decentralized Autonomous Organizations (DAOs), they are governed by computer software in the form of blockchain-powered smart contracts. These can be organized around any initiatives, and the governance will depend on the tokens and voting rights aligned to the controlling membership of the organization. Wyoming became the first US state to acquire legal entity status as DAO in July 2021. Some organizations have even received third-party advice to apply for existing as an entity around the DAOs, within a legal framework to afford a certain level of comfort. But with increasing numbers of DAO adoptions, their legal and tax treatment across the globe needs a certain level of clarification.
Currently, many first movers in the domain are taking modest steps towards entering the metaverse, but they seem to be continuing in the metaverse for a longer time. So it is crucial to conclude the tax issues. Moreover, metaverse promises a global annual revenue of more than $1T, and opportunities are in every economic sphere.
The tax issue and the probable solution
There is already an increase in the taxable events in the recent e-commerce’s entering the metaverse. Bu the primary problem the tax teams face is a question of which jurisdictions are entitled to tax the digital transactions, and adding to that is the complex and constantly evolving tax treatment of cryptos serving as the ‘metaverse money’ to acquire digital assets. The Multi-day tour of Ariana Grande, broadcasted on the Fortnite platform, earned more than $20M. But it is not yet taxed out of the confusion as to who is entitled to tax such an activity. There are some unsolved questions surrounding indirect taxation as well. In cases of the NFT real-estates, it isn’t clear if they are subjected to VAT. Since the rules aren’t clear, it won’t be easy to create a plan and design an operating model effectively. In all, tax functions risk living in a world of uncertainty.
One way the solution to the metaverse tax challenges is likely to be through the global response to the primarily original 1990s boom and the subsequent digitalization of the global economy. Historically, the jurisdiction constantly flexed existing tax frameworks and concepts to cover up emerging digital activity whenever they faced such problems.
Digital assets are capable of bypassing the conventional tax reporting mechanisms. So, rather than introducing brand new legislation, the OECD, US and UK are trying to extend the existing legislative frameworks, namely CRS, DAC-8, and FATCA, to include digital intermediaries.
The other way the problem can be solved is through the metaverse itself or even its Web3 infrastructure. On the one hand, the metaverse can be decentralized and widely unregulated in a pseudo-anonymous environment.
On the other hand, blockchain is transparent for viewing transactions in real-time on distributed ledger networks. Thus the real-time tax reporting engines can be built on top of blockchain transactions to share transaction information with tax authorities as they happen automatically.
Conclusion
The metaverse and the significant-other Web3 technology may cause significant tax challenges at present. Still, they are capable of placing exciting new tools into the hands of tax practitioners in the future. This will make it easier to collect the proper tax at the right time and help them do the task in a much more efficient and cost-effective manner for all parties involved.
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