It may seem a little hasty to imagine what taxation will be like in the metaverse.

However, technological developments are advancing by leaps and jumps, and I understand that it is always better for states to provide certainty and predictability in the new business models and here taxation is a particularly important aspect, as are legal, commercial, civil, labor, money laundering, protection of personal data and many others that are impacted by the metaverse.

That is why the purpose of the present blog is only to formulate some preliminary ideas on the topic in order to open it up to debate.

1. METAVERSE: SOME DEFINITIONS AND USE CASES.

The metaverse or meta-universe (acronym for “meta-” ‘beyond’ and “universe”) is a concept that denotes the next generation of the internet, which describes an immersive and multi-sensory experience in the applied use of various devices and technological developments on the internet^[1]. The term comes from the science fiction novel Snow Crash written by Stephenson.

The Metaverse is a collective virtual open space, created by the convergence of virtually enhanced physical and digital reality. Is physically persistent and provides enhanced immersive experiences^[2].

In a broader sense, the metaverse can refer not only to virtual worlds, but to the multidimensional experiences of internet use and application as a whole, especially the spectrum that combines web 2.0, augmented reality, third-dimensional technology (3D) and virtual reality.^[3]

Activities that take place in isolated environments (purchase of digital land and construction of virtual houses, participation in a virtual social experience, etc.) will eventually take place in the Metaverse.

The Metaverse is a collective virtual space, created by the convergence of enhanced physical and digital reality. In other words, it is device-independent and not owned by a single provider.

It is an independent virtual economy, enabled by digital currencies and non-fungible tokens (NFT)^[4] where technologies such as Blockchain are protagonists.

Gartner expects that by 2026, 25% of people spend at least one hour a day on Metaverse for work, shopping, education, social media and/or entertainment.

Applied uses of metaverses have been identified so far in the field of entertainment, teleworking, tele-education, telehealth and especially in the field of the digital economy where new forms of value begin to emerge, such as non-fungible tokens (NFT) and other crypto tokens such as cryptocurrencies.

If the concept of metaverse is analyzed from a broader sense than the definition of virtual world, the different synthetic worlds can be distinguished, as belonging to four different types^[5]:

• Games and virtual worlds: To this type belong the most similar to that discussed in the novel Snow Crash. These are fully immersive virtual environments, in which the user is immersed in an experience of contact with other users and elements within a virtual world. This contact can be game-oriented (e.g., World of Warcraft or Tibia), or oriented to the social aspect of the metaverse, as in Second Life.
• Mirror worlds: Are detailed virtual representations of one or more aspects of the real world. The clearest example is Google Earth, which represents world geography through aerial imagery.
• Augmented reality: They consist of the application of mirror worlds technology for real applications, which solve certain situations in our daily lives. These tools expand the physical world perceived by users, establishing a new dimension of useful information.
• Lifelogging: Includes systems that collect data on daily life, in order to be applied through statistics.

In addition, activities that are currently carried out in isolated environments will eventually take place in a single metaverse, such as: purchase of attire and accessories for online avatars, purchasing of digital land and construction of virtual houses, participating in a social experience, shopping in virtual malls through immersive trade, use of virtual classrooms to experience the immersive learning, purchasing digital art, collectibles and assets (NFT), interacting with human digital to incorporate employees, customer service, sales and other business interactions^[6].

Without a property “owner” and fewer barriers to entry, the possibilities are endless. People get cryptocurrencies in virtual worlds and sell them in exchange for fiat currency. In fact, in some cases they are earning thousands or even millions more than they would in the real world^[7].

For example, in December, a virtual real estate plot in The Sandbox was sold for $ 4.3 million to an Atari developer.

On the other hand, NFT sales reached about 25,000 million dollars in 2021 according to data from the market tracker DappRadar, and all forecasts indicate that they will continue to rise sharply^[8].

2. TAXATION. PRELIMINARY IDEAS

Within the complex and changing that is the Metaverse, I understand that in the first place today each country with its current legislation must determine whether taxable events are occurring, subject to taxation, whether in income taxes, property or consumption.

I see it as an” imaginary world “but that has many” bridges ” with the real world and it will be necessary to determine if there are taxable events.

Obviously, taxation is linked to the legal qualification of the contracts and activities that are conducted but also to unravel the” economic reality ” of the businesses and activities that are developed in the metaverse.

It is essential to have a deep knowledge of the metaverse working jointly with the public and private sectors, analyzing the tax issue as one more aspect within all the regulations to be developed.

It is especially important, for example, to find a common definition of NFT taxation which will require in-depth knowledge on many issues, beyond tax control aspects.

I find the reflections of Emilio Perez Pombo interesting^[9] that it is important to analyze the degree of decentralization of activities in the metaverse to determine if it is a type of video game, more or less evolved, or instead, we are facing something different, such as a “parallel world”.

In centralized and/or closed environments (such as Meta®, SecondLife®, Fornite® or Axie Infinity®), we interact in a delimited and controlled framework where the basic relationship is between the user and the creator/owner of the virtual world. On the other hand, in decentralized and open environments (such as The Sandbox® or Decentraland®), individual exchange and unique experiences take on a transcendental importance, without prejudice to the fact that there is an initial moment (the registration of access) that marks the link between the real-life individual or legal entity and his avatar (digital identity).

To cite just a few of the questions, it will be necessary to define how the income or sale of virtual real estate will be taxed, or the creation of digital content, as will be the treatment in the VAT and what will be the place of provision of the services, and what the jurisdictional nexus for example to define residence, source, application of international treaties, etc.

In addition to reforms in the tax systems to contemplate the new business models that the metaverse brings, I am convinced that sooner rather than later changes will occur in the way taxes are managed by TAs.

Let us not forget that a key actor in the metaverse is blockchain, and that its advantages such as transparency, efficiency, data integrity and security can be of benefit to the TAs in multiple ways, just as the feature of decentralization can improve its efficiency, and its interaction between multiple actors, by providing a more equitable environment for all stakeholders^[10].

Current and emerging technologies can combat fraud by bringing taxes closer to transactions in what are known as continuous transaction controls. For example, through smart contracts based on Blockchain, it would be possible to automate part of the collection of taxes as we have already mentioned.^[11]

3. CONCLUDING REMARKS

We are witnessing a historical period in terms of tokenization of the economy, also called Web3, as an evolutionary stage of the Internet; this will continue with the metaverse, which promises a constant expansion with new business models and forms of value creation.

The problems and unknowns of the metaverse are many but what is clear is that it is already a reality and I understand it will continue in permanent evolution.

It would be desirable for states to agree on uniform tax treatments for operations with cryptocurrencies and other cryptographic tokens such as NFT and other metaverse activities.

We know that the tokenized economy presents multiple variants and ways of performing operations, which will be enhanced within the Metaverse, which is why a very deep analysis of each of them is convenient.

I believe that in the face of global and disruptive developments such as those we are experiencing, the path of cooperation, collaboration and multilateralism among states is more appropriate than unilateral measures.

I say this both from the perspective of legislating to regulate and promote the development and digital transformation of countries, and with regard to the fight against tax fraud, money laundering, terrorism and other crimes.

I am convinced that today, more than ever, we must continue to make progress in international cooperation and multilateralism and in public-private partnerships involving academic and expert centers.

In short, I think countries should promote mechanisms more agile to define the legal frameworks, always prioritizing multilateral solutions for the new business models of the digital and tokenized economy, including the Metaverse, that seek on the one hand to enhance them, but also to guarantee transparency, security and certainty for citizens in many aspects including their tax legal framework.

[1] Duan, Haihan; Li, Jiaye; Fan, Sizheng; Lin, Zhonghao; Wu, Xiao; Cai, Wei (17 October 2021). Metaverse for Social Good: A University Campus Prototype. Association for Computing Machinery. pp. 153-161.
[2] https://www.gartner.com/en/articles/what-is-a-metaverse
[3] Smart, J. M.; Cascio, J.; Paffendorf, J. (2007). “Metaverse Roadmap Overview” (in English). Accelerated Studies Foundation.
[4] NFT are a non-fungible, unique and unrepeatable asset, not interchangeable with another similar one, which is based on blockchain with some particularities.
[5] https://en.wikipedia.org/wiki/Metaverse. Characteristics of the metaverse.
[6] https://www.gartner.com/en/articles/what-is-a-metaverse
[7] https://koinly.io/blog/metaverse-tax/
[8] https://www.reuters.com/markets/europe/nft-sales-hit-25-billion-2021-growth-shows-signs-slowing-2022-01-10/
[9] Metaverse Taxation – Fiscal blog. https://fiscalblog.es/?p=7211
[10] To expand see Alfredo Collosa, Blockchain in Tax Administrations
[11] Alfredo Collosa, Can blockchain improve VAT Collection? – Part 1
Alfredo Collosa, ¿Blockchain para mejorar la Recaudación del IVA? – Parte 2

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