A new research paper from Harvard legal scholar Christine Kim argues that the same tax principles that apply to physical world income should extend to the metaverse.
Christine Kim, a law professor at Yeshiva University, laid out the case for taxing the metaverse in her recent paper "Taxing the Metaverse." She contends that metaverse activities like trading virtual assets, selling digital products, and providing services meet the standard definitions of taxable income.
"Because economic activity within the Metaverse satisfies the Haig-Simons and Glenshaw Glass definitions of income, its exclusion will create a tax haven," she says in her research paper.
A key reason the metaverse has ignited such interest around taxation is its potential to closely track all transactions and measure individual gains. This gives tax authorities an unprecedented ability to monitor economic activity and accumulate tax revenue in real time.
Kim advocates moving from a system of taxing only realized income and capital gains to one that taxes unrealized gains as they occur. The transparency of the metaverse would facilitate this shift. She argues this approach could make the metaverse a test environment for envisioning the future direction of tax policy.
A major consideration is how to go about collecting taxes in decentralized digital worlds. Kim discusses two potential approaches: requiring platforms to withhold taxes on transactions or having users file taxes directly based on transaction records they receive.
Kim expresses a preference for the withholding model, while acknowledging users may object to platforms taking a direct role in tax collection. Resistance could arise from those participating in the metaverse specifically to exchange value
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