A recently published research paper by Christine Kim, a prestigious Harvard legal scholar currently working at Yeshiva University, might just add another layer to our perception of the digital reality. Using the metaverse as her subject of study, Kim nudges the significance of viewing tax principles from a more innovative standpoint rather than the conventional physical worldly perspective.
Kim underscored the potential of the metaverse when it comes to economic activities such as trading of virtual assets, selling digital products, or providing services. Given that these activities fit the standard definitions of taxable income, countering them under the economic paradigm could potentially create a tax haven.
The intriguing aspect of this metaverse proposition is the technology’s potential to record transactions and measure gains closely. This capability could hand tax authorities a golden opportunity to supervise economic activity and accumulate tax revenue efficiently. Christine proposes a significant shift – from taxing only realized income and capital gains to imposing taxes on unrealized gains as they surface.
Nevertheless, the conundrum of how tax collection will come to pass in such decentralized digital worlds does present a challenge. On this point, Kim envisions two probable models: compelling platforms to withhold taxes on transactions, or encouraging users to file taxes determined by the transaction records they receive. While favoring the withholding model, Kim also acknowledges potential resistance from users that may garner discomfort towards platforms’ direct role in tax collection.
In the eyes of most lawmakers, the metaverse is a frontier concept. However, methodically infusing real-world tax principles to metaverse activities can provide these policymakers a relatable perception of its magnitude. Consequently, it urges these policymakers to delve deeper into understanding Web3 technologies that could upset existing legal frameworks.
However, with the advent of such discussions, various open-ended questions choke the discourse. For instance, tax evasion could become an issue as users scatter assets throughout different virtual worlds. Accordingly, cooperation between platforms might become a necessity. On top of this, establishing guidelines to accurately value new metaverse assets could prove challenging.
The concept of taxing unrealized gains in real-time could face backlash for being a radical departure from what is traditionally practised. Critics argue this could impose undue tax burdens and create friction that may dampen economic activity. Moreover, the fluctuating liquidity in metaverse markets might create obstacles for users when they’re expected to pay taxes on gains that have not been realized yet.
Henceforth, metaverse platforms need to reach a delicate balance. The advantages of real-time taxation of unrealized gains will need to be carefully weighed against the potential discouragement of user participation. This taxing approach, while far-fetched in the tangible world, might just be a practical model for virtual economies. As we edge into the digital era, lawmakers might have a lot to gain from the metaverse’s glimpse into the transformative future of taxes.
Source: Cryptonews
