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Kim is advocating for a shift in strategy, proposing immediate taxation of all forms of income and assets within the metaverse.
Christine Kim, a legal scholar and professor of law, in a recently published research paper has expressed concern about the possibility of tax evasion in the metaverse and has urged the relevant authorities to put in place the necessary structures. She claims that the digital space has the potential to become a tax haven, allowing people to avoid their tax obligations. Kim believes that the current taxation system in the United States is unsuitable for the metaverse.
Users are currently taxed when they convert their digital assets into real-world assets or cash. She, on the other hand, advocates for a shift in strategy, proposing immediate taxation of all forms of income and assets within the metaverse. She also believes that it would be easy to tax within the system because all transactions are well documented. She said:
“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.”
While the concept of immediate taxation within the metaverse may hold promise for the government, enforcing it may prove challenging due to the emerging nature of the technology and the work still required for its development. Additionally, the government’s regulatory influence in the metaverse is not yet firmly established.
Nonetheless, Kim suggests approaches that the government could take to implement this system. The first approach entails Metaverse platforms being tasked with withholding and remitting taxes on behalf of users. The second option would be to allow platforms to provide users with tax information, making them responsible for filing and fulfilling their fiscal responsibilities.
Kim goes on to acknowledge the positive aspects of the metaverse’s development. She highlights that lawmakers can leverage this early stage to experiment with new tax policies, even in ways that may seem impossible in the physical world.
As the digital space continues to expand, she emphasizes the need for legal and tax professionals to adapt swiftly to the technology and its operational nuances, preventing it from becoming a haven for financial fraud. Kim also recommends the creation of tax codes for entities to ensure proper governance of the space.
Some of the Major Challenges with Metaverse Taxation
While the concept of taxation in the metaverse may appear appealing to the government and tax professionals, building a framework around it poses significant challenges.
One of the challenges is determining how to value virtual assets. Prices for virtual goods, currencies, and assets fluctuate, and determining their fair value can be difficult. Some questions that may arise in this regard include: What happens if the price of a virtual asset rises or falls sharply after it has been taxed?
Another issue is with international transactions. Users from various countries participate in the metaverse; however, because each jurisdiction has its own set of tax laws, how does taxation apply in this case?
The legal framework for metaverse taxation is still evolving, not only because the metaverse is a new system but also because it hasn’t fully developed.