By Owen Giordano

 

 

Since Mark Zuckerburg, founder of and chief executive officer of Meta, announced the company’s plans to construct their interpretation of metaverse, there have been many valid questions concerning the legal implications of such a novel development.[1] However, much like with many disruptive developments, many of the answers already exist.

To start, a working understanding of what the metaverse is needed. The metaverse is generally considered an extension of the internet as a multimedia platform.[2] Specifically, the metaverse envisions a distinct, virtual world that utilizes augmented[3] and virtual reality[4] technology (such as headsets) for users to be fully immersed in the virtual environment. To use pop culture as an analog, the metaverse’s closest analog is the Matrix from The Matrix in its aims to be an all-encompassing simulation for users to partake in.[5]

In tracing the development of Meta’s metaverse, many point to the onset of Massively Multiplayer Online Games (MMOs). For clarification, MMOs are a genre of video games where an individual plays with other individuals (in real-time) and complete quests or objectives together.[6] Importantly, the world in such games is “persistent,” meaning the world continues to operate and develop even when players are not present within it.[7] Some notable titles within the genre include World of Warcraft.[8] While Meta’s plans for the Metaverse may go beyond the realm of gaming, the similarities remain palpable, such as the idea of the metaverse being “persistent.”[9]

Importantly, many titles within this genre (as well as other games from other genres) allow players to purchase items for cosmetic (i.e., personalizing their in-game character) or practical purposes (i.e., allowing their character to complete quests or objectives more efficiently).[10] These purchases may be bought with in-game currency gained by completing quests (or by buying such funds via credit or debit card).[11] Given the goals of Meta’s metaverse, which include in-metaverse purchases to create a more immersive experience, the similarities between such games and the metaverse become more apparent.[12]

The Internal Revenue Service (IRS) has issued guidance concerning “virtual currencies” like Bitcoin and Ether.[13] Such guidance established that purchases made with virtual currencies for goods or services are taxable.[14] However, in a later statement, the IRS clarified that such taxation only applies to virtual currencies that are “convertible” (meaning that they can act as a substitute for real-world currency by “leaving the game environment”).[15] More specifically, IRS published this statement to clarify that “[t]ransacting in virtual currencies as part of a game that do not leave the game environment . . . would not require a taxpayer to indicate this on their tax return.” [16] Put into simpler terms, in-game purchases conducted with non-convertible virtual currencies would not be taxed at the federal level.[17]

Given the similarities between the metaverse and such video games, this guidance creates concern about a massive tax loophole for companies and individuals to take advantage of within the metaverse. Specifically, in-game (or, in this case, in-metaverse) transactions would go untaxed. However, the language of the statement seems to address this issue. This principle would apply only to virtual currencies that cannot leave the “game environment.”[18] As such, if the purchases are made with currencies such as cryptocurrency and card payments, then a tax must be reported paid.[19]

Overall, given the lack of specific guidance given by the federal government, it might very well be likely that the guidance that governs in-game transactions represents the de facto treatment of sales within the metaverse (at least when it comes to items solely used and consumed within the metaverse) for federal reporting purposes. However, given the scale and scope that Meta plans for their metaverse, the IRS may plan to develop more targeted guidance on the tax treatment of transactions conducted within the metaverse.

 

 

 

 

 

[1] Casey Newton, Mark in the Metaverse, The Verge (Jul 21, 2022), https://www.theverge.com/22588022/mark-zuckerberg-facebook-ceo-metaverse-interview; Nitin Kumar, Six Unaddressed Legal Concerns For The Metaverse, Forbes (Feb. 17, 2022),   https://www.forbes.com/sites/forbestechcouncil/2022/02/17/six-unaddressed-legal-concerns-for-the-metaverse/?sh=75d47ca47a94. See also Ethan E. White, Massively Multiplayer Online Fraud: Why the Introduction of Real World Law in A Virtual Context Is Good for Everyone, 6 Nw. J. Tech. & Intell. Prop. 228, 228 (2008) (arguing for the application of real world law in massively multiplayer online games, which are viewed as direct ancestors to contemporary understandings of the metaverse).

[2] Cory Ondrejka, Escaping the Gilded Cage: User Created Content and Building the Metaverse, 1 N.Y.L. Sch. L. Rev. 81, 81 (2005) (describing the metaverse as an “online environment that was a real place to its users, one where they interacted using the real world as a metaphor and socialized, conducted business, and were entertained”).  See also Adi Robertson & Jay Peters, What is the Metaverse, and Do I Have to Care?, The Verge (Oct. 4, 2022) https://www.theverge.com/22701104/metaverse-explained-fortnite-roblox-facebook-horizon; Peter Allen Clark, The Metaverse Has Already Arrived. Here’s What That Actually Means, Time (Nov. 15, 2021) https://time.com/6116826/what-is-the-metaverse/

[3] Matt O’Brien & Kelvin Chan, Explainer: What is the Metaverse and How Will It Work?, L.A. Times (Oct. 28, 2021), https://www.latimes.com/business/story/2021-10-28/explainer-what-is-the-metaverse-and-how-will-it-work#:~:text=Think%20of%20it%20as%20the,looking%20at%20on%20a%20screen; Casey Newton, Mark in the Metaverse, The Verge (Jul 21, 2022), https://www.theverge.com/22588022/mark-zuckerberg-facebook-ceo-metaverse-interview .

[4] Cory Ondrejka, Escaping the Gilded Cage: User Created Content and Building the Metaverse, 1 N.Y.L. Sch. L. Rev. 81, 82 (2005); Casey Newton, Mark in the Metaverse, The Verge (Jul 21, 2022), https://www.theverge.com/22588022/mark-zuckerberg-facebook-ceo-metaverse-interview.

[5] Sans the machine overlords, concerning lack of free will, and general inability to differentiate between the real and virtual worlds (hopefully).

[6] Ethan E. White, Massively Multiplayer Online Fraud: Why the Introduction of Real World Law in A Virtual Context Is Good for Everyone, 6 Nw. J. Tech. & Intell. Prop. 228, 228 (2008); Cory Ondrejka, Escaping the Gilded Cage: User Created Content and Building the Metaverse, 1 N.Y.L. Sch. L. Rev. 81, 81 (2005).

[7] Richard Bartle, Designing Virtual Worlds 1 (2003).

[8] Bob Woods, In Microsoft’s Activision Deal, It’s Not Just Stock Prices But a Future World at Stake, CNBC (May 7, 2022), https://www.cnbc.com/2022/05/07/in-microsofts-activision-deal-a-future-world-is-at-stake.html.

[9] Cory Ondrejka, Escaping the Gilded Cage: User Created Content and Building the Metaverse, 1 N.Y.L. Sch. L. Rev. 81, 81 (2005) (persistency as a key aspect of the metaverse); Ethan E. White, Massively Multiplayer Online Fraud: Why the Introduction of Real World Law in A Virtual Context Is Good for Everyone, 6 Nw. J. Tech. & Intell. Prop. 228, 228 (2008); (persistency as a key aspect of MMOs).

[10] Simulation & Gaming Through Times and Across Disciplines 422 (Marcin Wardaszko ed., 2019).

[11] Simulation & Gaming Through Times and Across Disciplines 422-23 (Marcin Wardaszko ed., 2019).

[12] See Casey Newton, Mark in the Metaverse, The Verge (Jul 21, 2022), https://www.theverge.com/22588022/mark-zuckerberg-facebook-ceo-metaverse-interview. (Mark Zuckerburg stating that “And this [the metaverse] is something that I hope eventually millions of people will be working in and creating content for — whether it’s experiences, or spaces, or virtual goods, or virtual clothing, or doing work helping to curate and introduce people to spaces and keep it safe. I just think this is going to be a huge economy and frankly, I think that that needs to exist”).

[13] Notice 2014-21, I.R.B. Q&A 3, IRS, https://www.irs.gov/pub/irs-drop/n-14-21.pdf

[14] Notice 2014-21, I.R.B. Q&A 3, IRS, https://www.irs.gov/pub/irs-drop/n-14-21.pdf

[15] RS Statement on Changes to Virtual Currency Webpage, IRS (Feb. 14, 2020), https://www.irs.gov/newsroom/irs-statement-on-changes-to-virtual-currency-webpage.

[16] IRS Statement on Changes to Virtual Currency Webpage, IRS (Feb. 14, 2020), https://www.irs.gov/newsroom/irs-statement-on-changes-to-virtual-currency-webpage.

[17] See Notice 2014-21, I.R.B. Q&A 3, IRS, https://www.irs.gov/pub/irs-drop/n-14-21.pdf; https://www.irs.gov/newsroom/irs-statement-on-changes-to-virtual-currency-webpage; IRS Statement on Changes to Virtual Currency Webpage, IRS (Feb. 14, 2020), https://www.irs.gov/newsroom/irs-statement-on-changes-to-virtual-currency-webpage.

[18] IRS Statement on Changes to Virtual Currency Webpage, IRS (Feb. 14, 2020), https://www.irs.gov/newsroom/irs-statement-on-changes-to-virtual-currency-webpage.

[19] See Notice 2014-21, I.R.B. Q&A 3, IRS, https://www.irs.gov/pub/irs-drop/n-14-21.pdf; https://www.irs.gov/newsroom/irs-statement-on-changes-to-virtual-currency-webpage; IRS Statement on Changes to Virtual Currency Webpage, IRS (Feb. 14, 2020), https://www.irs.gov/newsroom/irs-statement-on-changes-to-virtual-currency-webpage.

 

Image Source: https://www.mmorpg.com/editorials/is-the-metaverse-an-mmorpg-2000124322.