Before we tell you how much tax you will have to pay on your income from property situated in the Metaverse, let’s find out what exactly is this virtual place. It will surely be an injustice to come straight to the taxation aspect without explaining the Metaverse.
The Metaverse is a virtual universe or a parallel digital world where avatars of human beings will be present through technology. In this world, one can shop, buy, roam around and potentially do everything that he/she can do in real life. Many companies are creating many Metaverses for entertainment, education, and business.
Worldwide, the daily average screen time of a person is 6 hours and 57 minutes for internet-connected activities, as per news/research reports. Thus, companies are spending billions of dollars to create a virtual world that can give users better and more engaging experiences during this screen time.
Whether we believe in the Metaverse or not, many companies are betting on it. Microsoft, Google, and Facebook are a few of them. Nike has created Nikeland in Roblox, a Metaverse visited by millions of people every day.
The Metaverse encompasses the Digital Economy, and Blockchain plays a crucial role in its development. In this digital economy, entities will be able to sell goods, services or NFTs, and all these transactions will be validated with Blockchain technology.
Companies will need space in this virtual world to showcase their products or host events. And that space will be the virtual land. According to an international market research report, the size of the global metaverse real estate market is expected to grow at a CAGR of 31.2% during 2022-2028.
Why would anybody buy an NFT or land in Metaverse?
Well, just like physical land, each Metaverse will have a limited supply of land. As the rule of economics says rarity and scarcity contribute to the appreciation in value. The same logic goes with NFT. Nike launched 20,000 virtual sneakers, out of which 98 were limited edition, making them a scarce collector’s item. Someone paid $130,000 for a pair of virtual Nike sneakers.
Metaverse marketplaces combine virtual reality, Blockchain and NFT technology to create a virtual space and sell it as NFT to buyers. For instance, a virtual mall built on Blockchain technology networks in Metaverse where users can buy a commercial space as virtual real estate and earn money by leasing, advertising and developing it to deliver an immersive experience to visitors via VR technology.
The lands in the Metaverse are measured in tiles, which is the smallest measurable unit and cannot be further broken down. Every tile has a unique address (Block Id) and geolocation in the form of Longitude/Latitude, making it non-fungible. Fungible means something capable of substitution. Fungibility is the property of a good or a commodity that makes it replaceable by another identical item. For example, trade one cryptocurrency for another or fiat currency, and you will have precisely the same value. In contrast, ‘Non-Fungible’ means that it is unique and cannot be replaced with something else. As each tile is uniquely identifiable in the Metaverse, it is sold as an NFT.
So far, I believe that you have understood the basics of the virtual world.
This understanding will help you understand the tax implications that may arise from investing in and earning from virtual land.
One can earn from virtual land in a Metaverse by renting it, running an e-commerce business on it, hosting an event on it, or selling it.
Let’s talk about the taxability of each income.
As discussed previously, entities would need the land in the Metaverse to host events or run an e-commerce business. These virtual lands can either be purchased from the marketplace or be taken on rent from owners.
Such rental income shall not be taxed under the head of income from house property because the first condition that needs to be satisfied to tax the rental income under this head is that the income should be earned from a house property. It means no standard deduction of 30% shall be allowed from the rental income. This is because as per current income tax laws, only income from house property is taxed under the head ‘Income from house property’. Income from renting physical land is taxed under ‘Income from other sources’ as per tax laws.
Such income shall be taxed under the head of income from other sources or business income, as the case may be. The obligations to maintain books of accounts and get them audited shall also apply.
- Running an e-commerce business or hosting an event
Any income from running an e-commerce business in the Metaverse shall be charged to tax the way an ordinary business income is taxed. The taxpayer can claim a deduction for all expenses incurred wholly and exclusively in connection with such business. Similarly, if a resident person hosts an event in Metaverse, the income shall be taxable as business income or residuary income (Income from other sources), as the case may be.
As discussed above, a land in Metaverse is an NFT. Thus, the income arising from its transfer shall be taxable under Section 115BBH of the Income-tax Act, 1961, provided the government notifies this land as an NFT for the purpose of this section. However, it is not clear why, unlike crypto assets, only notified NFTs will be considered Virtual Digital Assets (VDAs).
As per Section 115BBH(1), the income arising from the transfer of VDAs shall be taxed at 30% plus surcharge and cess. Such income shall be computed without deduction of any direct or indirect expenditure, except the cost of acquisition of the VDAs, if any. Further, any loss arising from the transfer of a virtual land shall not be allowed to set off against any other income.
If the government does not notify the virtual land as VDA, the income from its transfer shall be taxable at rates as applicable in case of transfer of a normal capital asset. A virtual land held for more than 36 months shall be treated as long-term capital assets, and the income arising from such transfer shall be taxable at 20% after indexation of the cost of acquisition. The short-term capital gains will be taxable at the rate applicable as per the tax slab of the taxpayer.
TDS Obligations from July 1, 2022
It must be noted that any person responsible for paying to any resident any sum by way of consideration for the transfer of a virtual digital asset (including NFTs or virtual land) shall deduct tax at the rate of 1% of such sum. The requirement to deduct shall be applicable from July 1, 2022. Further, other transactions such as rental income, running e-commerce etc. will also have TDS obligations from July 1.
(The writer is Chartered Accountant and DGM at Taxmann.com. Information and statistics about the Metaverse have been taken from various sources such as media reports, research and information published on various websites.)