The Metaverse is booming, but how do you figure out their taxes? The Metaverse is incorporating gaming, DeFi, NFTs, and crypto while attracting both individuals and institutions. Popular play-to-earn games and virtual world ecosystems like The Sandbox, Axie Infinity, Decentraland, and many others are reaching record sales for in-game tokens and digital real estate in a new age of gaming based on decentralization.
From a tax perspective, there are no official guidelines for Metaverse taxes, but we do know how crypto, NFTs, and other tokens are taxed, which helps us in understanding how several operations in the Metaverse can lead to tax implications for users.
Today, we cover the main scenarios for Metaverse taxes, from creating tokens and selling them, buying and selling digital land, or buying Metaverse tokens.
In this article:
Is buying a Metaverse token taxable?
Buying a token from a Metaverse platform (e.g., $AXS, $SAND, $MANA) with another cryptocurrency is a taxable event in the US, subject to capital gains taxes.
Even if you don’t want to use your tokens on a Metaverse platform, you can still trade Metaverse tokens on a variety of exchanges. If you buy any of the tokens with any cryptocurrency, including stablecoins, you’ll have a taxable event and be subject to capital gains taxes. If you buy it directly with FIAT and do not sell it, just hold it, you won’t have any taxable event.
Is selling a token in a Metaverse platform taxable?
In short, yes, selling NFTs or in-game tokens for crypto is a taxable event.
Many of the Metaverse games let you mint NFTs or in-game tokens, which you can sell to other gamers for the platform’s native token. Let’s imagine you created an NFT, and it is worth $100. You now want to sell it for the platform’s native token. Let’s assume each $MANA is worth $2, so you sell your NFT for 50 $MANA tokens. Your cost basis on the NFT is zero since you’re the creator. In this case, the transaction is taxable, and it’s taxed at the ordinary income level, not as capital gains.
When you’re an NFT creator, your sales proceeds from NFT sales are taxed at the ordinary income level, even if creating and selling NFTs is not your main job. Learn more about NFT taxes.
Is buying digital land in the Metaverse taxable?
In short, yes. If you buy Metavere land (an NFT) with cryptocurrency, you’ll have a taxable event in the US.
If you’re an investor and want to start buying real estate in the Metaverse, you’re essentially converting cryptocurrency for a token/NFT, which represents the digital land on that platform. In the US, buying an NFT with another cryptocurrency is a taxable event, subject to capital gains taxes. Let’s look at a simple example.
In January 2021, you bought 10 ETH when each ETH was $2,000. In March 2022, you want to buy a piece of digital land on The Sandbox, valued at 3 ETH. Now, each ETH is worth $2,500.
You sell 3 ETH for $2,500 each to buy the NFT. You’ll have a capital gain because your ETH appreciated in value during your holding period. The gain is the difference between the sales proceeds of 3 ETH now (3*$2,500) and the cost basis of the 3 ETH when you bought it (3*$2,000). As a result, your capital gain for this digital land purchase is $1,500 ($7,500-$6,000).
You’ll be subject to a long-term capital gains tax rate because you held your ETH for longer than 12 months. Your effective tax rate will be between 0% and 20%, depending on your total income for the tax year, filing status, etc.
Learn how to import NFTs into CoinTracking:
The best Metaverse tax software: CoinTracking
The best Metaverse tax software in the market is CoinTracking.
You can import your trades using CSV or API, track your gains/losses, and generate tax reports according to your preferred accounting method.
CoinTracking is your full crypto tax solution for:
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25+ advanced reports, including which coins offer you a tax-free rate.
Automatic capital Gains, according to 12 accounting methods (e.g., FIFO, LIFO, HMRC, ACB), accepted worldwide.
Generating complete Tax Reports in your country.
Metaverse taxes with no errors: CoinTracking Full Service in the US.
CoinTracking also offers a Full Service for US traders. A crypto reconciliation tax expert from Polygon Advisory Group, a leading US crypto tax firm, will review your CoinTracking account, help fix any errors, and ensure you submit your crypto tax reports error-free.
Do you have any crypto tax questions? Check the best guides:
Do you pay taxes on crypto margin trading?
How are rebase token protocols taxed?
Do you pay taxes on fan tokens?
What happens if you don't file your crypto taxes?
Do you pay taxes when trading stablecoins?
How is Yield Farming Taxed?
DeFi Taxes: The Complete Guide.
How to save taxes with a Bitcoin IRA.
Do you pay taxes for receiving Bitcoin tips?
Uniswap Taxes Guide
How to calculate taxes with Bitcoin dollar-cost averaging?
FIFO for crypto taxes? Implications of accounting methods.
NFT Taxes: The Complete Guide.
Is Bitcoin taxable? The ultimate guide for 2021 taxes.
How to reduce your crypto taxes?
Crypto tax loss harvesting: Here’s what you need to know
This post is part of the Crypto Taxes AMA series. Follow our weekly AMAs on Twitter where our expert CPA, Sharon Yip answers your crypto tax questions. You can download 35+ AMA crypto tax reports for free.
Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.