Tax treatment of metaverse transactions

When we consider the tax treatment of metaverse transactions, invariably there will be an interaction with cryptocurrencies and NFT's. In this post we'll cover some of the tax issues that are applicable to those transactions in the metaverse.

Tax treatment of metaverse transactions

What is the metaverse?

The concept of a metaverse is probably most well known via popular culture in films such as 'Tron' and more recently the film adaptation of 'Ready player one'. Put very simply, it is best described as a virtual digital world that continues to exist alongside the 'real world' in which we live. 

The metaverse is accessed by virtual reality technology, for example using a Meta Quest 2 headset, though equally virtual worlds such as Fortnite, can be accessed using PC's, consoles and phones.

Whilst in the metaverse it is possible to play games, socialise or even conduct business transactions. Those businesses operating in the metaverse may be building or trading in digital assets and more about some of these transactions are covered later on in this post.

However, an important point to mention is that the metaverse is not one place, so a business operating a digital world calling itself a metaverse is one of many. It does not have the ability to 'jump' (or slide?) between digital worlds, or move assets between them either. 

The metaverse and play to earn ('P2E') games

Typically while playing games in the metaverse it's possible to earn rewards in the form of cryptocurrency or NFT's. Probably the most well known is Axie Infinity. These type of games are referred to as play to earn games or P2E for short. By completing various tasks and winning battles in these games etc an individuals can earn cryptocurrency and NFT's. 

The most popular game at the moment appears to be TamadogeThis game offers players the ability to earn utility tokens which arguably might make these earnings more tradeable (and thus more valuable) than other Cryptocurrencies or NFT's.

For many users this is their first introduction to cryptocurrencies and NFT's, having never held them before they started playing these games.

Any profits or losses realised from play to earn games will potentially be taxable as trading income when applying the principles set out in HMRC's  badges of trade.

Tax reliefs available for the metaverse

When considering the tax treatment of metaverse transactions it is also pertinent to consider the tax reliefs potentially available for start-up businesses.

Video Games Tax Relief

We will cover the subject of video games tax relief in a separate post at a later date though with regard to the metaverse, a few points worth mentioning are as follows:

  • A P2E game could potentially qualify for relief as the project will be computer software that is separate from the hardware itself. 
  • The business must be a qualifying company in order for the business to potentially gain access to the relief. The relief cannot be claimed for sole traders or partnerships.
  • If the game is for the purposes of gambling then it will not qualify for relief.

The relief operates in a similar fashion to aspects of R&D tax relief. In other words, it operates in the form of a repayable tax credit from HMRC. 

R&D Tax Relief

A company involved in developing it's own metaverse, could potentially qualify for R&D tax relief, which we've discussed in detail previously.

However, we would stress that just because your company is developing a metaverse, you should not automatically assume that it qualifies for R&D tax relief, as a claim was ultimately rejected by HMRC in this case.

In order to ensure a successful R&D tax claim with HMRC, you must be able to demonstrate that technological advances have been made, there is technological uncertainty and any information/knowledge implemented as part of the R&D process is not readily available in the public domain.

If it's not possible for your company to make a  R&D tax relief claim, it may be able to claim Video Games Tax Relief, though only where the P2E game satisfies the definition of Video Game.

Sale of virtual land

No article on the tax treatment of metaverse transactions would be complete without considering the purchase and sale of virtual land.

Virtual land is considered to be 'land' that exists in the digital world or metaverse. In simple terms it might be considered buying space in a video game.

Decentraland is one of the most popular metaverse platforms and has existed since 2015. As the name suggests, this is a decentralized platform. Virtual plots of land as NFT's, can be acquired using cryptocurrency on the platform

OpenSea is also another platform where individuals can buy and sell NFTs, as well as virtual land of varying sizes in the metaverse. 

Because virtual land in the metaverse is in limited supply, there is potentially the ability to earn income. NFT Worlds for example is a collection of digital worlds, which can be acquired and explored by an individual. 

You can develop the virtual land and receive an income by staking it and receiving tokens in return. You are also able to let the virtual land to other users, for example by charging artists to display art in your art gallery in the metaverse.  Any such payments will be taxed by HMRC in the £sterling equivalent as miscellaneous income, unless you are able to demonstrate this activity is carried out in such a manner that the badges of trade apply to your transaction.

Additionally, it may be possible to sell the virtual land at a profit some stage in the future. The tax treatment is similar to that which applies to NFT's held as an investment. In other words any transaction in virtual land will most likely be subject to capital gains tax rules. 

Alternatively, any gain realised by someone disposing of land developed in their own metaverse might be considered as realising a trading profit. If that's the case you should also be mindful of the VAT rules for digital services that potentially could apply to these transactions.

Last and by no means least, at the risk of stating the obvious, Stamp Duty Land Tax will not apply to a sale or purchase of virtual land. This is because Stamp Duty Land Tax is only due in relation to the purchase of land in England and Northern Ireland. 

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].

Alternatively, please feel free to complete our Business Questionnaire here.

Spread the word!

Why Friendly

We work with businesses and contractors/freelancers who want to embrace the world of online software and the benefits this brings. Using technology to help our clients is at the core of everything we do.

So if you'd like to find out more, just give a call or drop us an email - no hard sell.

Just friendly, professional advice!

Who we are

We're a small team with over 50 years experience of working with small businesses.

So we're in a unique position to understand the challenges that you face every day in your business.

And what's more, we're fully professionally qualified so you can be sure that your affairs are in safe hands.

Copyright 2016 by TFA Accountants Limited