Understanding the UK Taxation Landscape in the Metaverse

The metaverse has been billed as the next generation of the internet, allowing for a universal connected virtual world where people can meet, work, play and shop. Huge amounts of time and money have been invested in developing the metaverse, not least by Facebook who even rebranded to ‘Meta’, and although the vision of a single shared universe has not yet been fully realised, there has been an explosion in new technologies, industries and concepts.

This has in turn led to questions surrounding the taxation of virtual assets and activities. This article aims to provide an overview of the UK taxation of the metaverse, looking at key considerations for retailers navigating this emerging landscape.

Retail in the Metaverse

Many individuals and businesses are engaging in retail activities in the metaverse to generate income, and there are many markets for buying virtual goods. Games and websites, for example, can sell virtual outfits, home accessories and decorations for their customers’ virtual avatars, and there can sometimes be a secondary market for consumers to trade in these goods, either within or outside of the original sale platform. If individuals or businesses provide goods or services within the metaverse in exchange for real world or digital currencies, the resulting income may be subject to income tax or corporation tax. It is essential to keep accurate records of transactions to ensure compliance with accounting and tax filing obligations.

These types of virtual assets have been in existence for a number for years but have recently been ‘upgraded’ by the introduction of Non-Fungible Tokens (NFTs). These are a type of cryptoasset that represent unique digital assets, such as art, collectibles and virtual goods. In the UK, if an individual or business buys and sells NFTs, then broadly they may be liable to pay Capital Gains Tax (‘CGT’) or Corporation Tax (‘CT’) on the gains realised from such transactions, as they are usually considered to be capital assets.

There can also be employment tax issues to consider within the metaverse. With the rise of virtual jobs and remote work within the metaverse, individuals who earn a regular income from virtual employment may have to pay income tax in the same way as a traditional employee.

The VAT treatment of transactions in the metaverse can also be complicated. The VAT treatment of virtual land, for example, is discussed in our recent insight.

Deductibility and Losses

In the metaverse, individuals and businesses may incur expenses or generate losses. It is important to understand how these factors can impact taxation.

Virtual entrepreneurs can deduct legitimate business expenses incurred within the metaverse, such as platform fees, marketing costs, virtual asset creation expenses, or expenses related to virtual events. Again, proper record-keeping is crucial to support deductions and ensure compliance.

Tax losses can also arise, and if individuals or businesses incur losses from their metaverse trading activities, they may be able to offset those losses against other taxable income. The rules around loss relief for both individuals and companies can be complex and may be subject to specific conditions and limitations depending on individual circumstances.

Taxation of cryptoassets

Cryptoassets, such as digital currencies and, as discussed above, non-fungible tokens (NFTs), have become integral parts of the metaverse economy. From a UK tax perspective, the treatment of these assets can vary.

The tax treatment of digital currencies, such as Bitcoin and Ethereum, depends on their specific use. If held as an investment, when sold or exchanged they may be subject to capital gains tax (CGT) or, if held by a company, corporation tax on chargeable gains (CT). Alternatively, if there is sufficient volume of activity the transactions could be deemed to be part of a trading activity, and profits arising from them could be taxed as income. HMRC note that in their view this is less likely to occur than the capital gains scenario.

The structure of digital currencies can also allow for more complex decentralised finance (DeFi) transactions such as staking or lending. The current UK tax legislation was not designed to address these transactions specifically and can lead to unexpected gains being realised in circumstances where the taxpayer does not believe they have actually made a disposal. The UK government has announced a consultation on the taxation of Defi involving the lending and staking of cryptoassets and it will be interesting to see where this leads. In the meantime, taxpayers are left to try and establish the tax treatment by reference to the existing law, and hence it is important that suitable advice be obtained.

Get in touch

As the metaverse continues to expand, the UK tax landscape must adapt to account for virtual assets and the retail environment within this digital realm. The existing tax rules are complex and there are likely to be changes introduced in the near future. Understanding the tax implications of virtual assets and income is crucial, and advice should be sought to ensure compliance and identify opportunities.