Property in the metaverse and ‘heritage’ at stake raise questions about taxation

Buying and selling “real estate” in the metaverse. Accumulate equity in gaming apps. Taxpayers have expressed doubts about taxation on operations in these virtual environments, which go beyond cryptocurrency trading.

Currently, the IRS has a uniform rule for declaring and taxing capital gain with crypto assets, whether they are currencies such as bitcoin or exclusive property rights, NFTs (non-fungible tokens).

The profit obtained from the sale of crypto-assets is taxed as capital gain, according to progressive rates, when the total sold exceeds the monthly exemption limit of BRL 35,000.

The rule applies to all people with tax residency in Brazil, even those who operate through brokerage firms and accounts in other countries.

At the end of 2021, in response to a taxpayer’s query, the Tax Authorities clarified that taxation also occurs when a virtual currency is used in the acquisition of another cryptocurrency, even if there is no conversion of profit to real. The non-conversion of the asset or right sold into fiat currency does not change the incidence of Income Tax on the capital gain arising from the exchange, said the Internal Revenue Service.

The same goes for other crypto assets, such as virtual “real estate” that are acquired with digital currencies, says lawyer Fernando Zilveti. He has received questions from customers about the treatment given to NFTs and other types of properties in metaverses (three-dimensional virtual environments).

There are also issues related to gaming gains made by apps, which are not always taxed.

Currently, the person residing in Brazil must provide information to the IRS about these assets and pay the Income Tax on capital gains to the national tax authorities. Zilveti says that the understanding of tax authorities here and abroad may change as this market develops.

“The problem will be when you pay the tax here and the US tax authorities think they have to pay there, because the ‘property’ was bought and sold under US law”, says the lawyer.

Owner of a property in a virtual world, accountant specializing in crypto assets Ana Paula Rabello says that the same tax advantages and exemptions that apply to real properties cannot be applied to digital goods.

“When we talk about the metaverse, we are talking about goods that exist by digital representation. I bought land in the metaverse of Axie Infinity. This land of mine is not physical. It is a digital asset, a token, an NFT. , I will tax as subject to capital gain, progressive rate”, he says.

“When you sell a property, you have tax advantages. You can’t have the same benefits when that property is an NFT.”

Ana Paula herself, who is the author of a book on taxation of these rights, has recently become a token. Or nearly so. The avatar used on her blog — an illustration of the “tax blonde” — was inserted into an image registered on the OpenSea trading platform. An initiative of a friend, the creation of the NFT was a joke, with no commercial objective, she says.

To buy a property in a virtual world it is necessary to use digital currencies. If, between the acquisition of ethereum currency, for example, and its use in the purchase of land in a metaverse, the currency appreciates, the taxpayer must make a first tax payment — if the capital gain exceeds the exemption limit.

When selling the property you will receive ethereum again. If you make a profit from the sale of the land, you can be taxed again, even if you don’t exchange the virtual currency for reais, says Rabello.

Sabrina Lawder, International Tax leader at the consultancy Grant Thornton Brasil, says that each country has adapted to innovations in the virtual world in a different way.

Portugal, for example, opted for the broad exemption. Most tax the capital gain. Some, with rules of compensation between gains and losses. Others, like Brazil, do not allow compensation, a point that causes many doubts in Brazilians when collecting the tribute, according to the expert.

Some authorities levy tax only when the gain is converted into the country’s fiat currency, while Brazil follows the taxation rule regardless of conversion, as the Federal Revenue Service clarified at the end of last year.

“You still have a lack of knowledge from small investors and doubts even from the exchanges themselves [corretoras]. You have to pay the capital gain monthly on the trades. And people aren’t doing it,” says Lawder.

She says that taxpayer inquiries are still very much focused on cryptocurrencies and that there is little questioning about NFTs, which is expected to change in 2022 as this market is expected to grow. “Then we will have major legal-tax discussions in this regard.”

The fever of selling real estate in virtual environments gained strength in 2021, especially after Facebook changed the name of the company to Meta and announced a strategy to expand in the metaverse market.

According to the website Dapp, in a single week in December, virtual lands valued at more than US$ 100 million (more than R$ 500 million) were sold in the four main environments of the metaverse: The Sandbox, Decentraland, CryptoVoxels and Somnium Space.

Some governments are also already eyeing these environments. In November, the Caribbean island of Barbados announced the establishment of a diplomatic representation in Decentraland.

Many artworks are also being sold in the form of NFTs.

Specialist in Tax Law Ivana Marcon, a partner at Baptista Luz Advogados, says that discussions on taxation competence in virtual worlds should arise with the evolution of this market.

It states that virtual properties cannot be considered real estate for the purposes of exemption or collection of property transmission tax (ITBI). On the other hand, business in virtual worlds cannot be considered beyond the reach of the taxpayer’s country of residence.

“It is not because the transaction takes place in an immaterial environment that you cannot tax. Today, if you have gained on a crypto asset sale, you have to pay capital gain tax. The same reasoning applies to these transactions in the metaverse. .”

She says that understanding may change in the future. “We know how the IRS understands the virtual environment, because it has already given guidance on crypto assets. I think we may have some particularities for certain assets, for example, for real estate. Will it be considered property in the metaverse or not? When it sells, will it be able to charge ITBI? There are a series of discussions that are starting to emerge.”​