Crypto-Assets and Sales Tax: Transactions in the Metaverse

A recent ruling by the Federal Fiscal Court (BFH) addresses tax law issues related to cryptocurrencies. Prior to this, no German court had explicitly ruled on the value-added tax (VAT) treatment of cryptocurrencies. The following article provides an overview of the most important VAT issues related to the metaverse and input tax deduction.

The metaverse is a social network consisting of virtual 3D worlds. Users can move around these worlds using avatars and perform various activities. An earlier ruling by the BFH had already addressed virtual worlds, but did not directly refer to cryptocurrencies. The case involved the sale and rental of virtual goods in a 3D world in exchange for virtual dollars. The BFH ruled that only the exchange of in-game currency for legal tender constitutes a taxable supply. Transactions within the game are generally not considered taxable supplies.

The Metaverse is a real market

There are differing opinions on the BFH’s decision. Some argue that a consumable benefit also exists in the metaverse, for example, when using virtual land for advertising purposes. It is emphasized that the metaverse is not merely a game world, but that a real market exists.

Transactions in the metaverse are generally considered other services. Anyone who regularly generates income by offering virtual land or other services in the metaverse is considered an entrepreneur. The question of the place of supply is governed by the principles of the Value-Added Tax Act and can be determined based on the location of the entrepreneur, the recipient, or the consumer.

Tax Obligations in the Metaverse

Most sales in the metaverse are taxable unless exemption provisions apply. The tax base for sales tax is derived from the consideration paid in conventional currencies or virtual currencies. For payments made with virtual currencies, the value of these currencies must be determined in euros.

The reduced tax rate of 7% applies in the metaverse only in certain cases, e.g., when musicians give concerts in the metaverse.

Overall, the metaverse must be treated transparently from a tax perspective to account for the individuals and businesses behind it. Compliance with tax obligations is also required in the metaverse, and the issue of enforcement should not play a role in taxability.

It remains to be seen whether future court decisions will provide further clarity regarding sales tax in the metaverse. Until then, businesses operating in the metaverse should carefully review their sales and tax obligations.

As a general rule, however, the standard tax rates under Section 12(1) of the German Value-Added Tax Act (UStG) are likely to apply. These are the standard tax rate of 19% and the reduced tax rate of 7%. Which tax rate specifically applies depends on the nature of the service.

Challenges and Adjustments in the Tax Regulation of the Metaverse

It remains to be seen, however, how tax treatment in the metaverse will evolve. Since the metaverse is a relatively new and rapidly evolving technology, tax regulations may need to be adapted to the specific circumstances. It is possible that governments and tax authorities will introduce further guidelines and regulations in the future to clarify the taxation of activities in the metaverse.

Furthermore, international aspects could play a role, as the metaverse operates globally and involves users from various countries. The question of the place of supply and the applicability of international tax regulations could therefore be significant.

It is advisable to consult a tax advisor or expert with up-to-date information and specialized knowledge in this field regarding tax issues related to the metaverse. They can assess your individual situation and take the tax implications in the metaverse into account accordingly. Our team of tax advisors in Düsseldorf and Oberhausen is available to answer any questions you may have.