Sales tax on NFTs, virtual events, and the metaverse, from an expert

by TaxJar June 7, 2022

If you didn’t know what an NFT or the metaverse was prior to 2021, you weren’t alone. But as concepts like digital art and virtual worlds move into the mainstream, it’s inevitable that governments around the world will consider their tax implications. In fact, some US states and European countries have already begun to issue guidance around taxes. To get the lowdown on the shifting rules and regulations around sales tax and these new technologies, we spoke to Aleksandra Bal of Stripe to learn more. 

You wrote about the taxability of virtual events in the EU for Bloomberg Tax recently. What did you find most interesting about the subject during your research?

For me, the metaverse as a phenomenon is very interesting. I focused on one tiny part – virtual events. We have new rules about virtual events in the EU, so that’s the main reason why I focused on virtual events. What’s happening now is that virtual events are taxed in the same way as physical events. But of course they’re completely different, and this creates a lot of problems. Luckily, the European commission changed the rules. [Editor’s note: Bal states in the Bloomberg article that once the new rules are enacted, “admission fees to virtual events will be subject to tax in the customer country, which is already a common practice for all digital services.”] That’s why I wrote about virtual events, but I find the concept of metaverse exciting and how to apply taxes within the metaverse when you sell virtual goods for crypto.

Why do you think the EU’s guidance about the taxability of virtual events only happened recently? Is legislation always playing catch-up when it comes to taxing new technology?

I have a better example than virtual events: NFTs! As for the transactions in metaverses in general, there’s no clear guidance for it yet. It should apparently be covered by the existing rules, but it’s not clear how we should apply them. I wrote a follow-up story about taxing virtual land in Bloomberg, which is also about the metaverse. 

A lawyer will look at the existing law and assume that if two parties sell something in the metaverse, it’s still taxable because there’s a transaction taking place between two parties. But there was a decision by a German court that said that a virtual world is fake – it’s not the real world, and therefore you don’t apply taxes. [Editor’s note: the ruling was only valid for the case decided by the court, not for Germany or the EU at large.] That makes things interesting. That was a ruling in a particular case about Second Life. It’s basically saying, what happens in the metaverse, stays in the metaverse.

What are the best examples of the metaverse we have at the moment? Would it be something like Second Life?

We have many companies entering the metaverse space and building their own metaverses. We have Decentraland and Sandbox, which are open metaverses. Second Life is just a closed metaverse – it’s centralized because there’s a single operator behind it. They can say, ‘We’re shutting down the game’ and then everything would be lost. 

You mentioned in your article that there’s a proposal to charge sales tax on admission fees in the country of the customer – do you think it’s likely to pass? Will it be taxed based on the customer or the company’s servers or what?

Now, events are taxed at the place where the event takes place. If you sell tickets to events, you charge VAT in the country the event takes place [Editor’s note: some US states like North Carolina have laws that charge sales tax on admission to events taking place within the state]. It makes sense for physical events, because you consume an event where you attend it. 

But a virtual event – where does it take place? Can you say where it takes place? No. That’s why there was a problem. That’s why the European commission changed the rules, and the new rules are that events are taxable at the location of the customer. If you buy a ticket to an event, they should charge you the VAT of your country, just like with any digital service because you will consume the event at home.

Second Life announced that they’d charge sales tax on recurring billing – do you foresee sales tax being charged for a virtual world Meta might create as well? 

We don’t really know what Meta is up to. But when you listen to what Mark Zuckerberg says, he talks about the concept of interconnected metaverses. You create an avatar and you can move it from one metaverse or virtual world to another. It’s not closed. It doesn’t limit you. But how the division will be implemented, we don’t know.

That sounds a little like using a Facebook login (e.g. SSO or single sign-on) on other websites not related to Facebook. 

Yes, that’s similar. If you create your avatar, the avatar should move with you depending on where you want to go. If I want to go to a virtual meeting in that metaverse or virtual world, I should be able to do it. 

If Facebook’s version of the metaverse comes to fruition, will governments look to tax it to generate revenue? Will that focus more attention on it?

Always – where there is money, taxation usually follows. There are some potential revenue sources that will of course attract the attention of the government. And it’s very easy to enact rules, but it’s more difficult to enforce those rules. And if you cannot enforce them, you won’t enact them. The rules need to be implementable.

Are US state laws still being decided when it comes to applying sales tax to virtual events?

If there’s a law in the state that says you should charge sales tax on events, then you need to see how they define an event. Is an event something physical, or is it just a group of people meeting for a common purpose? If so, then a virtual event would be covered by the definition. You have to interpret the existing rules. Sometimes there are no rules – in the EU, there’s no definition of event. And then you have to look at all the court judgements – the court said that this might be an event. You have to interpret it – that makes it difficult because many concepts are not defined in law. They assume that you know what’s an event, but it’s not always so obvious.

Stay sales tax compliant in the metaverse (and beyond)

Just as Second Life explained in their announcement, individual sales tax charges vary by the user’s physical location. Even though a purchase is made in the digital world, the physical world matters for sales tax compliance. Keeping track of the laws related to digital goods and sales tax rate changes is an overwhelming amount of work. Especially for an innovative company focused on growing the digital universe. 

That’s where a sales tax solution like TaxJar and Stripe Tax can help. TaxJar makes sales tax compliance easier with a user-friendly dashboard and alerts that help you understand where you have sales tax obligations. Our team stays up to date with changing sales tax legislation so you don’t have to, and can instead focus on your company’s growth. Start a free TaxJar trial today.

The basics of US sales tax

Learn the fundamentals of sales tax.

Watch the video