Even In the Metaverse, You Can't Escape the Taxman

An anonymous reader quotes a report from Ars Technica, written by Kyle Orland: Second Life, the long-lived online metaverse that still attracts nearly a million monthly active users, has announced it will start charging US users local sales tax on many in-game purchases for the first time since its launch in 2003. That could be a significant drag on the online universe's robust in-game economy and serve as a warning for other nascent metaverse efforts hoping to sell virtual goods to US residents. In announcing the move Monday, Second Life developer Linden Labs cited the 2018 Supreme Court decision South Dakota v. Wayfair, Inc., Et Al. That decision established that states and localities could charge sales tax even for products sold by online companies that don't have a physical presence in that state. Following that decision, Linden Labs says it has "done our best to shield our residents from these taxes as long as possible, but we are no longer able to absorb them." As such, starting March 31, Second Life users will be billed for local taxes on recurring billings such as subscriptions and land fees. Linden Labs will continue to absorb any taxes charged on one-time purchases like name changes and purchases of L$ in-game currency. But those costs will be passed on to users "at some point in the future" Linden Labs writes. "This is news we don't enjoy sharing, but for the health of the business and of Second Life, we can no longer continue absorbing these tax burdens," Linden Labs writes. "Thank you for your understanding and your continued support of Second Life." Linden Labs' experience could serve as a cautionary tale as other major companies all rush to launch their own metaverse offerings. That includes companies using so-called "web3" technologies like cryptocurrencies and NFTs to power their virtual economies. Aside from possible local sales tax exposure, cryptocurrencies can be taxed as income or capital gains when they're earned, sold, or converted to another form. NFTs, meanwhile, could likely be taxed as collectibles, attracting a top capital gains tax rate of 28 percent in the US. And the IRS is starting to crack down on enforcement for crypto-based earnings thanks to a provision in last year's bipartisan infrastructure bill.

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