MHA | Can you opt to tax in the Metaverse?

Can you opt to tax in the Metaverse?

Julie Green · May 19th 2023 · read


The metaverse is still largely unexplored territory for the everyman, as are the potential tax implications for businesses deciding to operate in it. The metaverse is growing exponentially, and in this insight, we will examine further the implications for VAT on commercial property.

Many of us understand the metaverse to be a high-tech place for socialising, work meetings, and playing games. However, there are several different transactions that can occur in the metaverse. Some examples include 19 commercial properties being acquired for $5 million, the highest value real estate transaction in the metaverse to date, and in May 2021, a virtual Gucci bag sold for more than its real-life counterpart. In the first five months of 2022 alone, there was more than $120 million worth of investment in the metaverse.


Putting the metaverse aside, the default VAT position with property is the supply of commercial property is exempt. There are some exceptions, for example the freehold sale of a new commercial property is a taxable supply, however, we are looking specifically at exempt supplies in this insight. The issue with making VAT exempt supplies is that you cannot claim back input VAT on purchases in relation to these supplies. The VAT legislation allows you to opt to tax, meaning you can charge VAT on the lease or the sale of your property, and in turn that allows you to claim back the VAT that you incur on the property, for things like extensions and refurbishments.

So, the key question is; If you can opt to tax land in the real world, can you opt to tax land in the virtual world?

Before we answer that question, we need to ask the following question: are transactions that take place in the virtual world subject to VAT at all?

The law

There is currently no specific VAT legislation which covers transactions in the metaverse for VAT purposes. The only aspect we have any certainty about is surrounding Bitcoin being classified as a currency and being exempt from VAT, which is a different treatment to other taxes. The reason for this is that it has no other purpose other than a means of payment, so even then this VAT exemption cannot be used as a precedent for other cryptocurrencies which may have other uses.

There has been a German Federal Tax court case on the metaverse, in relation to a metaverse called Second Life, which may be a useful starting point for determining a VAT position.


In Second Life, players are allowed to earn an inclined currency called linden dollars by working in the metaverse. In this case, the taxpayer purchased virtual property between 2014 and 2017. They partially redesigned the virtual property and then rented it to others under rental agreements in return for linden dollars. The linden dollars were then exchanged for US dollars and withdrawn from the metaverse.

Should those linden dollars be subject to VAT?

The court concluded transactions which confer advantages that are limited to a game or a virtual world and confer no real-world economic advantage on the recipient, do not constitute participation in real economic life and are therefore outside the scope of VAT. The court also concluded that when the taxpayer exchanged the linden dollars for US dollars, that was capable of being a service for VAT purposes since the taxpayer assigned their rights in return for payment which constituted a real economic activity. However, in this case the metaverse platform was based in the US, so the assignment of rights fell outside of the scope of German VAT because, in this case, the place of supply was the US and outside the scope of VAT.

The court decided that what happens in the metaverse, stays in the metaverse for VAT purposes and only when virtual world activities lead to a real-world event will they be subject to tax.

Our thoughts

Whether this was the right decision is to be debated, however it was a pragmatic decision given the level of compliance that would be required for tax authorities to ensure compliance across multiple metaverses. In this German case, a ruling of being taxable would have meant the taxpayer was entitled to deduct VAT on all the in-game costs and on costs that the taxpayer incurred in developing the virtual land which would have brought further complexities.

A different case may have resulted in a different decision. If an individual wished to purchase an expensive item of clothing or accessory to wear in the metaverse to their next business meeting for example, then a sales transaction would occur on goods which are wholly consumed in the metaverse. Should that transaction be subject to VAT in the same way it would be outside of the metaverse?

The digital world is ever evolving, and we look forward to seeing what happens next. There are likely to be different treatments and decisions for different taxes. From a VAT perspective, we may possibly see a different decision in the future, but for now the key takeaway is transactions in the metaverse are, as far as we know, not subject to VAT, and therefore it seems it is not possible to opt to tax in the metaverse at the moment.

If you would like to know more about VAT in the metaverse, or to discuss any VAT related matters for your business, please get in touch with Julie Green.

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