Where in the Metaverse is my Cryptocurrency?
Where in the Metaverse is my Cryptocurrency?
The internet has been used for many pursuits since its development. A futuristic internet could look something like a “metaverse,” which is a term that describes a futuristic society in which people only live, work, and play in a virtual world. One version of this brave new world was portrayed by Steven Spielberg’s 2018 adaptation of Ready Player One.[1]
Imagine a future where all activity happened in the metaverse – recreation, work, and how we obtain and dispose of goods or assets. In that virtual world, cash and other forms of currency would be slow, inefficient, or at the very least not provide the best and most relevant, immediate funding. Cryptocurrency fits the virtual world. While this might sound like a galaxy far, far away, the widespread use of the internet also sounded that way to many when dial-up connections were introduced as the wave of the future.
Typically, cryptocurrency is held in a custodial wallet, assigned to a consumer’s account but where the private keys that control the cryptocurrency are held by the exchange. These exchange stores are really just a virtual bank – and like a bank the exchange does not really hold your money. A bank holds enough cryptocurrency in “hot” wallets connected to the internet to complete the anticipated level of consumer transactions, while the remainder is held in “cold” wallets not connected to the internet. That is good news for consumers with cryptocurrency because it does limit the amount of hacking of assets a/k/a security breaches. However, much like the old west and a gang of robbers, holding up the bank means seizing the opportunity in unregulated territory. A virtual bank is only as good as its internal security and insurance. The problem is that cryptocurrency consumers may be left holding the bag because their funds are not insured or otherwise protected under a financial claims scheme. It is also a problem for consumers if the exchange fails for purely commercial reasons without something similar to an FDIC protection.[2]
Cryptocurrency is becoming increasingly regulated. In fact, more cryptocurrency reporting changes may be on the horizon. The IRS recently added a question for individual income tax returns on cryptocurrency. In addition, a reporting requirements will soon be in effect, as passed within the Infrastructure Investment and Jobs Act (P.L. 117-58). Specifically, that bill expanded the definition of broker under IRC § 6045 to require more 1099-B filings for cryptocurrency transactions. However, this requirement may catch cryptocurrency minors, validators or software designers off-guard as the identity of the parties to transactions necessary to complete the 1099-B may not be gathered. Certainly, illicit uses of cryptocurrency will not be captured by a 1099 and would require cooperation of other government agencies and/or increased tracking mechanisms[3]. The new requirement applies to any tax form that would be due after December 31, 2023. Note though that the timeline also means that prior-year Forms 1099’s would fall under that deadline and the parties affected will have to collecting information as soon as January 1, 2023.[4]
So while the soon to be implemented rule attempts to capture the present, the metaverse will continue expanding and developing. And as it does, so will the definition and use of currency in the virtual world. The rise of Non-Fungible Tokens (NFT) allows for far more than currency. An NFT is a non-interchangeable unit of data stored on a blockchain, like cryptocurrency, and can be sold or traded. An NFT data unit may be associated with digital files such as photos, videos, and audio because each NFT is uniquely identifiable. In plainer language, a bitcoin is any dollar whereas an NFT is a piece of art. As a result, the terms and definitions within tax law will need to grow in order to capture this exchange of digital assets, which is in effect a barter of art for music, etc. [5]
[1] https://www.taxnotes.com/tax-notes-state/compliance/taxing-metaverse/2022/01/17/7cqhd
[2] Crypto theft is on the rise: How the crimes are committed, and how you can protect yourself (techxplore.com)
[3] Sen. Feinstein seeking information on use of digital currencies for illegal trafficking – Financial Regulation News (financialregnews.com)
[4] https://www.taxnotes.com/tax-notes-today-federal/cryptocurrency/more-cryptocurrency-reporting-changes-may-be-horizon/2022/01/27/7d4g8
[5] Non-fungible token Definition & Meaning – Merriam-Webster