Science fiction writer Neal Stephenson first coined the term “metaverse” in his 1992 cyberpunk novel, Snow Crash, referring to a virtual world inhabited by avatars of real people. Fast-forward 30 years, and Cathie Wood, the prolific manager of Ark Invest, told CNBC that the metaverse is a very real multi-trillion-dollar opportunity.
Facebook’s name change to Meta brought the metaverse into the mainstream. However, despite being the center of conversation, few people understand the metaverse. Mark Zuckerberg and Satya Nadella call it the future of the internet, while early implementations look more like video games or weird Zoom meetings.
Let’s look at what the metaverse is, how cryptocurrencies play a role, and what the future holds.
The metaverse could become a multi-trillion dollar market, and NFTs will play a critical role in its economy.
What is the Metaverse?
The metaverse is a broad term that refers to virtual environments where people can interact as they would in the real world. While most people associate the metaverse with virtual reality, virtual worlds like Second Life or Minecraft are metaverses accessible via computer. These are just some of the many metaverse products already here today.
Many organizations and working groups are developing standards and protocols to ensure interoperability between metaverses. Like signing in to a website with Google, these standards could enable you to sign in to different games or virtual environments with the same avatar. They also make it possible to access multiple metaverses from the same VR hardware.
In the future, the metaverse may expand from games to workplaces. For example, Meta (Facebook) imagines virtual environments where people can make presentations and interactively design products from the comfort of their own homes. And, one day, you may be able to use the same avatar and items across both games and workplaces.
Reports and Data estimates that the metaverse could become a $872.35 billion market by 2028, growing at a 44.1% compound annual growth rate. While the concept has been around since 2003, Meta’s (Facebook’s) move into the market could accelerate adoption and finally bring the metaverse into the mainstream across work and leisure markets.
Metaverse Tokens & NFTs
The metaverse includes digital economies where users can create, buy, and sell goods. For example, an Axie Infinity player recently purchased a piece of digital real estate for 888.25 ETH—or roughly $1.5 million. The transaction is one of the largest non-fungible token (NFT) transactions of all time—and it could be just the beginning if metaverses take off.
Most metaverses built on the Ethereum blockchain have their own native tokens to support in-game transactions and minting NFTs. For example, Axie Infinity uses the AXS token, with a market capitalization of more than $7.5 billion and a price that has risen from $0.50 in January to nearly $160 at its peak, making it attractive to players and speculators alike.
The most popular metaverse tokens include:
- Axie Infinity (AXS): Axie Infinity is a play-to-earn game built on the Ethereum network. Users earn Axie Infinity Shard tokens (AXS) and Smooth Love Potion (SLP) by breeding, raising, and battling Axies. Of course, the tokens are also available for purchase on decentralized exchanges for those that don’t want to play.
- Decentraland (MANA): Decentraland is a 3D virtual reality platform where players can own and develop land, build digital avatars, and attend virtual events. MANA is the platform’s native ERC-20 token for purchasing LAND, an NFT for in-world items.
- Sandbox (SAND): Sandbox is similar to Decentraland in that players can buy land and share in-game experiences. However, there’s more focus on customization and NFT creation. The platform also has high-profile partnerships with OpenSea, Snoop Dogg, and The Walking Dead, along with $93 million in funding.
- Enjin Coin (ENJ): Enjin is a platform for creating and managing cross-platform NFTs. The platform integrates with several gaming platforms, enabling players to use items across games and sell them on a burgeoning marketplace.
Many metaverse tokens are used to purchase NFTs representing virtual avatars, items, or real estate. For example, Decentraland’s MANA can purchase LAND that can be used to mint in-game NFTs. These NFTs can have significant real-world value, as illustrated by the Axie Infinity real estate, making them attractive to traders and investors.
Don’t Forget to Pay Tax
The IRS treats cryptocurrencies as property, meaning they’re subject to capital gains tax.
Play-to-earn games where players earn metaverse tokens, like AXS, may generate tax liabilities—even if the tokens never leave the metaverse. The IRS considers any crypto-to-crypto transaction a taxable event. So, for example, you may owe capital gains tax when selling Axies or income tax on SLP earned when battling Axies.
In addition to metaverse tokens, players may incur taxes on NFT purchases and sales. For example, a player that sells ETH to purchase an NFT may incur capital gains tax on the ETH sale. Meanwhile, a player that sells an NFT may owe a regular income, capital gains, or collectibles tax on the NFT sale, even if the proceeds never converted to U.S. dollars.
ZenLedger makes it easy to track cryptocurrency transactions, including metaverse tokens and NFTs. After connecting your wallet or exchange, the platform lets you review transactions and then automatically computes your capital gains or losses. You can also generate tax reports for your accountant or integrate directly with TurboTax to finish them on your own.
The Bottom Line
The metaverse refers to virtual environments where people can interact as they would in the real world, or in novel ways unique to the metaverse. NFTs are the building blocks of these metaverses, supporting everything from avatars to in-game digital assets. With metaverse tokens and NFTs already worth billions of dollars, gamers and speculators may want to pay close attention to the market.
If you’re buying and selling NFTs, ZenLedger can help you stay compliant with the IRS by calculating your capital gains and losses and pre-filling IRS forms. Try it for free today!