Virtual Real Estate in the Metaverse: How Should Countries Allocate Taxing Rights?

Virtual real estate is a significant digital asset class in the metaverse, allowing users to own and trade land and structures similar to physical real estate. However, taxing these transactions poses challenges for governments, as existing frameworks do not address their complexities. This article explores the allocation of taxing rights concerning virtual real estate. It first identifies relevant taxable transactions and then examines the legal characterization and classifications under the OECD Model, including income from immovable property, business profits, royalties and capital gains. The study highlights how the intangible and decentralized nature of virtual real estate complicates traditional tax classifications and source taxation. Consequently, the article advocates for a unified, residence-based taxation approach, granting exclusive taxing rights to the country of residence of the income recipient. This framework aims to align tax policies with the technological substance of
virtual real estate while ensuring compliance with international tax principles.