Many cryptocurrency game players are unaware they need to report winnings on their tax returns. Crypto games have been attracting more media attention and users in recent years, but crypto game tax implications remain unclear to many.
The IMF warns that tax systems need to be updated to reflect crypto, whose decentralized nature and anonymity pose challenges.
Make no mistake—reporting crypto game taxes can get complicated. This article explains how cryptocurrency games are taxed. For an in-depth guide on paying crypto taxes, you’ll get all the information you need here. It's highly recommended that you check it out.
Defining crypto games
Many traditional game players can make in-game purchases, but the gaming studio profits from these purchases. However, crypto games, also known as play-to-earn games, let players take the profit. Crypto games offer NFTs, tokens, and other in-game items, which you can exchange for other crypto on crypto marketplaces.
Fortnite, World of Warcraft, and other centralized games offer in-game currencies, but they are hard to swap for other assets outside of the game. Axie Infinity and other crypto games let you win prizes and trade them on exchanges for other assets.
Paying crypto game taxes
The IRS considers cryptocurrency a form of property, so you have to pay income and capital gains tax. The same goes for crypto earned in play-to-earn games. The tax on any crypto earned in a game is based on its fair market value at the time you earned it. Depending on how its price has changed, you will have a capital gain or a loss when you dispose of it.
Taxing in-game NFTs
Paying with crypto for an NFT or another in-game asset is considered a crypto game tax event because it is a crypto-to-crypto exchange. Again, depending on the asset's price change since you received it, you will incur a capital gain or a capital loss.
Exchanging crypto for an in-game NFT and vice versa is also considered a taxable event, and the same applies in terms of potential gain or loss.
Challenges with crypto game taxes
Reporting crypto game taxes is very challenging even though these games are becoming more and more popular. The main issues are unclear tax guidelines, crypto game players being compelled to sell their holdings, and the lack of tax records.
A grey area
The IRS has put out guidelines related to cryptocurrency taxes, but not crypto game taxes specifically, which is why some grey area exists in terms of taxation. According to the IRS, someone who earns virtual currencies in a game will not be considered to have obtained income if the currencies remain in the game’s marketplace. From this, it can be assumed that crypto earned in a game will not be treated as income if there is no market for it outside of the game ecosystem.
Tax experts seem to agree that earning crypto in a game should be considered an income event in any case, unlike earning income through Runescape or another centralized game. The IRS has not clarified the issue.
Selling your crypto to pay crypto game taxes
Crypto assets account for a big part of some crypto game players’ net worth. They are sometimes compelled to sell part of their crypto assets to pay their taxes. You can avoid this unpleasant situation by planning your crypto game taxes before the end of the tax year.
Lack of tax records
Finally, most games do not currently send players crypto game tax reports or even transaction history records. The player is responsible for keeping accurate transaction records and paying their crypto game taxes. They must be able to determine when exactly they obtained the crypto because it is taxed according to its fair market value at that time. Crypto tax software can help them determine its historical value automatically.
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