Taxes on Play-to-Earn Cryptocurrency Games

Taxes on Play-to-Earn Cryptocurrency Games

You must disclose your earnings on your tax return if you played cryptocurrency games.

Games involving bitcoin have attracted more players and media interest in recent years. Unfortunately, many investors still don’t understand how these games will affect their taxes.

We’ll cover all the essential information about cryptocurrency gaming taxes in this tutorial. We’ll break out the tax ramifications of the most common transactions in crypto games and explain why filing taxes for these games may get quite challenging very quickly.

What exactly are cryptogames?

Users have the option to make in-game purchases in a number of well-known games. But centralized gaming studios often end up with the rewards from these acquisitions. For instance, Fortnite skin generates 100% of revenue for Epic Games.

In contrast, play-to-earn or P2E games, commonly referred to as cryptocurrency games, allow players to make money. Tokens and NFTs, which can be easily swapped for other cryptocurrencies on crypto marketplaces, are common in-game commodities offered by crypto games.

Despite the fact that centralized games like World of Warcraft and Fortnite offer in-game currency, it is difficult to trade these for items that may be used outside of the game. In the meanwhile, tokenized awards are available in crypto games like Axie Infinity and Rushraids, which can be exchanged for other assets on cryptocurrency exchanges.

Do you pay taxes on virtual currency games?

Yes. According to the IRS, cryptocurrency is a type of property, making it taxable for capital gains and income. The same regulations apply to cryptocurrency acquired in play-to-earn games.

Depending on the fair market value of your tokens at the time you get them, you will recognize ordinary income if you win cryptocurrencies in a game.

Depending on how much the price of your tokens has changed when you first acquired them, you will either experience a financial gain or loss when you sell cryptocurrency you earned from gaming.

Taxation on earning cryptocurrency rewards?

When you win cryptocurrency in a crypto game, it’s likely that you’ll be taxed on it according to its fair market value at the time you won.

Depending on how your tokens’ value has changed, you can make a capital gain or loss if you decide to sell your cryptocurrencies in the future.

Why is it so difficult to record revenue from cryptocurrency games?

Despite the fact that crypto games are becoming more and more popular, tax reporting for them is exceedingly challenging. Here are a few common tax problems that affect investors.

Unclear tax regulations

As of right now, the IRS has not released any regulations pertaining to cryptocurrency games. Because of this, there is significant ambiguity around how these games are taxed.

For instance, according to the IRS, winning virtual currency in a game is not considered income as long as the currency stays within the game’s economy. This raises concerns about how game-related crypto-assets will be handled in the absence of a market for them outside of in-game purchases.

The majority of tax professionals concur that unlike making money from a centralized game like World of Warcraft, cryptocurrency gaming earnings are almost always going to be regarded as income events. The IRS has not yet provided any clarification on this matter, though.

No tax records

Unfortunately, many crypto games do not currently send consumers tax records or a record of their transaction history. The responsibility for maintaining accurate records of their transactions therefore rests with the taxpayers.

Taxpayers must retain a record of when they obtained their bitcoin. Because it is taxed according to its fair market value at the moment it was received. They can then utilize cryptocurrency tax software to automatically determine the coin’s past value.

Those who play cryptocurrency must sell their possessions

Some crypto enthusiasts invest a large portion of their overall wealth in cryptocurrencies. They could have to liquidate a sizable amount of their assets to pay their taxes.

Before the conclusion of the tax year, we advise completing tax preparation to avoid this situation. You may plan ahead and set aside the funds necessary to pay your tax obligation by calculating your tax liability.

Trying to keep up with your cryptocurrency taxes? We can help. We have you covered whether you’re trading on significant exchanges, engaging in crypto games, or connecting with DeFi protocols. Also check the top crypto gaming coins!

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