Crypto Taxes
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How are Play-to-Earn Crypto Games Taxed? Beginner's Guide 2023

How Are Cryptocurrency Games Taxed?
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If you’ve played a cryptocurrency game, you’ll need to report your earnings on your tax return. 

In recent years, cryptocurrency games have attracted more users and more media attention. Unfortunately, the tax implications of these games are still unclear to many investors. 

In this guide, we’ll break down everything you need to know about how cryptocurrency games are taxed. We’ll break down the tax implications of the most common crypto game transactions and share the reasons why reporting taxes on crypto games can get complicated quickly. 

What is a crypto game? 

Many popular games offer users the ability to make in-game purchases. However, the profits from these purchases are typically captured by centralized game studios. For example, 100% of the profits from Fortnite skins go to Epic Games. 

In contrast, cryptocurrency games, also known as play-to-earn or P2E games, give players the opportunity to profit. Crypto games often offer in-game items in the form of tokens and NFTs, which can easily be exchanged on crypto marketplaces for other cryptocurrencies. 

Centralized games like World of Warcraft and Fortnite offer in-game currencies, however these cannot be easily exchanged for other assets outside of the game. Meanwhile, crypto games like Axie Infinity and DeFi Kingdoms offer tokenized rewards that can be traded for other assets on crypto exchanges. 

Do you pay taxes on crypto games? 

Yes. Cryptocurrency is considered a form of property by the IRS, which means that it’s subject to income and capital gains tax. Crypto earned in play-to-earn games is subject to the same rules. 

If you earn cryptocurrency within a game, you will recognize ordinary income based on the fair market value of your tokens at the time you receive them. 

When you dispose of cryptocurrency earned within a game, you will incur a capital gain or capital loss depending on how the price of your tokens has changed since you originally obtained them. 

For more information, check out our complete guide to crypto taxes

How is earning cryptocurrency rewards taxed? 

If you earn cryptocurrency in a crypto game, it will likely be treated as income based on its fair market value at the time you received it. 

If you decide to sell your cryptocurrency in the future, you may incur a capital gain or loss depending on how the value of your tokens has fluctuated. 

Cryptocurrency games taxes

How are in-game NFTs taxed? 

Purchasing an NFT or in-game asset with cryptocurrency is considered a crypto-to-crypto trade and a taxable event. You will incur a capital gain depending on how the price of your asset has fluctuated since you originally received it. 

Trading away an in-game NFT for cryptocurrency is also considered a taxable event. You will incur a capital gain or loss depending on how the price of your asset has fluctuated since you originally received it. 

For more information, check out our guide to NFT taxes

Why is reporting income from cryptocurrency games so difficult? 

While cryptocurrency games are growing in popularity, reporting taxes for these games is incredibly difficult. Here are some of the common tax issues that investors run into. 

Unclear tax guidelines 

At this time, the IRS has not put out any guidelines related to cryptocurrency games. As a result, there is some grey area when it comes to how these games are taxed. 

For example, the IRS has said that earning virtual currencies in a game will not be treated as income as long as the currency doesn’t leave the game’s marketplace. This raises questions about how game-related crypto-assets will be treated if there is no market available for them outside of the in-game economy. 

Most tax experts agree that unlike earning income through a centralized game like World of Warcraft, earning cryptocurrency through gaming will likely be treated as an income event in any scenario. However, the IRS has yet to clarify this issue. 

No tax records 

Unfortunately, many crypto games currently do not send users tax reports or a record of their transaction history. That means that the burden is on the taxpayers to keep an accurate record of their transactions. 

Because cryptocurrency is taxed based on its fair market value at the time it was received, taxpayers need to keep a record of when they earned their cryptocurrency.  Crypto tax software like CoinLedger can then help them automatically find the historical value of their coins. 

Crypto gamers forced to sell their holdings 

Some cryptocurrency gamers hold a large percentage of their net worth in crypto assets. To pay their taxes, they may be forced to sell off a large portion of their assets. 

To avoid this scenario, we recommend doing tax planning before the end of the tax year. CoinLedger can help you calculate your tax liability so you can plan ahead and set aside the money you need to pay your tax bill. 

File your cryptocurrency game taxes today 

Are you looking to stay on top of your cryptocurrency taxes? CoinLedger can help. 

Whether you’re playing crypto games, interacting with DeFi protocols, or making trades on major exchanges, CoinLedger has got you covered. More than 400,000 investors use CoinLedger to file their taxes in minutes. 

Get started with a free preview report today.

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