It’s easy to get caught up playing crypto games. But one thing is almost always an afterthought: is any of this taxable? Play-to-earn (P2E) has been popularized by crypto and web3 gaming platforms such as Axie Infinity, Sandbox, and Illuvium. The rise of these blockchain-based ecosystems culminated in a metaverse-feeding frenzy at the end of 2021.
Creating a new ownership model for gamers, P2E has demonstrated a new method of storing in-game items. The immutability of blockchain technology facilitates the seamless transfer of items between players (and even between different games). P2E also allows players to earn rewards in the form of native tokens or other digital assets in-game. So should you be making the taxman aware of your gaming prowess? What are your responsibilities as a P2E gamer and tax-paying citizen? Let’s take a look.
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Engage-to-earn: a new frontier
Calculating and filing crypto taxes can be complicated; throwing web3 gaming into the mix more so. Those who have played crypto-based games might not even realize that some (or all) of their transactions are, in fact, taxable.
Play-to-earn is a subset within the broader “Engage to Earn” niche of the crypto space, which includes many other programs and platforms, including:
- Airdrops for using a platform such as LooksRare, Blur, Optimism or Uniswap
- Referral rewards from exchanges like Binance or Coinbase
- Learn and Earn campaigns such as Coinbase Learn
- Shop to earn via plugins or extensions such as Lolli
For those new to the crypto and web3 world, earning money for playing games or using platforms may seem too good to be true. However, it’s a great way for these platforms to create loyal users and cultivate dedicated communities.
Even though crypto and web3 gaming are still very much in their infancy, one thing is certain — crypto transactions are taxable events. This includes any digital assets received via play-to-earn.
If you’ve received any in-game NFTs or tokens over the past financial year, your crypto wallets may be caught in the crosshairs this tax season.
What are tax offices looking into?
Tax offices around the globe are taking cryptocurrency more seriously than ever. From the IRS in the US, the ATO in Australia, the CRA in Canada, and HMRC in the UK, there has been an increased focus on blockchain and crypto assets in recent months and years. This is especially heightened following the fallout from FTX’s collapse in late 2022.
So is play-to-earn taxable?
If you are a crypto investor, you are responsible for reporting any income made in the past financial year on your tax forms. This includes cryptocurrency earnings. It depends on what country you live in as to how your crypto is taxed. But what’s consistent across jurisdictions is that crypto will be taxed in one way, shape, or form.
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Many who have explored the play-to-earn ecosystem and platforms may not understand that every transaction may be taxable. This generally arises from crypto-to-crypto exchanges constituting tax disposal. For example, transacting an ERC1155 NFT for in-game tokens and then transacting these for ETH creates two separate taxable events.
It’s also important to remember that crypto and blockchain technology is inherently traceable. This allows tax offices to piece together information on your transactions and trading behavior. This is in addition to the comprehensive data-matching programs that tax offices have with local and international crypto exchanges.
Exchanges provide a plethora of data points to tax offices, who look for anomalies in tax returns. Tax officials can compare the information they already hold from banks and other financial institutions against those from crypto exchanges and on-chain transactions.
Tax offices also follow the flow of funds. So, something as simple as a play-to-earn transaction on Ethereum could easily show digital assets being transacted within a web3 game. Those same tokens end up on an exchange and are sold for fiat currency.
Onramps and offramps between traditional finance and the crypto world are incredibly important for regulators and tax offices. Know Your Customer (KYC) and Anti-Money Laundering (AML) dictate the ease at which investors can “cash out” their cryptocurrency.
So what do you actually need to report?
As mentioned, tax offices have access to information from a variety of sources, including crypto exchanges, financial institutions, and banks. They can track where crypto transactions flow back into ‘real’ financial systems.
Any tokens received during the past financial year will be in scope, as well as capital gains or losses. In essence, this means any “income” derived from activities involving digital assets (including play-to-earn). But what actually counts as income?
It’s always important to discuss this with your accountant. But to start off, it’s useful to understand how the platforms and protocols you use actually work.
A few examples of ways you may have generated “income” this financial year include:
- Staking rewards (such as staked Ethereum via Lido or RocketPool or exchanges like Coinbase or Kraken)
- Salary or payments received in crypto
- Digital assets received from hard forks (like Bitcoin Cash from Bitcoin or Ethereum Classic from Ethereum)
Other events, such as airdrops, are treated very differently depending on your local tax office. For example, in the USA, the IRS has clarified that earnings derived from an airdrop are taxable as income at the fair market price the day they are received. This compares to the ATO’s position for those in Australia, where initial airdrops have a cost basis of zero when received and only attract Capital Gains Tax (CGT) when sold.
For taxpayers in the US, any income over $600 earned through a platform should be reported to the IRS via a 1099-MISC form. Exchanges like Coinbase and Kraken usually issue these. However, play-to-earn platforms are unlikely to issue these to gamers, as they may be from any jurisdiction.
As such, it’s important to understand what may actually be taxable when it comes to play-to-earn transactions and report these properly at tax time.
Can play-to-earn platforms do anything to help?
Play-to-earn platforms won’t issue forms or documents to help your record-keeping. But some have reacted in interesting ways in order to help you save on your taxes.
For example, play-to-earn projects have started allowing NFTs or crypto tokens to be “claimed” days before they become transferable. This slight adjustment versus airdrops allows eligible wallets to claim digital assets from playing games or using a protocol while temporarily pausing the tokens to unlock and become tradeable.
Card-based web3 game Parallel recently allowed wallets to claim PRIME tokens weeks in advance of opening the tokens for trading. This means there is no taxable event when the tokens are claimed due to there being no market value.
This slight adjustment in mechanics may instigate a new wave of token claiming compared to the previous industry standard of airdropping to eligible wallets.
Play-to-earn and tax in 2023: An evolving reality
The play-to-earn space is still very much in its infancy. Yet it continues to innovate and push boundaries that other areas within the cryptocurrency and web3 space are unable to. As such, the situation is evolving. But there are already some clear requirements in place when it comes to web3 gaming and income reporting. Gaming is one of the largest entertainment sectors globally and is set to continue to grow immensely over the next decade. P2E and web3 gaming will likely also onboard many more people into the crypto space during this time.
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As P2E continues its rise in relevance and prevalence, it’s important to stay updated with the latest rules and regulations relevant to you and your local tax office.
Frequently asked questions
What is P2E (play-to-earn)?
What are tax offices looking into?
Can tax offices see my crypto?
What do you need to report?
About the author
Danny Talwar is the Head of Tax at Koinly, a leading cryptocurrency tax platform. As a crypto enthusiast, his experience as a chartered accountant and chartered tax adviser across Europe and Asia Pacific places him as a thought leader within the rapidly growing crypto taxation space. With extensive knowledge of the crypto tax issues faced by both companies and individuals, Danny regularly provides industry-leading commentary, especially in light of regularly updated government guidance.
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