Non-fungible tokens (NFTs) have become enormously famous over the past years. Aside from its roaring success in the art world, NFTs are also taking the gaming world by storm, powering profitable and immersive experiences. However, with the significant amount of money you may potentially earn through NFTs, the Internal Revenue Service (IRS) considers this kind of asset taxable, leading to a surprise tax bill for the players.
Now, let’s know what an NFT play-to-earn game means and what are the taxes that players should look out for to avoid surprise tax bills and overlooked crypto taxes at the end of the year.
What is NFT Play to Earn Games?
In today’s modern era, blockchain has already been applied to a wide range of sectors from arts to finance — and online video games are no exception. Play-to-earn gaming relies on the technology of blockchain as the foundation for value creation — including the form of non-fungible tokens (NFTs).
An NFT is a digital asset that represents real-world objects such as arts, music, videos clips, in-game items, and more. When it comes to video games, NFTs can take a lot of shapes within the virtual world. It can be in the form of characters, land, items, and personalization features such as digital armors, weapons, clothing, and more.
Usually, gamers may earn the most valuable items by playing the game at their best. These valuable items can be sold for real-world money on the owner’s terms. Meanwhile, most traditional games involve players spending a significant amount of time and effort to level up characters, earn points, or obtain items to complete quests.
Unfortunately, most of the traditional game developers forbid selling in-game accounts and assets. At the same time, players may be in doubt to purchase such assets when developers are the ones who control supply.
Unlike traditional games, NFT games combine conventional games with NFT-powered in-game assets, such as characters, skins, weapons, items, virtual land, and more. Players can breed and create new characters, purchase digital items, or obtain new ones. Plus, they can sell or trade the items to build a deeply engaging virtual economy and enable play-to-earn abilities.
Is NFT Game Winnings Taxable?
NFT Play-to-earn games became a multibillion-dollar industry by incorporating two trending things that most people love: online video games and earning dollars from cryptocurrency. However, with the significant amount of money you can potentially earn through play-to-earn games, various taxable events may occur in every transaction you make. In fact, even minor actions taken in a video game may be taxable. For non-NFT crypto, check out our complete guide to crypto taxes.
For example, if you sell a cute creature from one of your NFT games such as Axie Infinity, that’s one count of the taxable event. Then, if it has been sold less than a year after you have purchased it (given the perfect timing of the play-to-earn boom), it will fall under your short-term capital gain.
Moreover, if you have converted your NFT into crypto before cashing out, that will be counted as two separate investment transactions. Though trading of in-game items seems trivial when it comes to video games, it still has tax implications that you shouldn’t overlook.
NFT Games Taxes
According to Nonfungible.com, NFT sales have already reached almost a billion-dollar sales, but the taxes intertwined on the NFT games are ambiguous at best. As a result, players, particularly those who have high-value crypto transactions in the fair market, should ask their accountants for guidance to avoid potential issues related to play-to-earn NFT games taxes.
To understand why IRS considers NFTs as a potential goldmine, take a look at the multiple tax events related to non-fungible token play-to-earn games below:
- When NFT creators generate any digital sales, they generally owe an ordinary income tax. This income tax can be more than 35%, which may reach a significant amount.
- When buyers exchange cryptocurrency to buy an NFT, they generally owe capital gains tax. For example, if you purchase an item with ETH, you may owe capital gains tax on the ETH transactions.
- NFT gamers who play NFT games for profit generally owe capital gains or collectibles tax on their transactions. Usually, collectible taxes may reach 28% even if you have held the asset for more than a year.
Generally, NFTs are taxed as either ordinary income or capital gains. We’ve written a guide to reduce taxes on cryptocurrencies.
NFT play-to-earn games incorporate conventional games with blockchain-powered video game assets, such as characters, weapons, skins, and other personalizations. While these games may let you earn a significant amount of money, you should expect various taxable events in most of your transactions. Thus, you shouldn’t overlook these play-to-earn crypto games’ tax implications to avoid having piles of tax debt in the future.