Why Tax Laws Still Apply To Crypto Gaming

Introduction

The government wants a piece of your gaming fun.

A decade ago, a novel idea came along. The creation of a new digital currency with security, privacy, and a fixed supply of Bitcoin was a great combination of mathematics, economics, and computer science. Bitcoin still dominates the crypto space, so much in fact that governments created their crypto tax laws with the idea of Bitcoin and other major cryptocurrencies in mind. So what happens when crypto moves outside the financial realm?

The underlying technology behind bitcoin is so intriguing because of its applications outside pure finance. It can be used from business supply chains to tracking real estate ownership and transactions.

Outside finance, one of the fastest-growing ideas and areas of interest among crypto enthusiasts in the combination of cryptocurrencies and gaming. Imagine a multiverse gaming platform using virtual reality and cryptocurrencies to power the economics behind the game. This is the idea both gamers and crypto users are hoping we are working towards.

How cryptocurrencies differ from crypto gaming tokens?

There is an important distinction that needs to be made in relation to crypto in gaming. You may have heard the word pop up -  ‘fungible’ relates to the replaceability of an individual unit of a commodity or asset. For example, a $5 bill could be replaced with another $5 bill and be used to make the same transaction. If you loan someone $100 you wouldn’t care if they used a different $100 to pay you back, it has the same value.

On the other hand, non-fungible assets or tokens do not have this property. The most common and easily understood examples are baseball cards. They could have the same style, font, be printed on the same type of paper but what is on the cards define their value. They can have different levels of rarity as a card has individual characteristics.

To relate this to gaming, we can return to our multiverse concept. In this game there could be two kinds of tokens. The first could be an in-game currency such as MANA in Decentraland which would function the same as a fiat currency would in the real world, as a medium of exchange and would be a fungible token.

The other type of tokens relates to specific assets in the game, a player id, a parcel of land, a special weapon or vehicle. This would be the non-fungible kind but the individual assets would still need to be represented as a token to represent ownership and transferability.

Examples of crypto in gaming

To date Decentraland is one of the most ambitious crypto games, it is a whole 3D world in which users can interact, play games, and trade assets like land and collectible items. The platform is built on Ethereum and uses MANA as an in-game currency but also uses ERC-721 tokens to represent other assets.

CryptoKitties is a collectible trading game where users collect and can breed different cats, each represented by a non-fungible token. In 2018 a cryptokitty called dragon broke the record for the most expensive ever bought at a staggering $170,000.

My Crypto Heroes is a Japanese battle card game that is unique in that it also uses crypto assets to represent characters that users can train and trade.

The Tax Problem

As mentioned above one of the biggest problems in crypto at the moment comes from government intervention. The truth is crypto is new to them too and they have the issue of making the tax laws consistent with traditional finance while making them unique enough to handle cryptos' unique nature. The other side of the problem is that crypto was built to be decentralized and decentralized platforms can move a lot faster than bureaucracies like national governments. Most governments don’t even have DeFi related tax information let alone crypto gaming laws.

As such crypto users only have one option, use the existing crypto tax regulations and hope that in time the laws handle crypto use cases better.

The basic crypto tax framework

With the above in mind, the best you can do is understand the existing crypto tax laws and how they could apply to your crypto gaming tokens.

1. Any crypto to crypto transaction is subject to a capital gains event

This is the fundamental idea that makes crypto taxes so unique and hard for consumers to deal with. All transactions that involve swapping one token for another are part of a capital gains tax event. When this type of transaction occurs you are buying one token and selling another, the sale triggers a capital gains event and the buy forms the cost basis if you sell in the future.

One important thing to note is that the capital gain or loss on the trade is calculated in your home country's currency and not crypto. So, if you live in the US, all transactions will need to be recorded in USD. Likewise, if you live in England you will need to use GBP.

For crypto gaming, this means trading either in-game currency or non-fungible tokens will be subject to a crypto tax. Virtual land is not treated as land but cryptocurrency.

1. You are paid for a service or receive an airdrop

Airdrops and crypto transferred to your wallet for providing a service are generally treated as income not capital gains directly.

For example, you own some land in Decentraland and decide to put advertising on your plot. In exchange, the company advertising transfers MANA (the in-game currency) to your account. This is registered as income at the value of MANA in USD at the time it was transferred to you and subject to income tax.

As another example as a long-term player - you are airdropped as a special item, this would also be subject to income tax at the value when the token was airdropped to you.

The next thing to consider is that the tokens are subject to a capital gains tax if you hold the token where the cost basis will be the value of the token when airdropped to you.

1. Record keeping

As with all crypto transactions, the government wants you to keep and in some cases provide a record of transactions. As most crypto games are built on Ethereum this isn’t a problem and all the transactions will show up in the Ethereum wallet you use to connect to the game.

Wrapping Up

It is not surprising that crypto laws still have a long way to go, so until these laws evolve to be able to address crypto-specific gaming transactions, current crypto tax laws should be applied to your transactions even if you don’t think it’s fair.