What are Play to Earn games, and are they taxed?

What are play to earn games?

If you were around the crypto space in 2021, you would’ve likely heard about the phenomenon of play to earn gaming (P2E). If you weren’t around, don’t worry! We’ve got you covered.

Play to earn games are, quite simply, games that allow you to extract value in the form of cryptocurrency assets through time and energy spent playing. The usual anecdote that people within the P2E space like to use is “imagine if you could play your favorite video game, but could earn money for doing so?!”. With the development of blockchain technology, P2E gamers are able to earn tokens, NFTs and more.

If you ever dabbled in Runescape, you may recall stories of people farming for gold in order to sell on adapted marketplaces online for real-world money. Blockchain-based games take this idea to a whole new level: in ‘normal’ games, in-game items are gated and owned by the companies and/or publishers who own the game. You can’t just take your super-rare sword you found in Elden Ring and sell it to someone in Australia, because you don’t have the power to enact that transfer of ownership and/or funds. In P2E games, your in-game items exist on a blockchain, are owned by you and linked to your personal wallet, and can be transferred and/or sold anywhere within the realm of the blockchain in use.

This ability to sell your in-game items for cryptocurrency has completely changed the game (we apologize for the pun). There are now P2E games where people are earning a living wage from playing, purely because there is a market and a demand for the cryptocurrency assets they’re earning in-game. These users are able to play, earn assets, and then sell them in return for crypto - regardless of where or who they are.

What are some examples of play to earn games?

Axie Infinity: This is a play to earn game centred around characters called “Axies”. Axies are ethereum-based NFTs that players can collect, breed, raise, battle and trade on the Ronin network. Spanning a range of NFT marketplaces, there are many different types of Axies to choose from, and the breeding possibilities are endless. You can battle other users with your chosen Axie, with the winner receiving ‘love potions’ that can then be sold for AXS tokens.

Splinterlands: This is a play to earn game centred on strategic card gameplay. By being built on blockchain technology, players can buy, sell, and trade their digital cards freely, just as if they were physical cards, with all transactions being recorded publicly and immutably.

Gods Unchained: This blockchain-based play-to-earn game allows users to collect NFT cards to compete against each other in 1-on-1 matches. These cards can be bought, sold and/or traded. By completing daily quests, users can earn the in-game currency known as “GODS”. GODS can be sold on exchanges, used to buy cards and more.

DeFi Kingdoms: DeFi Kingdoms is a game, a DEX, a liquidity pool and a market of utility-driven NFTs all in one. This game and its assets are built and traded on the Harmony ONE platform, using the Uniswap V2 Protocol. Any assets earned in-game can be used to participate in trades, sales, staking programs and more.

The Sandbox: This blockchain-based game lets users build, craft and aim to survive in its metaverse. Users playing The Sandbox can buy LAND, which is an NFT, to build a house or a castle or to go on quests to earn in-game currency, which is the SAND token. This token can then be sold on exchanges.

How play to earn games could be taxable

In most tax jurisdictions, P2E games and their nuances have yet to be properly addressed by their relevant tax authorities. However, there are two ways play to earn gaming activity may be seen as taxable: your gaming rewards being seen as income or profits made from trading your gaming rewards being seen as capital gains.

Examples of how P2E gaming rewards may be viewed as income:

• Airdrop from the P2E game company

• Staking in-game assets for a yield

• Earning tokens by playing

Let’s use Cobie as an example: Cobie starts playing a P2E game where he can complete daily quests to earn 10 GAME tokens. He chooses to stake these tokens in a staking pool, where he earns 1 extra GAME token each day. As a bonus for being a supporter of the P2E game, the company decides to airdrop each of their users 20 GAME tokens. Each of these groups of transactions may be seen as Cobie earning taxable income.

Examples of potential CGT events from P2E gaming:

• Selling an in-game asset

• Swapping one in-game asset for another

• Purchasing an in-game asset with crypto

Once again, let’s dust off Cobie and use him to illustrate another example: Cobie’s been playing Splinterlands for a while now, and has amassed a huge collection of NFTs in the form of playing cards. He opens one ultra-rare card that he already has a copy of, and so decides to list it on an NFT marketplace for 1ETH. This card is sold to a user, and Cobie has an extra 1ETH in his linked wallet. This transaction would likely be viewed as a capital gains taxable event.

As mentioned above, P2E games are currently a grey area in most jurisdictions - so always make sure to check your region’s guidance on P2E crypto taxes and work with a local tax professional to categorize your transactions accordingly.

How Summ can help with your P2E crypto taxes

So, with all these potential taxable events occurring in your favorite (or soon to be favorite!) P2E game, you might be starting to panic. Never fear! Once you’ve imported any relevant wallet addresses linked to your P2E activity, our Summ (formerly Crypto Tax Calculator) algorithm will be able to categorize the majority of transactions accordingly. If there are some remaining, you have the option to categorize them as buys, sells, transfers, airdrops and more! This should help make doing your P2E crypto taxes easier than ever before.