Sure, Gods Unchained, Realms of Alurya, Axie Infinity and the rest of the P2E posse seem alluring. After all, who wouldn’t want to be paid to play games. I know first hand that the promise of being able to earn crypto and NFTs fighting monsters or creating a virtual kingdom is incredibly enticing. Before you dive headfirst into these digital goldmines, let's talk about something far less thrilling, yet infinitely more important: taxes.
Are You Really "Earning"? Or Trading?
The first question you need to ask yourself is: Am I really earning income, or am I simply trading one asset for another? A majority of P2E games are based on a closed-loop economy. You play to earn in-game tokens, which you can then use to purchase NFTs or other in-game assets. Token economics only works when what you are buying with tokens remains virtual.
This is where things get complicated. The IRS (and your local tax authority) will likely view any conversion of crypto or NFTs into fiat currency (USD, EUR, etc.) as a taxable event. This could be taxed as ordinary income if they consider it a form of payment for services (playing the game). They may view it through the lens of a capital gain. This capital gain is determined by taking the difference between your original purchase price, which may be zero if you earned the asset in-game, and your sale price.
Picture this, you are hard at work in Treeverse, day by day accumulating your resources and crafting your gear. Then, you make the big break and sell a rare NFT for $10,000. Congratulations! You've potentially triggered a taxable event. If you haven't been meticulously tracking your in-game earnings and transactions, you're in for a world of hurt come tax season. This is a little more than Axie Infinity’s cute creatures, it’s your real-life financial future.
Volatility Is a Double-Edged Sword
This situation is further complicated by the long-standing volatility prevalent in the crypto space. Let's say you earn 100 $SEED tokens in Treeverse when they're worth $1 each. You buy them, you put them in your vault, you wait for the price to appreciate. A month later, they’re worth $0.50 each when you sell them in the end. So despite the fact that on paper you’ve lost money, you could still be taxed on the original value of $100.
This is where the "unexpected connection" comes in. It's like investing in a volatile stock market, but with dragons and digital swords. The same principles hold true, but the absence of definite regulatory guidance renders it all the more perilous. Remember, the government doesn’t care if your Blast Royale weapon NFT devalued by 99.9%. What should matter to them, and what ought to matter to them are the gains you’ve truly achieved.
In a conversation with Sarah Johnson, a tax attorney focusing on crypto issues, she echoed the message of detailed documentation. "The biggest mistake people make is assuming that because it's a game, it's not real money," she said. As we speak, the IRS is deep in a crackdown on tax evasion related to investment in cryptocurrency. You have to treat these earnings like any other source of income.
Governments Are Slow, Crypto Is Fast
The most important issue, to me, is the regulatory lag. Governments are famously two steps behind when it comes to technology. P2E games such as My Neighbor Alice and Off the Grid are expanding the conversation around digital ownership and decentralized economies. At the same time, tax administrators are left in the dust.
This has resulted in a climate of uncertainty and confusion. What does it mean when a game token is deemed a security? What happens when NFTs are deemed collectibles? The inability to provide definitive answers puts taxpayers at risk for misapplication and underpayment of hefty penalties.
Here’s what I see as the damaging possibilities of any future “sin taxes” on blockchain activities. Such taxes would be justified due to the significant environmental damage caused by this technology. Engines of Fury is a darker-than-usual wicked post-apocalyptic shooter. Due to the energy impact from the blockchain that underlies the technology, there may soon be extra taxes for the technology.
Governments should offer safe harbors, clear and consistent tax guidance on crypto and NFTs. Personal accountability is certainly important, but it’s difficult to take responsibility when rules are ever-changing or there are simply no rules to follow. We need a system that encourages innovation and investment in the space, not one that stifles it with unnecessary complexity and uncertainty. Reducing capital gains taxes on crypto assets might encourage more people to get involved in a more responsible way.
It is clear that the P2E revolution can be a strong catalyst economic empowerment engine. However, absent clear guidance around the tax treatment, it can quickly become a tax-time nightmare. So, before you invest your time and money in these games, do your research, consult with a tax professional, and prepare for the inevitable: Uncle Sam always gets his cut. And as we know, ignorance is most definitely not bliss when it comes to taxes. It's a recipe for disaster.