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Are millions of NFT gamers in for an unpleasant surprise this tax season?

Protocol | Hirsh Chitkara | Nov 6, 2021

NFT and taxes - Are millions of NFT gamers in for an unpleasant surprise this tax season?NFT games are fun but filing taxes afterward is a nightmare.

In a matter of months, NFT gaming became a multibillion-dollar industry by combining two things people already loved: video games and getting rich from crypto. But it turns out the play-to-earn model also has the incredibly inconvenient side effect of turning even minor actions taken in a video game into taxable events.

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Did you sell your cute digital creature on Axie Infinity? That's a taxable event. Did you sell it less than a year after you bought it? (The answer is almost certainly "yes," given the timing of the play-to-earn boom.) Well, then it's a short-term capital gain. If you converted your NFT into a cryptocurrency before cashing out, that counts as two separate investment transactions. Even seemingly trivial in-game item swaps can have tax implications.

Making matters worse, NFT games don't typically keep track of all your transactions for tax documentation purposes. So while there are plenty of services designed to assist with crypto tax filings, it can be difficult to get the raw data that feeds into those products. By contrast, mainstream crypto-trading platforms like Coinbase prepare customer trade data for tax services either in the form of CSVs or direct software integrations.

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Kim also pointed to the added complexity that comes with the "scholarship" model employed within play-to-earn gaming. While the name suggests an altruistic support system, scholarships are all about making money. Thousands of "scholars'' in places like the Philippines and Venezuela play games on behalf of NFT owners ("managers") in exchange for a share of the resultant earnings.

Scholarship managers therefore operate business partnerships within NFT games. That triggers business tax requirements rather than capital gains. It also likely adds overseas tax implications, since many managers live in developed nations and lend to scholars in developing nations. By some estimates, around 40% of players on Axie Infinity are now based in the Philippines.

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