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- What is Axie Infinity?
- Do I need to pay taxes for playing Axie Infinity?
- Do I need to pay taxes when I buy an Axie?
- Do I need to pay taxes when I buy land or another in-game item?
- Do I need to pay when I receive Axies or another in-game item as a gift from another player?
- Do I need to pay taxes when I earn SLP?
- Do I need to pay taxes when I exchange my SLP or AXS for other types of cryptocurrency?
- How do I report scholarships on my taxes?
- Are gas fees tax deductible?
- Is there a tax benefit to breeding Axies?
- How do I determine the value of a newly-bred Axie?
- Are Axies taxed as collectibles?
- How can I keep track of my cryptocurrency taxes?
Axie Infinity is helping gamers all over the world earn money doing what they love.
In July, the game reported more than $100 million worth of transaction volume in a week. It’s been reported that in countries like the Philippines, gamers are playing Axie Infinity as a full-time job.
If you’re currently playing and earning money through Axie Infinity, you most likely have already incurred multiple taxable events throughout the course of gameplay. In this guide, we’ll break down how you can continue to enjoy the game while staying compliant with American tax law.
What is Axie Infinity?
Axie Infinity is a game built on the Ethereum blockchain where people can breed, battle, and earn money through NFT pets called Axies. Some players describe the game as a decentralized version of Pokemon.
To get started with the game, users need 3 Axies, which can be purchased on the game’s marketplace. Then, players can use their Axies to battle other players or play the game’s Adventure Mode. Their reward for winning battles is Smooth Love Potion (SLP), an ERC-20 token that can be used to breed Axies or traded for other cryptocurrencies on exchanges like Uniswap.
While there has been no explicit guidance from the IRS on tax reporting for virtual blockchain-based games like Axie Infinity, we can make reasonable assumptions based on current cryptocurrency tax guidance.
Let’s go through some frequently asked questions about how taxes work on Axie Infinity.
Do I need to pay taxes for playing Axie Infinity?
Yes. Axie Infinity users earn crypto tokens through the course of gameplay. This is considered income and needs to be reported on your taxes.
Do I need to pay taxes when I buy an Axie?
Yes. The IRS has made it clear that crypto-to-crypto transactions trigger a taxable event. Buying an Axie with Ethereum would fall into this category. You will incur capital gains or capital losses depending on how the price of your tokens has changed since you originally received them.
Do I need to pay taxes when I buy land or another in-game item?
Yes. Buying an in-game item is most likely a taxable event as it is technically a crypto-to-crypto trade. You will likely incur capital gains or capital losses based on how the price of the tokens you’re disposing of has changed since you originally received them.
Do I need to pay when I receive Axies or another in-game item as a gift from another player?
Likely not. The IRS has stated that virtual currency gifts are not taxed until you decide to sell your assets. To accurately report capital gains in the future, you should keep track of the fair market value of your Axies and other in-game items on the date they were gifted to you.
Do I need to pay taxes when I earn SLP?
Yes. Earning SLP is likely treated the same as earning any other cryptocurrency. It is a form of income and would be taxed based on its fair market value at the time it is received.
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Do I need to pay taxes when I exchange my SLP or AXS for other types of cryptocurrency?
Yes. Crypto-to-crypto trades are considered taxable events by the IRS. You will likely incur capital gains or losses based on how the price of your SLP and/or AXS has changed since you originally received the tokens.
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How do I report scholarships on my taxes?
Some Axie Infinity players choose to give out “scholarships'' to players who cannot afford the cost of the 3 Axies that are needed to get started with the game.
It works like this: A manager buys 3 Axies that are given to a “scholar”, who can start playing the game and earning SLP. The manager and scholar then split the revenue that is earned.
If you’re a scholar, you’ll need to report the tokens that you’ve earned as ordinary income.
If you’re managing a scholarship as part of a business, you can report Axie Infinity income and related expenses, including scholarship payments, on Schedule C of your tax return.
If you’re not sure whether your gaming activity constitutes a business or a hobby, please reference this IRS guidance on the mattertax tip. If you have further tax questions about your Axie Infinity activity, please make sure you discuss your situation with a tax professional.
Are gas fees tax deductible?
If you played Axie Infinity before the introduction of the Ronin sidechain, you may have paid significant gas fees when transferring your assets. Unfortunately, gas fees for transferring cryptocurrency from one account to another typically are not tax deductible, unless gas fees are a necessary expense of running your business.
However, gas fees that were incurred while buying or selling SLP, AXS, or Axies can be used to reduce your capital gains. For more information, check out our guide to how gas fees are taxed.
Is there a tax benefit to breeding Axies?
To prevent the supply of Axies from increasing dramatically, each Axie can only be bred a total of 7 times. Each time an Axie is bred, it loses some of its value. If you sell one of your Axies at a loss, you’ll likely be able to claim it as a capital loss.
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How do I determine the value of a newly-bred Axie?
While the IRS hasn’t released clear guidance on this question, it’s likely that breeding new Axies needs to be reported as ordinary income.
To estimate the value of your newly-bred Axies, you can look at other Axies with similar characteristics such as class and stats. If you do choose to go this route, you’ll need the following information.
- The date that your Axie was bred
- The market value of similar Axies on that date
- The value of Ethereum on that date
Are Axies taxed as collectibles?
The IRS has not clarified whether Axies should be taxed as collectibles.
Some tax experts say that Axies are simply a digital version of physical trading cards that have historically been taxed as collectibles. Others argue that Axies should be subject to regular capital gains taxes, just like other crypto assets.
If Axies are determined to be collectibles, Axies that are disposed of after a year will be subject to a higher long-term capital gains rate (up to 28%). Axies that are disposed of after less than a year will be subject to the typical short-term capital gain tax rate.
For more information, check out our complete guide to NFT taxes.
How can I keep track of my cryptocurrency taxes?
Cryptocurrency tax software like CoinLedger can be used to automate the tax reporting for your cryptocurrency activity.
By integrating directly with the exchanges, blockchains, and protocols that you use, CoinLedger can generate gains, losses, and income reports from your historical transactions with the click of a button.
You can join over 500,000 other crypto investors and find out your portfolio gains and losses as well as calculate your taxes by creating a free account here.
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