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.
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.
Yes. Axie Infinity users earn crypto tokens through the course of gameplay. This is considered income and needs to be reported on your taxes.
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.
Yes. Buying an in-game item is a taxable event as it is technically a crypto-to-crypto trade. You will 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.
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.
Yes. Earning SLP is 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.
Yes. Crypto-to-crypto trades are considered taxable events by the IRS. You will incur capital gains or losses based on how the price of your SLP and/or AXS has changed since you originally received the tokens.
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, you will incur capital gains or capital losses if you purchase the three Axies with cryptocurrency. However, it’s likely to assume that the income that you share with your scholar can be considered non-taxable return on capital.
If you have specific tax questions on your Axie Infinity scholarship, make sure you discuss your situation with a tax professional.
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 in most cases are not tax deductible.
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.
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 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 gains tax.
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