How is crypto gaming regulated?
While the average price of crypto has tanked in recent days, blockchain-based apps and games are still growing at a staggering rate, begging the question: How are crypto gaming rewards regulated by the Australian Tax Office (ATO)?
As of writing, the ATO has provided little-to-no guidance or official direction on how rewards from crypto gaming should or will be regulated.
In this third part of our crypto and tax series with Shane Brunette, co-founder of CryptoTaxCalculator, well explore some of the opportunities and pitfalls in crypto gaming.
In this article:
What is crypto gaming?
Crypto gaming, or blockchain-based games, area kind of decentralised gaming that requires (and usually offers) crypto coins to play.
Microtransactions (or voluntarily paying real money for in-game items or boosts) have existed almost as long as games have, and form the bedrock of most free-to-play games as their main source of income.
Generally, any rewards purchased in a game are locked to that particular game and cannot be transferred or shared, even to games owned by the same publisher.
Blockchain-based games take money in gaming a step further, implementing a play-to-earn model that allows players to earn rewards with real-world value which if given in the form of crypto tokens or non-fungible tokens (NFTs) can often be traded and transferred between multiple platforms.
As crypto games continue to develop in quality, and mainstream gaming studios dip their toes in the water so to speak, the experience will become both more common and more entertaining, Shane said.
I think just as crypto is becoming increasingly part of todays normal, so too will crypto gaming. I expect one day people wont even realise that theyre playing a crypto game, because the experience will be so seamless.
Leah Callon-Butler, CoinDesk columnist and director of investing firm Emfarsis, investigated the rise of play-to-earn crypto games in the Philippines, where crypto gaming has become a legitimate source of income:
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How are crypto gaming rewards regulated by the ATO?
As stated, there is currently no real understanding of how the ATO will approach the new and expanding frontier of crypto gaming.
Instead, crypto gamers will have to hedge their bets and maintain the best records they can to avoid a tax bill when the ATO catches up.
A play-to-earn gamer currently has two viable options to maintain records of their earnings and apply capital gains tax (CGT) to any profits and/or losses made, OR to maintain records of their earnings and ascribe the value as ordinary income (similar to how airdrops and staking rewards are currently treated by the ATO), Shane explains.
Theres also an argument to be made for play-to-earn rewards being considered personal use, but in all instances Id recommend that you work with your accountant or H&R Block (NYSE:HRB) representative to determine whats best for your personal circumstances.
Crypto gambling exists in a similarly grey area of lagging regulation, but gambling winnings are generally exempt from CGT, although with crypto there are no guarantees.
The ATO views crypto assets as property, rather than a traditional currency, Shane clarifies.
If this is the case, then any disposal events (for example depositing your crypto into an online betting platform) may be seen as taxable. Similarly, if this is the ATOs position, then any sales of crypto gambling winnings may be seen as CGT events.
What international regulation exists?
Cryptocurrency regulation is trailing behind its implementation everywhere in the world, as lawmakers attempt to tackle a technology few of us truly understand.
The European Union has proposed a regulatory framework (Markets in Crypto-assets or MiCA) for cryptocurrencies that could set the stage for the digital asset industry if adopted.
The proposal has been through multiple revisions and delays, with many in the crypto industry seeing the framework as a net win for the sector.
Many countries around the world will now take a close look at MiCA,” The European Parliament member spearheading the legislation, Stefan Berger, said in a press release.
He called it pioneering in its establishment of reliable supervisory structures something crypto companies, especially in the US, have been calling for.
The UK, on the other hand, has been pursuing formal licensing and registration for the crypto industry, while bringing the legal hammer down on 50 unauthorised crypto firms with active investigations.
The UK Treasury has also signalled its intention to regulate stablecoins the generally less volatile version of crypto that are supposed to betied to external values in particular, as theyve been deemed a direct risk to traditional payment methods.
Overall, the UK is expected to fall broadly inline with the EUs regulation, although likely with its own caveats.
Crypto regulation in the US is even more of a mess, with multiple agencies fighting for jurisdiction over the digital assets even as each of the 50 states insist on having their own input.
The US Securities and Exchange Commission (SEC) appears to be driving in a similar direction to the ATO, arguing that crypto should be classified as securities and regulated as such.
Its unlikely well get much clarity anytime soon, so it may be best to hedge your bets and keep immaculate records until regulation is better understood and implemented.
What could crypto gaming regulation in Australia look like?
When asked what areas of crypto gaming regulation need to be addressed in Australia, Shane Brunette answered simply: To be frank, all of it!
Right now, without any official direction from the ATO on crypto gaming, Australian crypto gamers are lost when it comes to staying tax compliant, Shane explained.
They can work with professionals to make an educated guess on what would likely be the most tax-compliant way to move forward, but its simply that a guess.
While many gamers appear reluctant to wave the crypto banner, more and more mainstream gaming companies are plugging into the blockchain, sometimes selling major and beloved franchises looking at you Square Enix in order to fund the transition.
Triple A gaming companies like Ubisoft, Square Enix and Electronic Arts have jumped on the bandwagon following some shockingly successful blockchain games like Axie Infinity and Alien Worlds player bases peaking at 2.78 million and 4.75 million respectively meaning crypto gaming will likely continue to become more mainstream and accessible.
Asked what he thinks regulation around crypto gaming rewards should look like, Shane points to crypto staking and the way rewards from proof-of-stake are treated.
Both activities are ones that have the potential to occur on a recurring basis and both rewards are based on participation rather than pure speculation, he said.
Itll be interesting to see how the ATO approaches this segment of the crypto industry, as play-to-earn games continue to grow in reach and volume.
As always, we recommend using a crypto tax calculation software or tax professional to help navigate blockchain waters, especially in such a grey area lacking any real regulation.
About Shane Brunette CEO of CryptoTaxCalculator
A software engineer by trade, Shane created CryptoTaxCalculator after experiencing the pain of doing his taxes during the 2017 crypto boom. He holds a Master in Artificial Intelligence, as well as a double degree in Psychology and Economics.
About CryptoTaxCalculator
CryptoTaxCalculator makes understanding tax obligations simple and straightforward. Its signature tools help to identify, track, and organise personal crypto activity across hundreds of exchanges and blockchains, with both ease and accuracy.
CryptoTaxCalculator generates reports with added transparency, saving time and stress. The company is helping investors, traders, and accountants by providing clear and secure records of their crypto activity, so they can relax at tax time.
CryptoTaxCalculator was co-founded by brothers Shane and Tim Brunette in 2018, and is headquartered in Sydney, Australia. For more information visit cryptotaxcalculator.io
