Cryptographic games based on Web 3.0 and blockchain technology attract a diverse and increasingly large audience. Gaming transactions reached 7.4 billion, a growth of 37% over the previous year and a staggering 3260% since 2020.

In 2022, on average, 1.13 million unique active wallets were connected daily to apps [1] of games. That’s a 60% increase over the 2021 numbers [2].

These crypto games often offer game elements in the form of tokens and NFTs, which can be easily exchanged on crypto markets for other cryptocurrencies. It is a phenomenon in constant evolution and with many aspects yet to be defined, among which is its taxation.

Through the present I try to make a preliminary analysis of the topic to formulate later final reflections.

Cryptographic Games 

One of the main reasons why people choose to play crypto games is to earn money. Many of the cryptocurrency games offer rewards in the form of NFT, that is, they make you an owner. The collected NFTs can be player avatars, characters, creatures, special items or any other artifact.

These NFTs can be exchanged or sold on other platforms, either in cash or in cryptocurrencies. In addition, you can keep these rewards until you find the right time to collect them.

There are different cryptographic games such as “Play-to-earn — P2E” and “Move-to-earn – M2E”.

P2E’s provide users with the opportunity to earn assets, typically NFTs [3], so it is essential to play within the framework of a blockchain.

Axie Infinity, Aavegotchi and The Sandbox are examples of P2E games [4].

Axie infinity is an online video game supported on blockchain both with its own currency for the game and in NFTs for the game assets, whose economic system uses Ethereum-based cryptocurrencies both to enter the game and to convert transactions. Transactions pay a percentage of commission to the market operator, the company that created the game,. In the Philippines, where a large part of the players are located, income derived from gambling has become taxable.

Aavegotchi is another example of a P2E game. It is described as an open source community-owned NFT game protocol. Users can go on adventures such as pixelated ghosts, reminiscent of Tamagotchi games.  You can earn tokens with mini-games, exchange Aavegotchis or start farming rarities.

The Sandbox offers its users a unique gaming experience that gives them a preview of what the Metaverse is likely to be like. Users can play, create, build and own the future. While enjoying the immersive experience, users can monetize the game by creating, investing and earning in-game assets.

On the other hand, Move-to-earn (M2E) games combine physical movement, games and obtaining cryptocurrencies on the blockchain.

Move-to-earn skyrocketed during the height of the COVID-19 pandemic. Most people were at home, sitting and spending their time behind the screen. Since moving frequently is fundamental for health, M2E became very popular.

It’s a new way to reward users for getting up and getting moving while using technology. The essence is that depending on the movements you make, you are allowed to earn cryptocurrency. Examples of move-to-win games are STEPN, Sweatcoin and MetaGym [5].

STEPN was born to make users healthier and richer by putting each foot in front of the other.  If users want to start using STEPN, they should invest in a pair of STEPN sneakers by purchasing an NFT.

When you take the first step, it is important to move around and track your steps with GPS. The value obtained in the game, in the internal cryptocurrency, can be exchanged for in-game assets or for other cryptocurrencies later.

In the game Sweatcoin, users earn their coins by running, walking and, above all, sweating. Every 1000 steps you take, you will get a reward in SWEAT, the native currency of the platform.  The goal of its creators is to reduce the billions of dollars in health care costs by making people healthier.

Finally, MetaGym provides the possibility to earn money while moving the body through an app and even a smartwatch app. Users earn cryptocurrencies while completing tasks such as finishing cardio, or strength training, or getting a good night’s sleep.

Challenges around their taxation

There are still many gray areas around the taxation of crypto virtual games.

However, there is no doubt that rewards from P2E or M2E games, such as earning tokens by playing games, airdrop from a gaming company and betting assets on the game to earn passive income, could be considered as taxable for the income tax, or transactions subject to VAT, according to the legislation of each country.

Similarly, the purchase of a gaming asset with cryptocurrencies, the sale of gaming assets and the exchange of one gaming asset for another could be considered as earnings for tax purposes according to the current legislation in each country.

It should be noted that these exchanges can be made inside or outside the games, which increases the complexity.

Likewise, the holdings of crypto-assets obtained in the games should be included for the purposes of determining the current taxable assets.

In many countries there are taxes on games of chance (prizes, sweepstakes, lotteries, etc.), so it will be necessary to determine, depending on the legislation in force, whether the winnings obtained from virtual games would be included in such taxes or in the income tax.

Another difficulty arises because many crypto games currently do not send users a record of their transaction history. That means that the burden falls on taxpayers to keep an accurate record of their transactions so that they can then be correctly valued for tax purposes.

One of the challenges of crypto gaming taxation is to determine which jurisdictions have the right to tax digital transactions, in this sense it is likely that the complexity and speed of adoption of these types of games exacerbate the existing problems related to the digital economy.

A not minor issue is that many of these games involve minors. Therefore, in each country it should be defined who will declare this income, if for example it will be the parents of the minor.

Undoubtedly, one of the greatest challenges for the States and their tax administrations is to identify this type of operations, the different parties involved, as well as the different operations carried out.

There are currently information regimes in force in some countries where virtual service providers must report operations. However, today the big limitation for states is that they only have the power to require subjects residing in their jurisdictions to report their operations, including those using crypto-assets. They do not have the power to regulate the information regimes that would oblige non-resident virtual service providers to report such operations. The OECD has proposed a crypto asset transaction information reporting framework (CARF) [6], which will operate in a scheme similar to the CRS [7].

It is clear that in addition to these challenges, many others will arise with its development, including in other areas such as money laundering and cybercrime.

Final thoughts

Crypto games are already producing income in the form of crypto assets so today each country must determine with its current legislation if taxable events are occurring that are subject to taxation, either in income, property or consumption taxes.

In order to determine its correct taxation, it is necessary to have a deep understanding of the “economic reality” of businesses and activities, for which the States and tax administrations must work together with the private sector, analyzing the tax issue as one more aspect within all the regulations to be developed.

Several jurisdictions are working to define the taxation of the different cryptographic tokens, where there are tax guides or guidelines for each of the different types of tokens and the most frequent operations, also supporting a consultation service and publishing the answers to provide legal certainty and security to the taxation.

In short, given a global phenomenon such as the new Web 3.0 business models with cryptographic tokens, it would be convenient for the states to agree on uniform tax treatments for operations with cryptocurrencies and other cryptographic tokens such as NFTs and other virtual game activities or those that take place in the metaverse, including a common information reporting framework such as the aforementioned CARF.

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[1] Decentralized applications

[2] To expand see https://dappradar.com/blog/dappradar-x-bga-games-report-2022-overview

[3] https://cointelegraph.com/explained/play-to-earn-vs-move-to-earn-explained?s=03

[4] There are many cryptographic games in addition to those mentioned. To enlarge see for example https://www.business2community.com/es/juegos/mejores-juegos-play-to-earn

[5] There are many M2E games to expand, see https://geekflare.com/es/move-to-earn-m2e-crypto-tokens/

[6] To expand see “New regime of international exchange of information of operations with cryptoassets” CIAT Blog https://www.ciat.org/nuevo-regimen-de-intercambio-internacional-de-informacion-de-operaciones-con-criptoactivos/

[7] Common Reporting Standard

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