Reporting Requirements for Video Game Currency

Amid school and business closures, some gamers may be increasing their screen time and raking in the virtual dough. What does virtual currency mean for tax purposes?

The IRS released a statement last month informing gamers who exchange virtual currencies in video games that they do not have to report these transactions on their tax returns, if the currency stays within the gaming environment. 

As more and more virtual currencies become established in the market, the IRS has provided clarification on the reporting requirements surrounding transactions made within video games—and the key is convertibility.

If a currency used in a video game is deemed “convertible” into real currency—bitcoin for example—gamers are then required to report income on their tax return if it’s converted into currency outside of the gaming space. This would allow a person to exchange currency used in the game to make purchases outside of the game.

The IRS states that “transacting in virtual currencies as part of a game that do not leave the game environment (virtual currencies that are not convertible) would not require a taxpayer to indicate this on their tax return.” An example is V-bucks. V-bucks is an in-game currency used in Fornite and cannot be converted from virtual currency into real tangible money. 

On the other hand, if a player earned bitcoin in a mining game like Rollercoin, and then in turn, went onto a different platform, such as Bitrefill, to purchase gaming items, the gamer would have to report the property on Form 1040, Schedule 1, which now asks taxpayers “did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” This is a new filing requirement in 2019.

The IRS views virtual currency transactions differently than everyday currency transactions. For example, it treats bitcoin as property, thus applying the general tax principles of property transactions to transactions using virtual currency.
 

The tax implication assessment is that if you keep convertible currency in the game, you do not need to report it on your returns. If you take it out, it must be reported.
 

If you have any questions about virtual currencies in video games, please contact your advisor at (805) 963-7811.