IRS removes tax reporting doubts for in-game tokens

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The Internal Revenue Service (IRS) has rolled back on language that could have required gamers to report their virtual cash dealings from a number of popular video games, following an investigation by Bloomberg Tax.

In an attachment to Form 1040, which is used by taxpayers to complete their annual tax returns, the IRS required submissions to declare whether the individual had “received, sold, exchanged, or otherwise acquired a financial interest in virtual currency” during the tax year.

As a ‘yes/no’ question, it had been suggested that the broad parameters set by the language could also include gamers rich in in-game tokens, including players of the popular Fortnite and Roblox online games.

Roblox and V-bucks were originally listed by the IRS as specific examples of virtual currency deemed ‘convertible’ which the IRS had suggested would need to be reported, alongside Bitcoin, ETH, and other cryptocurrencies.

However, following contact from Bloomberg Tax, the IRS updated its website, removing example references to all virtual currencies except for Bitcoin. At the time of press, the IRS had yet to respond to a request for comment.

In a tweet earlier this week, Jerry Brito of Coin Center said the provisions could unknowingly catch gamers who were unaware their in-game currency could be considered taxable: “I think a lot of people aren’t going to know that they have to answer ‘yes’ so they’re going to answer ‘no.’”

https://twitter.com/jerrybrito/status/1227608767338078214?s=20

He pointed out that the aim of the question on the form was to identify taxpayers who may not be paying the appropriate tax due on virtual currency transactions by design, and said it was unclear how requiring millions of gamers to report in-game holdings would help with that objective.

A spokesperson for the company behind Fortnite, Epic Games Inc., said it disagreed with the IRS’ classification of its in-game currency as a ‘convertible currency’.

While the language has now been clarified, the case shows the difficulties that arise through vague drafting, particularly in the context of digital currencies and other virtual assets.

A spokesperson for the Entertainment Software Association said in-game currencies were different from regular virtual currencies because they were intended for use within closed game economies.

“Financial regulators who have considered the status of game currencies in detail have treated them distinctly different from Bitcoin and similar virtual currencies precisely because they cannot be cashed out.”