The IRS scrubbed some language from its guidance about virtual currencies, and how gaming currencies could fall under that definition.

February 17, 2020

By: Bobby Casey, Managing Director GWP

Full disclosure: I am having the worst time deciphering the difference between satire and real news.

I recognize some sites as being satire, like the Onion or Babylon Bee. But some headlines I see, I’ll laugh first, thinking it’s not real… only to find out they actually ARE real.

Here’s one: IRS suggests game currencies are not taxable; tax experts say don’t believe it

Excuse me? Game. Currencies. These are the little tokens you get for doing well at a game. I win, I get these tokens that I might later be able to use to “buy” a weapon, or a clue, or another “life”, in that game. They only mean something in the context of a particular game.

Some games allow you to buy their currencies. For example, I can get 1,000 tokens for $4.99. I’m presuming that this would be used as an “exchange rate” for tokens earned? I don’t know, since the policy description never went that far. Here is the original verbiage from the IRS:

Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency. Bitcoin, Ether, Roblox, and V-bucks are a few examples of a convertible virtual currency.

V-bucks are a form of gaming currency found on the game Fortnite. Robux are a form of gaming currency found on the game Roblox.

Then, the IRS changed the verbiage quickly afterward:

Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency. Bitcoin is one example of a convertible virtual currency. Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies.

According to CNN business, the former was the standing verbiage since at least the fall of last year, but was scrubbed recently (Wednesday February 12, 2020). The IRS pulled the reference to gaming currency, but some tax professionals are not convinced that gaming currencies are exempt!

Mark Steber, chief tax officer at the tax prep company Jackson Hewitt said, “In the law, if it’s not specifically exempted, then it’s taxable. Nothing is exempt from taxation which is not excluded from the law.“

Others are suggesting that the IRS is just grappling with the challenges of applying the same tax principles to virtual currencies:

“The IRS is trying to communicate that an accretion of value … will trigger a taxable event, whether you are using the currency to buy a tangible item or to acquire a virtual item,” said Mary Baker, who leads the tax policy practice at the law firm K&L Gates in Washington.

As we’d mentioned in an earlier post, there will be a new question on the 1040 Schedule 1, which asks: “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

When Ally Versprille of Bloomberg pressed IRS Chief Counsel Michael Desmond about whether holders of gaming currency needed to check the box affirming that they have a form of “virtual currency”, he had this to say:

“I am not even looking into that… I’m not saying one way or another. I think I’d be getting ahead of myself if I said anything. Read the website. We posted a correction yesterday.”

Mark Steber’s trepidation is not unfounded. This kind of equivocation from the IRS Chief Counsel is cause for concern.

Did you catch what was missing between the question on the 1040 Schedule 1 form and the verbiage on the IRS website? The word “convertible”.

This is likely what has tax professionals thinking the change in verbiage is irrelevant. While Bitcoin is an example of a convertible virtual currency, the question being asked makes no distinction whether the currency is convertible or not. Only that it is virtual.

If “gaming currency” is potentially taxable, then what about credit card reward points? There isn’t any discernible difference. You earn them through using a credit card at a rate clearly defined in the terms and conditions. You can BUY points if you wish in some cases. You can even transfer points to other card holders if you want.

What about reward programs through businesses that say “buy 10 get one free”?

That gaming currencies ever made it to the IRS taxable guidance is brow-raising.

But for now, it appears gamers are safe.  Here is the official position of the IRS on the matter of gaming currencies:

The IRS recognizes that the language on our page potentially caused concern for some taxpayers. We have changed the language in order to lessen any confusion. 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.

I think it comes down to Mary Baker’s point about the link between value and taxes. They backed off gaming currencies for now. But they don’t want to close the door on it, should there be some surge of value down the line.  Given where blockchain is heading, this isn’t entirely out of the question, and could very well happen in the foreseeable future.

I’m still suspicious. All I can say is, be careful.