The IRS said it was trying to clear up confusion around virtual currency used to enhance the gaming experience.
Tax season just became a lot less stressful for a lot of gamers.
In-game currencies that can’t be turned into real-world money do not count as reportable virtual currency for tax purposes, the Internal Revenue Service clarified this week.
That means currencies used in video games, like Fortnite’s V-Bucks and Roblox’s Robux, are safe from the tax man.
In most situations, virtual currency transactions are taxable, the IRS says. That’s because the currency — like BTCUSD, -0.03% Bitcoin for example — can be ultimately be traded or exchanged for U.S. dollars, Euros and other forms of “real currency.”
Currencies like V-Bucks and Robux are in-game currencies that gamers can only use to upgrade their gaming experience. For example, Fortnite players spend V-Bucks to buy new outfits for their avatar, “wraps” to change the look of weapons or to purchase new dances in the game. A $25 dollar V-Bucks gift card on Amazon AMZN, -0.70% is worth 2,800 V-Bucks while a gift card for the same amount is worth 2,000 Robux.
Until earlier this week, an explanation of the virtual currency tax rules on the IRS website included V-Bucks and Robux as examples of reportable currency. The agency deleted those examples from its website this week, and a spokesman confirmed to MarketWatch that the IRS had indeed officially changed its rules.
“The IRS recognizes that the language on our page potentially caused concern for some taxpayers,” a spokesman said. “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.”
The IRS removed the references to Fortnite’s V-Bucks and Robux after Bloomberg asked whether gamers would have to disclose the currencies on their tax returns.
The tweaks should cause for a serious sigh of relief across cyberspace. Fortnite has an estimated 250 million users worldwide, while Roblox said it had 100 million monthly active users as of last summer.
A spokesman for Epic Games, Fortnite’s creator, said “The introduction of the IRS’s informal guidance with respect to convertible virtual currencies inaccurately describes V-Bucks. V-Bucks cannot ‘be digitally traded between users,’ nor can they be ‘exchanged into, U.S. dollars, Euros, and other real or virtual currencies.’”
Roblox did not reply to a request for comment.
But the IRS can still take a cut from gamers
Of course, there are all sorts of other ways the IRS can take its cut from gamers — especially if players make their living via their video gaming skills, said Galen Herbst de Cortina, a financial planner who advises professional video game players.
For example, players streaming themselves playing a game on Twitch or Facebook FB, +0.49% might mention a “creator code,” which viewers can include when they buy V-bucks. The player with the creator code receives a portion of the transaction, and that money is taxable, said Herbst de Cortina, founder of Buff Your Finances. Income from sponsors and tournament prize winnings are also taxable, he said.
That can be real money. Last summer, a 16-year-old boy won $3 million playing Fortnite.
Professional gaming has some tax breaks too, Herbst de Cortina noted. A professional gamer buying V-bucks could count the expense as a deductible business expense. A newly-purchased video game could be a write-off too because it could count as “market research,” he said.
“It’s just like anything else. If you’re earning income from it, you need be aware it’s theoretically taxable. It’s still a business you’re running,” according to Herbst de Cortina.
Virtual currency is a focus for the IRS
The IRS clarification on V-Bucks and Robux comes as the agency is increasing its focus on virtual currency.
For the first time, tax forms this year include a question asking all taxpayers if “at any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
Last year, the IRS sent “educational letters” to more than 10,000 people who might have incorrectly reported virtual currency transactions. “Virtual currency, also called crypto currency, will remain an important focal point for the IRS in 2020,” the agency said in a January report.
Beyond questions about in-game currencies, there are still plenty of open tax questions about virtual currency, said Ryan Losi, executive vice president of Piascek, a Richmond, Va.-based tax firm.
The IRS issued its first guidance on virtual currencies in 2014 and only followed up with a second last year. The IRS regards virtual currency as “property,” even though it can act like a stock that goes up and down. That can open up all sorts of questions about calculating gains and loses, said Losi.
By comparison, the issues with in-game currencies are more clear-cut. “You could be a millionaire in a game, but when you leave the game, in reality, you’re not a millionaire. …If your net worth doesn’t increase,” there’s no tax, Losi said.