Taxes on game credits and currency- What you need to know?

As online and video gaming into a massive industry, new forms of in-game monetization have emerged. It includes various types of credits, currencies, and items that players can purchase within games. However, when real money gets involved, tax implications are never far behind.  If you earn income from selling or trading virtual assets like game credits or currencies, you may be wondering how this impacts your taxes with tax season approaching.

Counts as taxable income from games

The IRS considers virtual currencies and assets as property for tax purposes. It means that if you earn an income trading or selling these items, it is subject to capital gains tax like investments. Some specific examples of taxable game-related income include:

  1. Selling in-game credits or currencies for real money
  2. Trading skins, accessories, or other items through third-party markets
  3. Earning significant ad revenue from streaming gaming content
  4. Cashing out rewards from play-to-earn games

Small amounts of in-game credits you earn just from playing likely do not need to be reported. But if you actively trade or profit from virtual assets, that income qualifies as taxable.

Game items and currencies are taxed

Virtual currencies and items are treated as capital assets for tax purposes, similar to stocks, bonds, or property investments. It means that they are subject to capital gains taxes. Here is how it works:

  • If you hold an item or currency for over a year before selling, any profits are taxed at long-term capital gains rates. For 2023, this rate ranges from 0% to 20% depending on your income top up gim.
  • If you sell an item you’ve held for under a year, profits are subject to the same tax rates as ordinary income. It is as high as 37% depending on your tax bracket.
  • If you sell an item at a loss, you can claim that capital loss to offset capital gains or even up to $3,000 of ordinary income.

So essentially, you need to treat profits from virtual items and currencies like any other investment. The exact tax rates depend on whether it is a long or short-term gain or loss.

Reporting in-game earnings and profits

Earnings from game items, currencies, or streaming needs to reports to your annual tax return online game. Most typical income streams should be reported as follows:

  • Income from selling in-game items is reported on Schedule D to calculate capital gains.
  • Ad revenue from streaming or video content should be reported on Schedule C as self-employment business income. 
  • Rewards converted to cash from play-to-earn games constitute miscellaneous taxable income reported on Form 1040.

Failing to report any taxable income from virtual games and currencies can lead to penalties, interest, and back taxes if caught during an audit so proper documentation is essential.

Tax forms from third-party transactions  

Many game publishers and platforms now issue tax forms to users who earned over certain thresholds from selling items or currency. Common examples include:

  1. Form 1099-MISC- Issued by third-party game marketplaces for users who profited over $600 selling items or currency.
  2. Form 1099-K- Issued by game publishers or service providers like twitch once transaction volume exceeds $20,000 and 200 transactions. 

These forms help users properly document incomes for tax filing but receiving one does not necessarily mean you owe tax. There are still exclusions and thresholds to qualify. But if you do receive tax forms for game earnings, be sure to include them when filing.