Non-fungible tokens, or NFTs, have become tremendously popular over the past couple of years. In addition to taking the art world by storm, NFTs are revolutionizing the gaming world, powering immersive (and profitable) new experiences. The catch is that the IRS still considers NFTs taxable, which could lead to a surprise tax bill for many players.
Let's look at NFT games, the most popular NFT games in 2021, and NFT game taxes that players should be aware of to avoid a surprise tax bill.
What Are NFTs?
Non-fungible tokens, or NFTs, are cryptographic tokens that exist on a blockchain. While all Bitcoin tokens are identical and worth the same amount, NFTs are unique with customizable metadata. NFTs are also extensible, meaning that you can combine or modify them under smart contract rules to create new unique tokens.
There are many unique use cases for NFTs:
- The rights to digital artwork, such as Beeple's 5000 Days, can be encoded in an NFT and sold to patrons or investors. In addition, these smart contracts can be updated to pay artists a portion of each sale in the future.
- NFTs can represent real-life items, such as real estate, and track ownership and transactions on the blockchain. For example, NFTs could enable fractional real estate ownership or even power stock market listings.
- NFTs can create unique games with smart contracts that enable "breeding" and other capabilities. For example, two NFTs can be combined by a smart contract to yield a new NFT with characteristics based on the two “parents”.
According to NonFungible.com, NFT sales have reached nearly $900 million from a combination of sports cards, artwork, NFT games, and other assets. For example, CryptoKitties, Cyberpunks, and other collectibles regularly sell for thousands or even millions of dollars, primarily on the Ethereum blockchain using ERC-20 tokens.
What Are NFT Games?
Most traditional games involve players spending a lot of time and effort to earn points, level up characters, or acquire items to complete quests. Unfortunately, many game developers prohibit selling in-game assets and accounts. At the same time, players may be hesitant to buy these assets when game developers control supply.
NFT games combine conventional games with NFT-powered in-game assets, such as skins, characters, weapons, virtual land, and more. Players can create or breed new characters, purchase digital items, or earn new items. In addition, they can trade or sell the items to create an immersive virtual economy and enable play-to-earn abilities.
NFTs enable the creation of unique, programmatically created in-game items rather than developer-designed objects. In addition, players have a "license" that certifies the in-game item's authenticity, ownership, and transferability. These dynamics can help support a robust play-to-earn business model without the drawbacks of traditional games.
Top NFT Games in 2022
There are many different NFT games, and more are coming out each year. That said, a handful of titles have already become extremely popular among both crypto enthusiasts and gamers. While many of the current stock of games focus on trading cards, there are a growing number of more advanced games, such as arcade racing and metaverse games.
Axie Infinity is a Pokemon-like game where players breed and collect NFT-based digital pets, known as Axies. Using blockchain-powered genetics, strengths and weaknesses are passed down to offspring. You can then complete quests or compete against other players to earn Smooth Love Potion (SLP)—the platform's native ERC-20 token—to breed new Axies. There’s another ERC20 token native to this game, which works as a governance token, Axis Infinity Shard (AXS). This token is also associated with the staking services, which went live in 2021.
Gods Unchained is one of the largest blockchain and crypto projects in the card trading gaming genre. Founded by brothers James and Robbie Ferguson, this free-to-play game can be considered one of the best NFT games because it is redefining the space with its play-to-earn model and creating a virtual economy where gamers stand a chance to earn money.
In this game, players collect cards by either buying them or by winning player vs. player matches. For every match you win, you get experience points and when the experience bar is topped, you move on to the next level and get a new pack of cards added to your collection.
Each card is powered by an ERC-20 token and they are tradeable on the open market. Players who sell these cards get GODS, the native token of the platform, as payment.
Similar to Gods Unchained, Splinterlands is a free-to-play card game where players earn rewards as they win card matchups. The players can battle with each other in skill-based matches to build a card collection. In this game, players can buy/sell/and trade their digital assets.
Jesse Reich and Matthew Rosen created Splinterlands after games went digital and players couldn’t truly own their assets. With Splinterlands, players can truly own their digital assets and can even trade them. Splinterlands functions on the Hive blockchain, meaning it has a verifiable supply and historical record of all cards on the platform.
To play Splinterlands, the first thing you need to do is buy a starter pack of cards. Then, you have to create a Steam account and then reveal your cards on Splinterlands. If you are lucky enough, you’ll find a rare card in your first set of purchased cards. Once you get familiarised with the cards, you can go ahead and battle other players.
SPS, the native token of this crypto game, is integrated into the game allowing players to influence decisions about the ecosystem and the game. Players can also propose their own changes to the game.
The Sandbox 3D
Launched by Pixowl in 2011, Sandbox 3D is one of the most active blockchain-based NFT gaming platforms. In this game, players can create, buy, and sell digital assets.
This voxel-based gaming metaverse allows players to monetize a voxel asset, a pixel with volume. Look at it as the blockchain version of games such as Minecraft and Roblox. In the game, players get the tools to create and animate objects and after that, they can sell them in the marketplace. Other than that, players can create bespoke games and play them on the platform.
Sandbox 3D has introduced its native ERC-20 token, SAND. With this token, players can buy in-game items on The Sandbox 3D’s marketplace. Moreover, the game also has NFT tokens called LAND, which are some of the most sought-after assets in the game.
Alien Worlds is a decentralized NFT metaverse where players challenge each other to gather sparse resources, such as Trilium (TLM), the in-game currency. This game simulates economic competition and collaboration among players and is centered around exploring other planets.
What makes this one of the best NFT games is in this gaming metaverse there are numerous DAOs giving every TLM holder a say in who runs the platform. TLM holders can also vote for who becomes the leader or become a leader themselves.
In the Alien Worlds metaverse, players can stake their TLM to Planet DAOs showing their alliance with the planet, which in turn gives them more daily TLM rewards. The amount of TLM staked directly affects the player's ability to vote for the future of the planet.
This game is inspired by famous games such as Super Mario Kart and F-Zero. The idea behind this game is to merge different parts and weapons and create the most powerful cars possible, which gives them an advantage on the arcade-sized tracks.
Once you win, you can register your prized cars on the blockchain network as NFTs and earn crypto by selling them on OpenSea. The game can be played on Decentraland, a blockchain-based virtual world.
Sorare — Fantasy Football
Sorare is one of the best NFT games on the Ethereum blockchain. This fantasy football trading card game has built a huge collection of NFT football trading cards for players to create their fantasy football team and compete with other players to unlock more NFT cards and with ETH.
This crypto game has more than 200 football clubs licensed on the platform such as Liverpool, Real Madrid, Bayern Munich, Paris Saint-Germain, and more are being added every week.
It is a free-to-play game and when players finish their registration, they get a random deck of cards. If players want to progress in the division leagues and win prizes, they have to buy rare cards with ETH.
There are four categories of cards in the game: commons, rare, super-rare, and unique. With the cards you have, you can assemble a five-player team, choose a captain, and enter into weekly competitions. Players have ownership of their cards and can sell them on NFT marketplaces.
NFT Game Taxes
NFT sales have reached nearly $900 million, according to NonFungible.com, but NFT game taxes are ambiguous at best. As a result, players should ask their accountants to provide guidance, particularly if they have high-value transactions, and consider being conservative to avoid potential issues down the road.
NFTs are a potential goldmine for the IRS because they produce multiple tax events:
- NFT creators owe ordinary income tax on any digital sales. For example, NFT gamers who mint a new item and sell it may owe income tax on the sale proceeds. Ordinary income taxes can be upwards of 35%, making these taxes significant for some.
- Buyers owe capital gains tax on the cryptocurrency that they exchange to purchase an NFT. For instance, NFT gamers who buy an item with ETH may owe capital gains tax on the ETH transaction, which can be upwards of 15%.
- NFT gamers that flip an NFT for a profit may owe capital gains or collectibles tax on the transaction. Collectible taxes are typically 28% even if the asset is held for longer than one year (e.g., a long-term capital gain).
That said, the IRS hasn't issued any specific formal or informal guidance on NFT game taxes. NFT gamers may want to take a proactive stance to avoid the need to back pay taxes in the future (as was the case with early cryptocurrency investors). However, you may not be able to claim an investment or gambling loss if you misplace the NFTs.
ZenLedger makes it easy to track crypto transactions, including NFT game taxes, across wallets and exchanges. In addition to aggregating transactions and computing capital gains and losses, the platform autocompletes the IRS forms you need and even integrates with TurboTax. You can also identify ways to save money through tax-loss harvesting.
The Bottom Line
NFT games blend conventional games with blockchain-powered in-game assets, such as skins, characters, or weapons. While these games have innovative in-game economies, there are NFT game taxes that players should carefully consider. Unfortunately, the IRS hasn't provided any specific guidance, but a conservative strategy can help avoid problems.