Editor: Sally P. Schreiber, J.D.
Gamers who transact in virtual currencies as part of a video game do not have to report the transactions on a tax return if the currencies do not leave the game environment, the IRS made clear in a statement released on its website Feb. 14.
The clarification relates to whether, or when, a currency used in a video game should be considered "convertible," meaning it can be converted into real currency. The Service's current guidance on virtual currencies applies only to currencies that are convertible, a typical example being bitcoin.
The clarification came two days after the IRS made an unannounced deletion of language from its website about video game currencies.
The Feb. 14 statement reads in full:
The IRS recognizes that the language on our page [about virtual currencies] 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.
Before the Feb. 12 website edit, the Service's "Virtual Currencies" webpage said that examples of a convertible virtual currency include "Bitcoin, Ether, Roblox, and V-bucks." Roblox is an online video game platform, and V-bucks is an in-game currency used in the game Fortnite.
The same webpage now lists bitcoin as the sole example of a convertible virtual currency.
Taxation of virtual currency transactions
The IRS treats virtual currencies such as bitcoin as property, rather than as currency, and says that general tax principles applicable to property transactions apply to transactions using virtual currency. In a set of frequently asked questions, the IRS notes that its current guidance about the taxation of virtual currency transactions relates only to virtual currencies that are convertible.
Some virtual currencies are convertible, which means that they have an equivalent value in real currency or act as a substitute for real currency. The IRS uses the term "virtual currency" in these FAQs to describe the various types of convertible virtual currency that are used as a medium of exchange, such as digital currency and cryptocurrency (from FAQ No. 1).
The IRS recently revised Form 1040, Schedule 1, Additional Income and Adjustments to Income, which now asks taxpayers, "[D]id you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?" As noted above, the IRS's Feb. 14 statement clarifies that transacting in virtual currencies as part of a game that do not leave the game environment "would not require a taxpayer to indicate this on their tax return."