Taxation is currently a hot topic in the cryptocurrency ecosystem, with market leading cryptocurrency broker Coinbase announcing that it has been legally obligated to turn over information on approximately 13,000 users to the United States Internal Revenue Service. The looming presence of the tax-man has catalyzed a strong fear response in many investors, but has also sparked an interesting discussion: why is cryptocurrency taxed, while other digital currencies — such as World of Warcraft gold, or FarmVille “Farm Bucks” overlooked by the IRS?
Disclaimer: This article does not constitute a legal opinion, tax advice, or official reference material for tax purposes.
The recent release of Coinbase customer records to the IRS is the latest development in an international taxation crackdown on cryptocurrency, with the tax authorities of both Australia and the UK announcing upcoming investigations into Bitcoin-related tax fraud.
The question raised by many cryptocurrency investors in response to the ongoing tax crackdown is this: what makes cryptocurrencies different — from a legal perspective — than any other digital asset issued within a video game such as World of Warcraft, Second Life, or Farmville?
Are In-Game Currencies “Digital Currencies?”
The implications of the question are obvious — let’s say that a particularly belligerent cryptocurrency investor was to be audited by a taxation authority regarding potential tax evasion through cryptocurrency investments, would it be possible to draw parallels between Bitcoin and FarmVille Farm Bucks?
The answer may surprise you. For the uninitiated, FarmVille is a free-to-play farming simulator game developed by Zynga in 2009, and is one of the most popular Facebook games of all time.
Like most free-to-play games, FarmVille provides players with an in-game currency that can be earned slowly, or purchased with real-world fiat currency in order to speed up game progress.
FarmVille’s in-game currency, however, raises some interesting questions. At peak popularity, FarmVille boasted over 83,760,000 monthly active users, all of whom were provided with the option to purchase “Farm Cash” without any kind of AML/KYC requirements.
Now, there are obvious parallels between Farm Bucks and Bitcoin — both are essentially digital currencies, but there is an important difference between the two — it’s not possible to trade Farm Cash back to real-world currency, which blows the comparison out of the water.
When assessing other in-game currencies, however, their comparison cryptocurrencies becomes more accurate.
World of Warcraft, the most popular online role-playing game of all time, uses an in-game “gold” currency that can be purchased directly with fiat currency without any AML/KYC requirements. World of Warcraft gold can, however, be converted back into real-world money via a booming secondary market.
Platforms such as PlayerAuctions allow users to sell World of Warcraft gold with virtually no KYC of AML verification whatsoever.
The real-world sale of in-game currencies is even more prevalent on marketplaces such as eBay — it’s even possible to find exhaustive guides on how to capitalize on World of Warcraft gold via these platforms.
The Financial Action Task Force, an intergovernmental organization that combats money laundering and a major driver behind AML/KYC requirements in the cryptocurrency market, published a 2014 report that specifically identified World of Warcraft gold in comparison to cryptocurrencies.
According to the report, the FATF defines in-game currencies as “centralized virtual currencies” that have a “single administering authority” and are “issued by a central authority that establishes rules making them non-convertible” — an assumption rendered false as demonstrated by the aforementioned secondary markets.
So, if in-game currencies are functionally identical to cryptocurrencies with the only difference being the scale of the amount of currency transferred, why is regulatory furor so tightly focused on the cryptocurrency market? The answer can be found within the 2014 FAFT report itself.
In-Game Currencies Can be Controlled — Unlike Cryptos
The answer to the question of why in-game currencies are largely ignored by regulatory bodies is obvious. The FAFT “Virtual Currencies Key Definitions and Potential AML/CFT Risks” report summarizes the threat imposed by cryptocurrencies in a succinct manner:
“Law enforcement cannot target one central location or entity (administrator) for investigative or asset seizure purposes… customer and transaction records may be held by different entities, often in different jurisdictions, making it more difficult for law enforcement and regulators to access them.”
Put simply, in-game currencies are not regulated, as it’s easy for authorities to take them away from you.
Cryptocurrencies, however, “exist in a digital universe entirely outside the reach of any particular country”, and thus represent a threat to the incumbent centralized financial system that is integral to the operation of virtually every government.
Regulatory bodies only became interested in cryptocurrency taxes when the cryptocurrency market began generating a significant amount of capital. Why are in-game currencies largely ignored? The answer is provided by one particularly pithy Reddit user:
“WoW gold is a friendly game of poker at a friend’s house. Crypto is a river boat casino.”
