According to the IRS, “virtual currency” is “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.” Virtual currency is becoming more common as a source of investment and for privacy. However, virtual currency in video games is giving taxpayers and the IRS cause for confusion. A recent update from the IRS removed some video game virtual money from disclosure requirements.
Is Virtual Currency Taxable?
One of the most well-known virtual currencies or cryptocurrencies is Bitcoin. The IRS has issued guidance on the tax treatment of virtual currency transactions, including Bitcoin, in Notice 2014-21. The position of the IRS is that gross income means, “all income from whatever source derived.” Virtual currency is property and the sale or exchange of virtual currency has tax consequences that may result in tax liability.
Taxpayers who do not report income on the sale or exchange of virtual currency may be subject to penalties for failure to comply with IRS tax laws, including for underpayment and failure to report penalties.
Bitcoin is a cryptocurrency that generally allows users to make transactions anonymously. However, digital currency exchanges like Coinbase record digital transactions and have turned over records to the IRS, which includes the user's name, taxpayer ID, date of birth, address, and account statements.
Gamers With Fortnite and Roblox Currency
When is virtual currency real enough to be taxed? The IRS recently changed the language on the IRS.gov website to remove examples of virtual currency linked to some popular video games. Prior to the change, the website included Fortnite's V-Bucks and Roblox Robux as virtual currency subject to taxation.
Fortnite is one of the most popular games in the country. V-Bucks are the in-game currency that users can use to buy items from the item shop or spend in other game modes. V-Bucks can be purchased with a credit card on the gaming platform or earned through completing missions and daily rewards. However, V-Bucks are not freely exchangeable back to real-world cash.
Roblox is another very popular game, especially among young people aged 9-15. Roblox in-game currency is Robux, which can also be used to upgrade the player's avatar or buy special abilities. Robux can be purchased, received through a membership stipend, or gained through a percentage of sales or game passes. However, unlike V-Bucks, Robux can also be cashed out for real-world money.
According to the company: “If you (a user of Roblox who is 13 years of age or older) both have at least 100,000 Robux in your account and are a member of Roblox Premium, you will be presented with an option to exchange your Robux for U.S. dollars at the then-current exchange rate set by Roblox ("Cash Out").”
Tax Questions About Virtual Currency in Maryland
Even though the IRS removed V-Bucks and Robux as examples of virtual currency, it does not mean those virtual currencies are not taxable. It may be more difficult to make a case that V-Bucks would be taxable because they cannot be traded between users nor exchanged for other currencies. However, Robux are exchangeable for cash. In fact, Roblox reports developer exchange payments to the IRS through a form 1099.
If you have questions about virtual currency and your taxes, talk to your Maryland tax attorney for help. Contact Gabaie & Associates, LLC for a free consultation on your state or federal tax issue at (410) 862-2198.