Here's how the new crypto regulations are impacting gaming rewards

The advent of cryptos and blockchain has taken the multi-billion dollar entertainment industry to a whole new level. One of the primary beneficiaries of blockchain technology is crypto gaming, especially play-to-earn games. Players need digital assets such as digital property, weapons or wearables while playing crypto games purchased with cryptos. Game designers build transferable and unique in-game objects using the blockchain. You can trade these objects for cryptos. Moreover, online games offer rewarded advertisements where you complete specific tasks to earn cryptocurrencies. Let's understand how crypto laws affect gaming rewards.

What are gaming rewards in cryptos?

You can earn cryptos by focusing on play-to-earn blockchain games or GameFi. It involves making an initial contribution to play the crypto game.

Many crypto games run on the Ethereum Blockchain. You must purchase Ethereum by converting your money through a crypto exchange. Moreover, crypto games offer rewards through Non-Fungible Tokens (NFTs) or in-game currency for computing challenges and quests.

NFTs are digital assets with unique identifying codes representing real-world objects like videos, art, music and games. You can convert NFTs and in-game currency into real-world currency or other cryptos.

One of the main differences between online video games and crypto games is that you can transfer in-game currency outside of the game and exchange it for NFTs or cryptos.

How do crypto laws affect gaming rewards?

The government has introduced a 30 per cent tax on the transfer of virtual digital assets or VDAs effective from April 01, 2022. As cryptos are classified as VDAs, one incurs this tax on crypto income without allowing for the deduction of expenses except for acquisition cost. Moreover, the newly introduced law impacts in-app purchases and reward points offered by crypto gaming apps.

The government proposes to impose a 1 per cent Tax Deducted at Source (TDS) on virtual digital asset transactions. Moreover, you would incur TDS on in-app purchases and rewards from crypto gaming apps where the burden of compliance falls on the buyer.

However, grey areas persist around the levying of TDS for in-app purchases of gaming assets in crypto games. For instance, if you buy weapons in a crypto game, would TDS be levied each time you buy a new weapon or is it applicable in every game?

Let's understand the taxation of crypto gaming rewards with an example. Suppose you earn five tokens worth Rs 10,000 as rewards for winning crypto games. Two taxable events arise in this scenario. Firstly, you incur a 30 per cent tax on the market value of the tokens when you win them. It is considered as a gift from the gaming company and the receiver of the reward is liable to pay tax at 30 per cent. It translates to Rs 3,000, which is 30 per cent of Rs 10,000.

The next taxable event occurs when you sell or transfer these tokens. You are levied a tax rate of 30% after deducting the acquisition cost. The acquisition cost is the market value of the tokens considered when paying tax at the time of winning the game.  

Suppose you sell five tokens for Rs 25,000. You will have to subtract the acquisition cost of Rs 10,000 from the token's selling price of Rs 25,000. You incur taxation of 30 per cent on Rs 15,000, which translates to Rs 4,500. Note that detailed instructions about this tax should be determined are not yet laid down.

Crypto tax impacts people who earn reward points and make in-app purchases in crypto gaming. Moreover, the industry fears higher tax levels could drive people out of crypto gaming, affecting the industry. Crypto gaming has vast potential, but crypto taxation rules on rewards and in-app purchases will impact how the industry moves forward.

Views are personal. The author is founder and CEO, Clear.