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2022-05-23 | Selina Mathew
Axie Infinity is a Pokémon-like online video game developed by the Vietnamese start-up Sky Mavis that allows users to grow, breed, and fight their digital creatures known as Axies. Axies, like their Pokémon counterparts, have exaggerated cartoonish traits such as chubby, egg-shaped bodies with goat-like horns, acorn-like tails, and fish-like gills, and may wear an eyepatch or sunglasses. Unlike Pokémon characters, which have little value outside of the game, each Axie is a non-fungible token (NFT) that can be sold for cash or exchanged for cryptocurrency or another NFT.
What is a non-fungible token, exactly? It's essentially a one-of-a-kind digital asset that tracks ownership via blockchain technology. Anything digital, such as music, a tweet, this page, or, in the case of Axie Infinity, the game's characters, can be transformed into an NFT. The public may verify and trace who owns a non-fungible token using blockchain technology. As a result, you may buy or sell ownership of unique digital goods using a non-fungible token. An NFT is similar to a cryptocurrency like Bitcoin, Ethereum (ETH), or Litecoin in that it uses blockchain technology to track ownership (LTC). Unlike cryptocurrencies, however, each NFT may be given its own set of properties.
This is why non-fungible tokens are referred to as such. Cryptocurrency, on the other hand, is fungible, meaning you may exchange one Bitcoin for another. Non-fungible tokens are more like original works of art. You don't get the same thing if you exchange a Monet for a Rembrandt. The same may be said about NFTs.
Axie Infinity users may make money thanks to the game's usage of NFTs, as well as the game's expanding popularity and the developing NFT market. Indeed, the Philippines' Department of Finance and Bureau of Internal Revenue have apparently reminded local players that they must pay income tax on their Axie Infinity revenues because of this lucrative possibility.
The same is true for Canadian taxpayers who make money via Axie Infinity. However, pay-to-play games like Axie Infinity raise a variety of income-tax difficulties in Canada. For instance: Is it a tax-free windfall or taxable income if a Canadian taxpayer earns a profit playing Axie Infinity? When does a Canadian taxpayer's participation in a game constitute a "source of income"? How can Axie Infinity create revenue for a Canadian taxpayer? And do the various income-earning options have distinct tax implications? What is the nature of the money a Canadian taxpayer receives from the sale of NFT Axie characters in the game? Is it profit from a business? Income from investments? Is there a profit? Or perhaps a mix of the three?
This essay examines some of the income-tax difficulties raised by Axie Infinity and the non-fungible-token market in Canada. This article looks at some of the ways that Axie Infinity users may make money while playing the game. The essay then goes through the basics of Canadian tax regulations, such as what constitutes taxable income and how to tell one source from another. This article examines the Canadian income-tax implications of the means by which Axie Infinity users might earn profit while playing the game after studying the legal environment. This post continues with tax advice from our top Canadian tax experts for Canadian taxpayers who earn money through cryptocurrency-based, pay-to-play games like Axie Infinity.
While playing Axie Infinity, users may earn money in a variety of ways. Small Love Potion, the game's utility token, is usually sold for a profit by newer players (or SLP). When players' Axies win combat, they are rewarded with SLP. The SLP tokens have a specific in-game purpose: a player cannot breed new Axie characters without them. As a result, the tokens for the Small Love Potion are in high demand. SLP tokens may also be purchased, sold, and traded on the open market, just like any other cryptocurrency. As a result, for novice users, earning and selling SLP tokens is the easiest way to make money in Axie Infinity.
Axies can also be traded by Axie Infinity gamers. Each Axie character, as previously stated, is a non-fungible token that may be sold for cash or swapped for bitcoin or another NFT. As a result, players may breed and sell Axies on the open market. The lowest Axies cost around $200 per in early to mid-2021. Rare Axies, on the other hand, are more expensive. Two extremely rare Axies sold for a total of 150 ETH (about $68,000 at the time) in August 2020, and a single Axie sold for 300 ETH (around $130,000 at the time) in November 2020.
Finally, some Axie owners are renting out their axes to other gamers. To play Axie Infinity, a player must have at least three Axies. If a new player can't afford to buy three Axies, he or she can start for free by borrowing them from a lender (who are called "managers'’ in the game). The managers take a percentage of the player's revenues in exchange for renting out their Axies. For example, the manager may be entitled to a share of the SLP tokens acquired by the player while utilizing the manager's Axies.
Section 3 of the Income Tax Act of Canada lists the sources of taxable income in Canada.
Every Canadian tax resident is required to pay tax on "taxable income" under subsection 2(1) of the Income Tax Act of Canada.
Subsection 2(2) goes on to say that a taxpayer's "taxable income" is equal to their "income for the year" minus the deductions allowed under Division C of the Income Tax Act. (The loss-carryover rules, the lifetime-capital-gains exemption or LCGE, the part-year-resident rule, which makes offshore income non-taxable if earned when a taxpayer was a non-resident of Canada, and tax-treaty exemptions are also included in Division C.)
Section 3 explains how to calculate a taxpayer's "annual income." In doing so, the section mentions (in no particular order) the following "revenue sources":
Office, Employment, Business, Property, and Capital Gains are all terms that can be used interchangeably.
As a result, a person's taxable income is made up of various sources of income. The "source" idea has been used by Canadian courts to exclude certain receipts from a taxpayer's income.
The concept of "income from a source" has influenced how Parliament designed the Income Tax Act, as well as how courts interpret it. The essential concept is that a receipt is only considered income if it is obtained from a productive source.
Only "revenue from a source" is considered for determining a taxpayer's income for the year, according to Section 3 of the Income Tax Act. "Whether a taxpayer has a source of income is decided by evaluating whether the taxpayer wants to carry on the activity for profit, and whether there is evidence to support that purpose," the Supreme Court of Canada noted in Stewart v Canada (2002 SCC 46).
As a result, a source of income usually has one or more of the following characteristics:
It generates a yield that occurs on a regular basis.
It necessitates the taxpayer's organized effort, activity, or pursuit; it includes a marketplace exchange; it provides the taxpayer with an enforceable claim to payment; and it arises from the taxpayer's desire of profit (in the case of a source of business income or property income).
As a result, the definition of "income" under tax law excludes windfalls like gains from amateur gaming. Amateur or casual gaming does not generate revenue.
Even obsessive gamblers who repeatedly try their luck at a game of chance—say, the lottery—the activity remains a personal endeavor, not a source of money (e.g., see: Leblanc v The Queen, 2006 TCC 680).
This isn't always the case, though. In two situations, gambling profits are taxable business income. The first is when gambling is a sideline or event of a business, such as when a casino owner gambles at his own casino or when a horse owner trains, races, and bets on the races. The second scenario is when a person exploits his or her own skills to make a living from a gambling activity in which ability is a key factor, such as a pool player who challenges drunken pool players to a game of pool for money in cold sobriety.
What is the difference between business income, investment income, and capital gains?
Assuming that the action is a source of revenue, the next issue is: Which source? Is it salary from a job or salary from an office? Business earnings? Property-based income? Is there a profit?
This is an essential subject since different tax regulations apply to various types of income. For example, whereas business and investment income are both completely taxed, capital gains are only half taxable. Losses from a business or an investment are completely deductible against any source of income. Only half of a capital loss, on the other hand, is deductible, and the allowed component of a capital loss may usually only be used to offset the taxable portion of a capital gain.
We'll look at how to tell the difference between investment income (sometimes known as "income from property"), company income, and capital gains.
The return from property is referred to as investment income. Dividends are paid on stocks, for example. Bonds generate income. Royalties are derived from intellectual property. Rent is generated through real estate. And so forth. To put it another way, investment income is passive income derived from the simple ownership of property; it does not necessitate any considerable time, effort, or attention. For example, a person can buy public stock and get dividends without doing anything else. Dividends are considered investment income.
Business revenue, on the other hand, necessitates planning, deliberate effort, and some level of engagement. An investment dealer, for example, can buy and maintain a portfolio of public stock, but a cryptocurrency trader actively looks for chances to buy and sell bitcoin. The dealer is in the investing industry, whereas the bitcoin trader is in the trading business. Business income is made up of each company's revenues. A "enterprise" is defined as a "profession, vocation, trade, or undertaking of any sort whatsoever" under subsection 248(1) of the Income Tax Act of Canada. As a result, a "business" implies activity and a profit motivation. Activity, enterprise, entrepreneurship, and commercial risk are all typical features of a firm. A business is, above all, about making money.
A business is distinguished from a hobby or pleasure by its pursuit of profit (Stewart v Canada, 2002 SCC 46).
As a result, the distinction between business and investment income is based on the degree of work involved in earning the money. Although investment income is referred to as "income from property" in Canada's Revenue Tax Act, the mere use of a property does not imply that the income generated is investment income. It's the degree of exercise that counts. A taxpayer who actively maintains a hotel and a taxpayer who leases a basement flat, for example, both utilize a property and get rent income. The hotel manager, on the other hand, makes money from his company, and the homeowner makes money from his investment (rental).
While the utilization of property can result in either business or investment income, the Income Tax Act explicitly separates investment income from capital gains in paragraph 9(3). This provision states that income from a property (i.e., investment income) does not include a gain from the property's disposition. (It also says that a loss from property does not include a loss from selling it.) To put it another way, if you sell a property, the profit you make isn't taxed as investment income; it's either a capital gain or business income.
When you sell an asset that qualifies as "capital property," you get a capital gain (or loss). For tax purposes, the Income Tax Act of Canada recognises just two types of property:
Inventory, which is used to calculate business revenue, and capital property, which generates a capital gain or loss when sold.
Whether a property is a capital asset or inventory is determined by the sort of revenue it creates upon sale, such as capital gains or business income. To put it another way, you define the property after discovering the nature of the revenue, not the other way around. Even so, the conclusion is frequently ambiguous, necessitating the assistance of a knowledgeable Canadian tax lawyer.
While grappling with the ambiguity between investing, which results in a capital gain, and trading, which results in business income, Canadian tax courts have churned up an enormous body of case law over the years. When determining whether a transaction's profits or losses should be classified as capital or income, courts consider a variety of variables. These elements might include:
Frequency of transactions; length of ownership; market knowledge; relationship or likeness to the taxpayer's work or other company; time and energy spent on the endeavor; use of financing; and use of advertising
Finally, when assessing whether a transaction created a capital gain or business income, the taxpayer's purpose at the time of acquisition is the most crucial factor that tax courts examine. The question is whether the taxpayer bought the property with the intention of trading it. Nonetheless, a court must consider the objective elements surrounding both the acquisition and sale of the property in order to determine the taxpayer's purpose. In other words, courts will use the elements outlined above to determine a taxpayer's purpose.
Axie Infinity Players in Canada: Income Tax Implications
Two major takeaways may be found in the preceding sections. To begin with, a person's taxable income solely comprises "source income." This is why an amateur gambler's gains are not taxed. Amateur or casual gambling does not generate cash since it is often a personal endeavor that does not yield a consistent profit. When gambling is part of another business or the gambler makes a living from a skill-based game, it is considered a source of income and the earnings are taxed as business income.
The second point to remember is that a property might create business income, investment income, or capital gain depending on how it is used by the taxpayer. If the property generates revenue, the revenue may be classified as either business or investment income (i.e., income from property). The right tax classification is determined by the amount of action required to generate the revenue: company income necessitates activity, whereas investment income necessitates passivity. If the profit comes from the sale of the property, it might be classified as either business income or capital gain. The right tax classification in this scenario is determined by whether the taxpayer purchased the property with the purpose to trade.
So, how do these observations affect Axie Infinity gamers in Canada?
To begin, a player's engagement in Axie Infinity may or may not be a source of revenue. On the one hand, Axie Infinity is a skill-based game that also advertises its pay-to-win model. So, for the determined player who logs considerable playtime to breed Axies NFTs and sell them on the open market, there's very likely a source of taxable business revenue.
On the other hand, for a casual Axie Infinity player who earns SLP tokens but uses them for nothing other than in-game purposes, or who breeds Axies NFTs but never rents or sells them-no matter what their market price is-participation may be purely personal and hence not a revenue source.
The second point to remember is that Axie Infinity is a legitimate source of income for Canadian taxation. The problem for them is figuring out how to correctly record that money. A property can create commercial revenue, investment income, or capital gain, as previously stated. It all depends on how you use that property.
To be clear, the term "property" in the Income Tax Act covers intangible property like cryptocurrencies and non-fungible tokens. When Axie Infinity players sell or trade their Small Love Potion tokens, breed, sell, or trade their NFT-based Axie characters, or managers rent out their Axie characters for a percentage of player revenues, they've all utilized a property to create money for tax reasons. And the kind of that revenue is determined by how the property was utilized. For example, depending on the size of the enterprise and the degree of activity involved, the manager who leases out Axie characters may be making investment or commercial revenue.
A player who breeds Axies solely to sell them may benefit financially from the sale of an Axie. However, for a manager who has utilized the Axie as a source of income for years, the sale of an Axie might result in a capital gain.
Finally, Canadian Axie Infinity players should be aware that no single tax-law study will cover all possible scenarios. The tax ramifications will be determined by each taxpayer's unique set of circumstances. This implies that Canadian taxpayers who earn money through cryptocurrency-based, pay-to-play games like Axie Infinity should get familiar with their tax requirements by consulting a Canadian tax counsel.
According to the Department of Finance (DOF), players of the popular online game Axie Infinity who sell "pets" and make money in the real world must pay their income taxes.
Last Monday, Finance Undersecretary Antonette Tionko told reporters, "Whoever gains cash from it, it's income you should disclose."
Thousands of Filipinos are becoming addicted to play-to-earn games like Axie Infinity, where users earn cryptocurrencies and non fungible tokens (NTFs) by nurturing fantastical animals called "axies," according to CNBC in May.
While players cannot now profit from the NTFs they earn in the game, trading pet axies online may yield thousands of pesos.
Tionko stated that axies are taxed regardless of whether they are paid in cash or in kind.
Even the cryptocurrency generated in Axie Infinity were taxable, according to Tionko, albeit the government had yet to establish a system to calculate the amount and collect tax on these digital assets.
"Because cryptocurrency is an asset, it is already subject to taxation in the Philippines." What type of tax is imposed? The profits are almost certainly taxable. But, when you get down to the nitty-gritty, a lot of it will be determined by its classification, which I believe would be decided by the Securities and Exchange Commission and the Bangko Sentral ng Pilipinas. Is it a matter of safety? Is it a unit of account?
Over a third of the P3.29 trillion in tax and non-tax revenues that the government plans to receive next year would come from income taxes, according to documents on the projected P5.024 trillion national budget for 2022.
Taxes on net income and profits would account for P1.25 trillion of the P3.13 trillion in tax revenues anticipated for collection in 2022, while VAT would provide P443.98 billion.
The BIR was given the job of collecting P2.43 trillion in taxes next year, up from P2.08 trillion this year.
Meanwhile, the BOC's target for 2022 was P671.66 billion, up from P616.75 billion in 2021.
Thousands of Filipinos become addicted to play-to-earn games like Axie Infinity, in which users earn cryptocurrency and non-fungible tokens (NFTs) by breeding and exchanging mythical creatures called axies during Covid-fueled lockdowns.
While the NFTs cannot currently be monetized, users may make money in the game by selling these digital pets online - a lucrative hobby worth thousands of pesos. The DOF deemed all axies to be taxed, regardless of whether they were paid for in cash or in kind.
Sky Mavis, the Vietnamese creator of Axie Infinity, is now unable to compute her revenues from the game since she is a non-resident foreign entity.
Axie Infinity is one of the world's most popular blockchain games (Read: Why Axie Infinity is no Ponzi scheme). Because of the popularity of such games, various decentralized gaming guilds have sprung up in the Philippines, like Yield Guild Games, which assists cash-strapped people in joining the fast-growing community.
MANILA, Philippines (UPDATED) – According to the finance ministry, players of the popular online game Axie Infinity who trade "pets" and earn real-world money must pay income taxes on these transactions ( DOF).
Last Monday, Deputy Finance Secretary Antonette Tionko told reporters, "Whoever makes money out of it is income that you have to declare."
Thousands of Filipinos have grown addicted to up-and-coming games like Axie Infinity, where users win cryptocurrencies and non-fungible tokens, according to a report by CNBC in May. (NTFs). by raising magnificent monsters known as "axes"
While players are unable to profit from the NTFs they earn in the game, online pet axe selling can make thousands of pesos when sold.
Tionko stated that axies are taxed whether they are paid in cash or in kind.
Even the bitcoin produced in Axie Infinity is taxable, according to Tionko, but the government has yet to establish a system to calculate the amount and collect tax on these digital assets.
"Because cryptocurrency is an asset, it is already subject to taxation in the Philippines." What kind of tax is imposed? "The earnings are undoubtedly liable to income tax," Tionko stated.
"However, if you look at the facts, a lot of it will depend on its categorization, which I believe is something for the SEC and the BSP [Bangko Sentral ng Pilipinas] to decide," she added.
"Is it a safety issue?" Is it a unit of account? So these aspects will assist us in determining how it should be taxed. "However it is defined, it is taxable and subject to income tax," Tionko noted.
The purchase of tokens to play the game, however, is not taxed, according to Tionko.
"Remember the tax principle: it is a flow of wealth." Buying is thus not a wealth transfer. "Perhaps it's taxable for them if you buy it at a discount, but that goes into the weeds," she explained.
Sky Mavis, the Vietnamese game developer behind Axie Infinity, is still waiting for the Philippine tax authorities to collect income from the game.
According to Tionko, Sky Mavis is a non-resident foreign corporation that is not registered in the Philippines, according to a report from the Bureau of Internal Revenue (BIR).
"Once we have this registration mechanism for non-residents, these sorts of enterprises that are not in the Philippines," Tionko added, "this is one of the things that we expect to grasp."
Bills to apply a 12% value added tax (VAT) on digital products and services, particularly transactions through worldwide internet platforms, are pending in Congress.
More than a third of the 3.29 billion pesos in tax and non-tax revenue the government plans to collect next year will come from the 'income tax,' according to documents on the 2022 billion peso national budget proposal.
Taxes on net income and profits are estimated to provide 1.25 trillion pesos to the 3.13 trillion pesos in tax revenue targeted for collection in 2022, while VAT is expected to contribute 443.98 billion pesos.
The BIR was given the duty of collecting 2.43 trillion pesos in taxes next year, up from 2.08 trillion pesos this year.
Meanwhile, the BOC's 2022 goal was 671.66 billion pesos, up from 616.75 billion pesos in 2021.
The Philippines' government has taken notice of Axie Infinity, a game in which users may trade, train, and combat their 'pets' while also earning money. The government now wants to tax gamers' profits.
"Because cryptocurrency is an asset, it is already subject to taxation in the Philippines... "Anyone who gains money through [Axie Infinity] should disclose it ," Philippine Finance Undersecretary Antonette Tionko told the Inquirer.
In the midst of the COVID-19 outbreak, Axie Infinity has apparently become a popular method for Filipinos to pass the time. Its 'play to earn' strategy helped people pay their bills and put food on the table after losing their jobs due to the economic downturn.
According to Sky Mavis, the company behind Axie Infinity, the majority of gamers on the platform are from the island country, accounting for little more than 40%.
Nobody is sure how the new tax would affect Axie Infinity players. On the one hand, a tax appears to be justified whenever money is earned. Regulators, on the other hand, are unsure of 'what' to tax: the actual NFTs or the in-game crypto tokens?
For those unfamiliar with the game, the NFTs are the game's charming Pokemon-like 'pets,' known as Axies. Users may use them to teach, upgrade, and combat other pets.
Axie Infinity Shards (AXS) and Small Love Potion (SLP) are the tokens, and there are two of them (SLP). AXS is traded on cryptocurrency exchanges such as Coinbase. AXS may be purchased with regular dollars or by swapping other cryptocurrencies. According to Sky Mavis, the native token will eventually act as a governance token, giving holders a vote in the game's growth.
SLP, on the other hand, is awarded to players in exchange for their time spent in the game. These tokens may be obtained by completing in-game tasks and fighting other Axies. The more a player plays the game, the more SLP they will likely accumulate.
The two cryptocurrencies are significant because they can be used to 'breed' new Axies, which is the only method for new pets to be created.
According to Tionko, the central bank or the country's Securities and Exchange Commission (SEC) would most likely decide whether the 'pets' will be taxed or the in-game token will be taxed. It doesn't help matters because the game's creator, Sky Mavis, is not currently registered with the Bureau of Revenue, despite the fact that the game generates revenue from Filipinos.
"Is it a safety issue?" Is it a unit of account? So those are the factors that will help us create the laws for taxation. "But it's taxable – subject to income tax," he told the Inquirer, regardless of how it's defined.
The Department of Finance (DOF) said that earnings from online play-to-earn games like Axie Infinity are taxable.
Finance Undersecretary Antonette C. Tiono noted that gains from these gaming platforms are subject to income tax, notwithstanding the huge surge in popularity of online multiplayer video games that also allow gamers to make money.
Tionko revealed that the DOF and the Bureau of Internal Revenue (BIR) are investigating Axie Infinity, a Vietnamese firm Sky Mavis adventure online game.
Players may earn in-game cryptocurrency that can subsequently be sold and swapped for pesos in Axie Infinity, a blockchain game whose popularity exploded in the country during the outbreak.
However, in order to play the game, users must first acquire three digital creatures known as "Axies," which they will breed to create avatars who will fly on the battlefield. The rewards for completing the combat are cryptocurrency.
Tionko did reveal, however, that the Securities and Exchange Commission (SEC) and the Bangko Sentral ng Pilipinas are still debating whether "Axie" is a money or a security (BSP).
"However, it's taxable, subject to income tax," said Tionko, who leads the Department of Finance's Revenue Operations Group.
An "Axie" used to cost approximately P250, but due to the virtual game's quick surge in popularity, its price has risen to around P33,000 per digital pet.
"Keep in mind that taxation is a flow of money," she said.
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