Tax
Esports: What’s in the Tax?
The emergence of the metaverse has highlighted how the lines separating the digital and virtual spheres are becoming less distinct. Virtual reality tech pioneers are now realizing the growing demand for intricate virtual environments. A key element of this shift is the flourishing commerce of virtual items, exclusive to online role-playing platforms.
Tax Implications for Virtual Items
The German Federal Fiscal Court (Bundesfinanzhof, BFH) recently delved into the issue of whether the sale of virtual items should be subject to sales tax. Their conclusion was clear: Transactions within the virtual environment remain exempt from sales tax until such a time when virtual currency is converted into actual money.
The Financial Landscape of the Virtual Economy
Digital platforms typically have their own financial systems and transactional procedures. Some platforms even offer a unique opportunity for players to convert their virtual achievements into actual cash, marking a prosperous venture. To give a clearer picture, the revenue from such virtual transactions in Germany alone amounted to an impressive EUR 3 billion in 2020.
BFH’s Perspective on Digital Taxation
In a landmark case, the BFH was tasked with determining if a gamer’s transaction involving the virtual property was a taxable event under the German Turnover Tax Act (Umsatzsteuergesetz, UStG) (BFH, 18 November 2021, Case No. V R 38/19). While the Fiscal Court (Finanzgericht, FG, Judgment of 13 August 2019, Case No. 8 K 1565/18) of Cologne had earlier sided with this notion, the BFH set a boundary, distinguishing in-game virtual transactions from real-world financial activities.
At the heart of this case was a gamer who rented out virtual plots to fellow players in exchange for the game’s digital currency. Interestingly, the game’s administrator even facilitated a “rental contract” for such transactions. Yet, this virtual rental was defined in the game’s terms as a restricted license, symbolized by a digital token. The gamer later traded this virtual currency for tangible money.
The Debate Over Economic Value in the Virtual World
The FG Cologne viewed the virtual plot rental as a taxable advantage. However, the BFH countered that a transaction should offer a tangible economic benefit for a transaction to be taxable. While renting out virtual plots might enhance the gaming journey, it doesn’t provide a concrete economic advantage. In-game activities in exchange for digital currency are categorized as non-taxable.
Yet, the narrative shifts when in-game currency is exchanged for tangible money. The BFH drew parallels to scenarios where sports event organizers charge for equipment usage. In this context, trading digital currency becomes a taxable service.
Emerging Concerns and Implications
The BFH’s pronouncement has spurred discussions. While the distinction between digital and tangible services seems straightforward, there are nuances. For instance, if digital rights like cryptocurrencies can lead to taxable outcomes, why should in-game currencies be any different? The sustainability of the BFH’s clear division between these realms remains to be tested.
Gamers should be cognizant that tangible profits stemming from in-game activities could be taxable. Moreover, regular monetary gains from virtual gaming might also bear income tax implications. As highlighted by the BFH’s stance on the taxability of online poker profits (BFH, Judgment, 25 February 2021, Case No. III R 67/18), the broader context plays a crucial role. Sporadic profits from selling virtual assets might not be taxable, but consistent revenue might be.
