Every innovation generates its own debate and questioning. Non-fungible tokens (NFTs) are no exception. This new form of cryptographic asset represented, in its early days, works of art such as paintings or music. The question of their legal status was already the subject of intense debate. But, with the emergence of projects like Axie Infinity, NFTs have gone beyond the artistic category and the question of taxation associated with these assets is beginning to be raised with acuity throughout the world.
Axie Infinity, the new gaming and NFT phenomenon
Axie Infinity is a game developed by Sky Mavis, based in Vietnam. It is an online adventure game that requires players to purchase NFTs to play. These same players can also earn tokens when they win games on the game. The concept of Axie Infinity is simple, players purchase Axies in the form of NFTs, then these digital creatures (quite similar to well-fed Pokemon) are raised and trained. Once an Axie is well trained, the player finds themselves able to take part in battles allowing them to earn cryptocurrency rewards or resell their Axie in hopes of a higher value.
Since the beginning of the summer, Axie Infinity and its two native tokens, Small Love Potion (SLP) and Axis Infinity Shards (AXS) are all the rage. In fact, Axie Infinity is the NFT project that has generated the most sales, surpassing even the popular CryptoPunk. In addition, the Axie Infinity blockchain is the protocol that has generated the most revenue in fees with $515 million over the last 3 months, nearly double the fees paid on the Ethereum network.
This spectacular craze is necessarily reflected in the prices of SLP and AXS, which have soared this summer. The SLP has risen more than 900% since May 1, 2021, while the AXS has risen more than 2,000% over the same period. And, it just so happens that 40% of the users of this protocol live in the Philippines. Indeed, the country’s economy is moribund and gambling has become an excellent source of income for Filipinos, which does not please the authorities.
Philippines wants to tax Axie Infinity users’ earnings
According to the Manila Bulletin, the Department of finance (DOF) of the Philippines is now considering taxing Sky Mavis, the operator of the Axie Infinity universe. This is because the government considers the profits made by blockchain-based gaming companies to be taxable in the country.
But the Philippines’ fiscal ambitions do not stop there. Indeed, the authorities are also studying a possible taxation of the gains made by Axis users. Antonette Tiono, Secretary of Finance, admits that the legal classification of Axis is not yet clear. Indeed, the question of whether Axies are a currency or a financial asset is still undecided in the Philippines:
“Cryptocurrencies are assets, so they are already taxable in the Philippines. What kind of tax applies? Certainly capital gains are subject to income tax […] Is it a security? Is it a currency? These are the elements that will help us define the taxation rules. But, regardless of how they are classified, they will be subject to income tax.”Antonette Tiono, Philippine Secretary of Finance
As you can see, regardless of the classification assigned to Axies, users will have to report capital gains on Axie sales. But even if these gains are now considered taxable, a mechanism to determine the taxable amount and how to tax them is yet to be determined. Tionko is relying on the Philippine Securities and Exchange Commission (SEC) and the Bangko Sentral ng Pilipinas (BSP) to define the tax framework.