Web3 tax: The complete guide
16 Mar, 2023 · 4 min read
Web3 may be the virtual world, but the taxes are quite real.
Web3 and the Metaverse were one of the most popular words of 2022, with people and companies building the virtual world with new games, applications, and use cases.
Let’s cover how to do your Metaverse taxes, how the Web3 is taxed, if earning tokens in play-to-earn games is taxable, and more!
Let’s cover how Web3 taxes work, from buying and selling Web3 tokens to earning income from Web3 games and the Metaverse.
Is buying and selling Web3 tokens taxable?
Yes, if you buy tokens from Web3 infrastructure providers, tools, or other projects with crypto, you’d have a taxable event in the US.
If you use crypto to buy popular Web3 ecosystem tokens like FET, AUDIUS, LPT, or others, you’d have to determine your capital gains and generate tax reports based on those gains/losses.
Do you pay taxes earning crypto on Web3 games?
Yes, if you earn any crypto income from play-to-earn games, you’d have to report those new tokens and pay income taxes.
If you earn income from Web3 games, you need to determine the Fair Market Value (in USD) at the time you receive the income, report it in your 1040 Form, and pay the appropriate income taxes.
Are there taxes in the Metaverse?
Yes. The Metaverse is the virtual world, but there are real taxes to be paid if you trade tokens in a Metaverse ecosystem or earn any crypto income.
For example, if you trade NFTs or tokens in a Metaverse virtual game, you’d have to determine the gains from those trades, report it in your taxes, and then pay capital gains taxes.
If you earn any income from airdrops, rewards, or other income from Web3 projects, you’d have to determine the Fair Market Value (in USD) at the time you receive the income and then report it in your US Individual Tax Return.
Do you pay taxes trading NFTs on decentralized games?
Yes, if you trade NFTs on any platform, from centralized exchanges to decentralized games, you’d have to pay taxes in the US.
Trading NFTs in the US is a taxable event, subject to capital gains taxes, with your effective rate being dependent on the holding period of your NFT.
If you held it for 12 months or less, you’d have to pay capital taxes, ranging from a rate of 10% to 37%. If you held it for over 12 months, you’d have to pay taxes between 0% and 20%.
Is trading digital land taxable?
In the Metaverse, you can buy and trade digital land, incurring in a taxable event, similar to trading NFTs in the US.
If you buy and sell digital land, you need to determine the capital gain in that transaction like you would when buying and selling a token and report that gain. After determining the gain, the capital gains tax rate will depend on the holding period of the purchased digital land.
Is getting paid from a DAO taxable?
Yes, if you earn a salary from your contribution to a Decentralized Autonomous Organization (DAO), you’d have to pay income taxes.
You’d need to determine the Fair Market Value (in USD) each time you’re paid in crypto for your work and then report that income in your US Individual Income Tax Return.
Is earning interest from a Web3 provider taxable?
Yes, in the US, earning interest from any investment vehicles, from staking Ethereum to providing liquidity to a decentralized provider, will be taxed at the income level.
You’ll need to determine the Fair Market Value (in USD) of the interest or staking rewards you receive at the time you receive them and report it in your income tax return.
Do I pay taxes from node work?
If you perform node work for a Web3 infrastructure provider, you’ll receive tokens in the form of rewards, and those will be taxed at an income level.
You’ll have to determine the Fair Market Value (in USD) of all the tokens you receive from this work and report it on Form 1040.
If you receive rewards from owning nodes, you’d be taxed at the income level and need to determine the FMV (in USD) of all the rewards you receive.
The best crypto tax software: CoinTracking
The best crypto tax software in the market is CoinTracking.
You can import your trades using CSV or API, track your gains/losses, and generate tax reports according to your preferred accounting method.
CoinTracking is your full crypto tax solution for:
- Importing (API & CSV) your trades from 110+ exchanges.
- DeFi and NFT support with our ETH+DEX importer.
- Importing your Binance Chain, Binance Smart Chain, and MATIC transactions.
- 25+ advanced reports, including which coins offer you a tax-free rate.
- Automatic capital Gains, according to 12 accounting methods (e.g., FIFO, LIFO, HMRC, ACB), accepted worldwide.
- Generating complete Tax Reports in your country.
Moreover, CoinTracking can easily classify all your earnings from yield farming, liquidity pools, crypto staking, and much more.
Crypto taxes with no errors: CoinTracking Full Service in the US
CoinTracking also offers a Full Service for US traders. A crypto reconciliation tax expert from Polygon Advisory Group, a leading US crypto tax firm, will review your CoinTracking account, help fix any errors, and ensure you submit your crypto tax reports error-free.
This post is part of the Crypto Taxes AMA series. Follow our weekly AMAs on Twitter where our expert CPA, Sharon Yip answers your crypto tax questions. You can download 35+ AMA crypto tax reports for free.
Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.