Will I get taxed on withdrawals from Real Cash Economy games?

Question

I'm a Dutch (from the Netherlands) player of a game called Entropia Universe.

Entropia Universe is a game owned by MindArk. MindArk is a company located in Sweden.

Entropia Universe is a game that uses a Real Cash Economy. You can deposit US dollars, and you will get PED (Project Entropia Dollar) in return. The exchange rate is fixed at $1 = 10 PED.

It's also possible to make withdrawals. Fees are 100 PED or 1%, whichever is higher, plus any transaction fees your bank will apply. Minimum withdrawal amount is 1000 PED.

I can take this PED and use it to buy an in-game weapon and in-game ammunition. I can then use these in-game items to kill in-game monsters. I may receive in-game items by killing these in-game monsters. If I sell these in-game items to an in-game shopkeeper or other players, I can get PED back. The game is designed to not let your profit in this way (giving about 90% returns for killing monsters). All the in-game items are owned by MindArk, or so the EULA says. Only the PED on my PED card is my property. I suppose this means that if MindArk goes bankrupt, I'm not entitled to claim the value of my items, only the value of the PED on my PED card. I suppose this also means that when I trade items with players, nothing is actually changing owners, and thus no taxes can be applied.

However, I can run services in the game. I can trade items with other players. Like this, I can earn PED.

My current situation is as such that I haven't made a single deposit yet. I've earned about 400 PED (of which 200 PED as PED, 200 more in items that I could sell to other players).

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Situation #1: I keep playing, and eventually earn 1000 PED. I withdraw this. Will I get taxed? If so, by how much?

Situation #2: I deposit $5000, play the game, lose some money and withdraw PED equal to $4000. Will I get taxed? If so, by how much?

Situation #3: I deposit $5000 and use this to buy in-game items. I later sell these items for massive profits (200%+, this can happen over the course of 2 years for sure). I withdraw $10000. Will I get taxed? If so, by how much?

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Basically: Will I get taxed on withdrawals from Real Cash Economy games? And do the taxes apply to the full withdrawal, or only on the profits? Or only on the profits above a certain amount?

Answer 1

Situation #1: I keep playing, and eventually earn 1000 PED. I withdraw this. Will I get taxed? If so, by how much?

This is probably considered an "award", so whatever your country taxes for lottery/gambling winnings would be applicable. If there's no specific taxation on this kinds of income - then it is ordinary income.

Situation #2: I deposit $5000, play the game, lose some money and withdraw PED equal to $4000. Will I get taxed? If so, by how much?

Since it is a game, it is unlikely that deducting losses from your income would be allowed. However, the $4000 would probably not be taxed as income (since you are getting your own money back).

Situation #3: I deposit $5000 and use this to buy in-game items. I later sell these items for massive profits (200%+, this can happen over the course of 2 years for sure). I withdraw $10000. Will I get taxed? If so, by how much?

Either the same as #1 (i.e.: ordinary income) or as capital gains (although tax authority may argue that this was not a for-profit investment, and capital gains treatment shouldn't be applicable).

Will I get taxed on withdrawals from Real Cash Economy games? And do the taxes apply to the full withdrawal, or only on the profits? Or only on the profits above a certain amount?

Generally income taxes only apply on income. So if you paid $10000 and got back $12000 - only the $2000 is considered income.

However some countries may tax full amounts under certain conditions. Such taxes are called "franchise taxes".

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For a proper tax advice consult with the locally licensed tax adviser.

Answer 2

"Income from a hobby" is tax exempt under Dutch law. To consider whether it's hobby, a few rules are applied such as: How much time do you spend on the activity? And is the hourly wage low? Obviously, having a boss is a sure sign of it not being a hobby.

The typical example is making dolls and selling them on a crafts fair. If you travel the country and sell each weekend on a different fair, that's a lot of time. If you only sell them on the fair in your home town, it's a hobby.

Situation 3 is the most difficult. If you just happened to luck out, it's still a hobby. If you spent significant time to improve the value of your holdings, e.g. by trading in-game, then it might be seen as work. In the latter case, you simply file it as "income from other sources, not yet taxed".

For the purpose of determining income from a hobby, you may deduct actual expenses. So, in your case they'd look at the net income of $-1000, which is not unusual for a hobby. It wouldn't be any different if you took up horse riding, decided that you didn't like it, and sell your horse at a loss.