For the taxman, going after crypto deals may be a tedious task

MANILA, Philippines – *Frederic, 30, is a government employee and a cryptocurrency trader on the side.

He initially invested P70,000 in early June to play a Pokemon-inspired game called Axie Infinity, one of the fastest-growing non-fungible token games in the market. In just two months, Frederic has already earned back his money and has since reinvested it to build a team of “scholars”, a term attached to people sponsored by players like Frederic to play a team of Axies on his behalf under a revenue-sharing scheme they agree to.

“At first, I was playing a scholar for a short time,” Frederic said in an online exchange. “I slowly built my team of scholars. It's a small group, though, just 4 of them, unlike other friends of mine who have more than 20 scholars.”

Frederic represents a new wave of investors who are out for a piece of this modern-day gold rush, largely riding on new money circulating in cryptocurrencies and online games at a time the coronavirus pandemic is smashing economies and throwing people into unemployment.

The cryptocurrency market, estimated to be valued at $2.2-trillion, has gotten so popular even at home that it caught the attention of the cash-strapped Philippine government. Last month, the Department of Finance and the Bureau of Internal Revenue said they are now studying how to collect taxes from cryptocurrency deals, adding a reminder to investors that their earnings from these platforms are subject to taxes. Under the law, those who earn a maximum of P250,000 annually are exempted from income taxes.

But it seems capturing burgeoning cryptocurrency deals in the Philippines won’t be an easy task for the taxman.

“As of now, it is not possible for investors, traders, and Axie Infinity players to be taxed unless they convert their blockchain assets into a currency that the Philippine government can regulate e.g. Philippine peso,” Beryl Li, co-founder of Yield Guild Games, a Filipino-led startup that employs “scholars” to play games like Axie, said in an interview.

In their inception, cryptocurrencies were set up to be free from government regulation. Trading cryptocurrencies real-time in platforms such as Binance either happens through peer-to-peer transactions or spot purchases, which are all decentralized and under the cover of anonymity.

For Axie players, they can easily receive earnings through platforms like GCash, a digital wallet. Tracing these transactions would be difficult, since the government would have to ask the platform for user information. In an interview, Aleksander Leonard Larsen, chief operating officer and co-founder of Sky Mavis, developer of Axie, said they have reminded subscribers to “abide by the law of their home countries”.

However, the government has ways to go after these earnings. Finance Undersecretary Antonette Tionko earlier said regulators are assessing how they can put up a registration system for non-resident foreign firms like Axie, which is based in Vietnam.

Eleanor Roque, tax principal for P&A Grant Thornton, said the government could employ automatic exchange of information mechanisms — put in place by world governments to curb tax evasion — among other things.

“The government has mean to request information from foreign governments under the exchange of information mechanisms. They can use that,” Roque said in an SMS exchange.

“Or they can pass a law similar to the digital tax laws in other countries where major online companies are forced to register and be withholding agents for income paid to Philippine taxpayers,” she added.

'Taxes better than no earnings at all'

Cryptocurrencies have become an option for Filipinos to invest their hard-earned money, provided they’re aware of its volatility since it never stops trading. On the other hand, the play-to-earn Axie has transformed working-class Filipinos into cryptocurrency traders with a lucrative side gig, with all the mechanics of addictive online gaming.

As it is, any form of taxation is always unpopular, but analysts believe it is unlikely to dampen investor interest in cryptocurrencies.

“Most of us are subject to paying taxes on our sources of income; this does really deter us from working, investing and earning.  The same goes with cryptocurrency investors, traders and play-to-earn gamers,” Nichel Gaba, founder and CEO of Philippine Digital Asset Exchange, said in an interview.

“Anytime something new comes along, market structures and regulators have to quickly adapt. Clarity on regulation and taxation may actually be good for the space, helping integrate it into the mainstream economy,” Gaba added.

Yield Guild Games’ Li agreed with Gaba, adding that levies on income are better for investors than earning nothing at all amid hard times. It is said that Axie players can earn about P30,000 per month, almost double Metro Manila's minimum wage.

“The overwhelming majority of Axie Infinity players come from low-income backgrounds, and are either unemployed or underemployed. Even an income that is substantially reduced by taxation is better than no income at all,” Li said.

For Louis Delos Santos, a 26-year-old electronics and communications engineer who has invested P85,000 to play Axie, the proposed taxes may cause “anxious feelings”, but the measures are unlikely to deter people from playing.

“As long as players can play, the taxes won’t affect the player base,” Delos Santos said.

*Source requested not to display his real name.