Gaming & e-sports: the virtual world remains sales tax-free (for now)

As the new metaverse shows: the boundaries between digital and virtual worlds are becoming increasingly blurred. Manufacturers of virtual reality technology have long since recognised that the need for complex, virtual worlds is immense and needs to be differentiated further.

This includes the fact that, especially in online role-playing games, there is a market for virtual goods that only exist within the respective game. The German Federal Fiscal Court (Bundesfinanzhof, BFH) has now addressed the question of whether the trading of virtual goods triggers sales tax. The BFH deems there to be no sales tax liability in the virtual world, but only once virtual money is exchanged for real money.

Virtual in-game trading - a billion-dollar business

Virtual markets usually involve integrated monetary currencies and transaction systems. Depending on the game, these internal economies are also connected to the real market via a kind of currency exchange. Players can then exchange virtually earned money for real money and generate income. Trading usually takes place within the respective game itself or on collection platforms such as steam. Revenue from such in-game sales was estimated at around EUR 3 billion in Germany alone in 2020.

BFH: no sales tax in the virtual world

The BFH recently had to decide whether a player's trade with virtual land constituted a service that was subject to sales tax under Section 1 (1) sentence 1 No. 1 of the German Turnover Tax Act (Umsatzsteuergesetz, UStG) (see ruling dated 18 November 2021, docket No. V R 38/19). The Fiscal Court (Finanzgericht, FG) of Cologne had previously affirmed this and had rejected the revocation of the corresponding sales tax assessments. The BFH has now drawn a clear distinction between virtual, in-game trading and participation in real economic transactions. This delimitation is not only important for the individual case.

In the case up for decision, the player leased to other players virtual land to which he was entitled in the gaming area, receiving virtual money in the game's own currency in return. For this purpose, the homepage of the company operating the game even offered a document called "lease agreement", which was used by the players involved.

However, according to the terms of use of the company operating the game, the virtual lease constituted a limited licence right in the form of a virtual token that made certain content, applications, services and user-developed functions available to the player. The player then exchanged the game's own currency for real money via a kind of internal currency exchange of the company operating the game.

No economic benefit in the virtual world

The FG Cologne had regarded the lease of the virtual land to another player to be a service that was subject to sales tax and essentially justified this with it constituting an exchange of services. The BFH, however, differentiated between the virtual lease on the one hand and the exchange of the gaming currency into real money on the other hand in its determination of the subject matter of the service:

A service subject to sales tax requires "that an identifiable consumer be provided with an advantage that could form a cost factor in the activity of another participant in the economy." In other words: leasing virtual land may constitute an advantage in the game, but it is not an economic advantage that can be measured in monetary value. The BFH went on to state that its purpose was interaction with other game participants and the structuring of the gaming experience. The "lessee" of the virtual land certainly does not have any economic benefit. Consequently, he would not be entitled to deduct input tax from an in-game input service.

Hence, the in-game economic activity in return for in-game currency has to be assigned to the non-taxable area. This is not changed by the fact that the players conclude a "lease agreement", because "this is not associated with any meaning beyond the gaming experience, let alone a real legally relevant action".

Sales tax upon exchange into real money

According to the BFH, this changes as soon as game currency is exchanged for real money. This is because a distinction must be made between the relationship between the players among themselves and the relationship between the player and the company operating the game. The game currency is basically a contractual right. This was transferred for real remuneration on the gaming company's internal exchange. Thus, this transaction was no longer confined to a mere participation in the gaming event, but took place in the real market. By transferring the contractual right "game currency", the player provided the respective recipient with a virtual game object for later use in the game and thus with a consumable benefit. The BFH compared this to the situation in which organisers of sporting events provide corresponding playing equipment against payment. Accordingly, by exchanging the gaming currency, the player provided another service against payment that is subject to sales tax.

BFH decision raises questions

The interrelationship between the virtual and real world can be relevant for sales tax purposes, whilst purely virtual service relationships should not be taxable. At first glance, this seems clear. However, this is not mandatory; after all, one can take the view - without this requiring much effort to justify - that the in-game (and successful!) lease was obviously also the basis for the subsequent transaction subject to VAT.

The literature also points out that, although cryptocurrency is ultimately a virtual right, it is tradable and can lead to tax-relevant turnover. Why should this be different for an in-game currency? It also remains unclear whether the principles established here can automatically be applied to any type of virtual currency.

Whether this clear distinction by the BFH between the virtual and real worlds can therefore always be maintained in the future is not yet clear. The interrelationships between the virtual and real worlds of relevance to decision-making process here are probably just the beginning of it all. However, players should keep in mind that, at the latest, money that is earned in real terms based on in-game services can lead to taxable turnover if the other requirements of Sections 1, 2 UStG are met.

In addition to the sales tax consequences, players who regularly generate money based on virtual gaming successes should consider possible income tax consequences. According to the BFH’s case law on the income tax liability of winnings of online poker players (see most recent ruling of 25 February 2021), the overall picture presented by the circumstances in each individual case is decisive. While one-off profit generated from trading virtual items probably will not yet give rise to an income tax liability, a person who makes a living from it will have to declare the income to the tax office. However, there is no rigid limit above which profits are taxable.


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Martin Brandenburger-Nonnast<br/>LL.M.

Martin Brandenburger-Nonnast

Junior PartnerAttorney
Konrad-Adenauer-Ufer 23
50668 Cologne
T +49 221 2091 548
M +49 151 1403 3886



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