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Real Canadian Tax Consequences of ‘Axie Infinity,’ a Vietnamese Fantasy Online Video Game that uses NFTs

Picture of teenager with headset playing video game
By: Crypto Tax Lawyer

Published: March 7, 2023

Introduction - What Is Axie Infinity?

Axie Infinity is an online video game similar to Pokémon that allows users to grow, breed, and battle their virtual pets, known as Axies. It was created by the Vietnamese start-up Sky Mavis. Similar to their Pokémon counterparts, Axies are imagined cartoon creatures with exaggerated cartoonish traits. They have chubby, egg-shaped bodies with goat-like horns, acorn-like tails, and fish-like gills, and they can be wearing eyepatch or sunglasses. Each Axie is a non-fungible token (NFT), which can be sold for money or exchanged for cryptocurrencies or other NFTs. This contrasts with Pokémon characters, which are of no value outside of the game.

So what precisely is a non-fungible token? It is essentially a special digital asset that uses blockchain technology to monitor ownership. Everything digital may be made into an NFT, including songs, tweets, articles such as this one, and, in the case of Axie Infinity, the game's characters. With the use of blockchain technology, anybody can confirm and keep track of who is the owner of a certain non-fungible token. So, you may purchase or sell ownership of one-of-a-kind digital objects using a non-fungible token. An NFT is comparable to a cryptocurrency like Bitcoin, Ethereum (ETH), or Litecoin (LTC) in that it uses blockchain technology to track ownership. Nonetheless, each NFT may be given distinctive properties, unlike cryptocurrencies. For this reason, non-fungible tokens are called such. On the other hand, trading one Bitcoin for another will give you the exact identical item since cryptocurrency is fungible. The closest comparison to an original work of art is a non-fungible token. One does not obtain the same thing if individuals exchange a Monet for a Rembrandt. With NFTs, the same remains true.

Players of Axie Infinity are able to make money thanks to the usage of NFTs in the game, as well as the game's rising popularity and the expanding NFT market. In fact, it is said that the Philippines' Department of Finance and Bureau of Internal Revenue informed local players that they must pay income tax on their Axie Infinity revenues as a result of this exact potential to earn money.

For Canadian taxpayers who use Axie Infinity as a means of income, the same holds true. Yet, play-for-pay games like Axie Infinity raise a lot of Canadian crypto tax issues. Consider this: Do Axie Infinity winnings accrued by Canadian tax payers as a result of winning in the game fall under the tax-free or taxable income category? When does a Canadian taxpayer's participation in the game qualify as a "source of income"? How can playing Axie Infinity allow a Canadian taxpayer to make money? And do the income-tax ramifications of these various income-generating prospects vary? What kind of revenue is generated when a Canadian taxpayer sells NFT Axie characters from the game? Is this money from your business income? investment earnings? a profit on capital account? or perhaps some fusion of the three?

In light of Axie Infinity and the associated non-fungible token market, this article explores some of the Canadian income tax concerns raised. This article looks at a few ways players of Axie Infinity might make money from the game at the beginning. The article continues by providing a comprehensive summary of Canadian tax laws about what constitutes a source of taxable income and how to differentiate one source from another. This article first reviews the legal background before examining the ways that players of Axie Infinity can make money while playing the game in terms of how Canadian income taxes are affected. In order to help Canadian taxpayers who make money from playing cryptocurrencies-based, play-for-pay games like Axie Infinity, this article's conclusion offers professional tax advice from some of our country's finest Canadian crypto tax lawyers, followed by frequently asked questions.

How Do Players of Axie Infinity Make Money From the Game?

When playing Axie Infinity, there are several ways for players to earn money. Little Love Potion, the game's utility token, is usually sold for a profit by newer players (or SLP). SLP is given to players as a prize when their Axies conquer in combat. The SLP tokens have the following particular in-game uses: New Axie characters cannot be generated by a player without SLP tokens. The Little Love Potion tokens are in high demand as a result. SLP tokens can also be purchased, sold, and traded on the open market in the same way as any other cryptocurrency. So, the easiest way for new users to make money in Axie Infinity is to earn and sell SLP tokens.

Players of Axie Infinity can also exchange their own Axies. Each Axie character is a non-fungible token, as was already stated. These tokens may be sold for money or exchanged for cryptocurrencies or other NFTs. Axies can therefore be bred by players and sold on the open market. Early to mid-2021 saw prices for the lowest Axies hovering about $200 per. Yet, the cost of rare Axies is greater. Two extremely rare Axies sold for a combined 150 ETH in August 2020 (equal to around $68,000 at the time), and one Axie sold for 300 ETH in November 2020 (equal to more than $130,000 at the time).

The last step is that some owners of Axies have started renting out their Axies to gamers. To play Axie Infinity, a player must have a minimum of three Axies. If a new player is unable to afford to buy three Axies, they can start off for nothing by borrowing Axies from a lender (referred to in the game as a "manager"). In return for renting out their Axies, the managers receive a portion of the player's revenue. The player may have earned SLP tokens while using the manager's Axies, for example, and the manager may be entitled to a share of those tokens.

Canadian sources of taxable income: Section 3 of the Income Tax Act of Canada

Every Canadian resident who is subject to tax must pay tax on "taxable income," according to Subsection 2(1) of the Income Tax Act of Canada.

The next sentence in subsection 2(2) states that a taxpayer's "taxable income" is equal to their "income for the year" less any deductions allowed by Division C of the Income Tax Act. (Division C includes a number of tax subsidies, tax-relief provisions, and policy-based deductions, such as the loss-carryover rules, the lifetime capital gains exemption or LCGE, the part-year-resident rule, which exempts offshore income earned while a taxpayer was a non-resident of Canada from taxation, and tax treaty exemptions.)

A taxpayer's "income for the year" can be calculated according to Section 3. The section (which does not mention all possible sources of revenue) does so by listing the following:

  • Employment
  • Workplace
  • real estate
  • businesses and
  • capital gains.

Hence, the sum of various sources of income is what is eventually considered taxable income. As a result, Canadian courts have used the "source" notion to declare some receipts to be exempt from being counted against a taxpayer's income.

The idea of "income from a source" has had a significant impact on how Parliament drafted—and how courts interpret—the Income Tax Act. The fundamental tenet is that a receipt only qualifies as income if it originates from a productive source. This principle is codified in Section 3 of the Income Tax Act, which specifies that only "income from a source" is taken into account when determining a taxpayer's annual income. The Supreme Court of Canada said in Stewart v. Canada (2002 SCC 46) that "whether a taxpayer has a source of income is decided by evaluating whether the taxpayer wants to carry on the activity for profit and whether there is evidence to support that purpose."

  • As a result, a revenue source frequently has one or more of the following qualities:
  • It generates a yield that occurs again on a regular basis;
  • It demands the taxpayer to exert organized effort, activity, or pursuit;
  • A market exchange is involved;
  • It provides the taxpayer with an enforceable claim to payment; and
  • It is brought on by the taxpayer's desire for financial gain (in the case of a source of business income or property income).

As windfalls like gains from amateur gaming are not considered "income" under tax law, they are not included. Gambling for fun or for a living does not provide an income. Even for obsessive gamblers who repeatedly try their luck at a game of chance, such as the lottery, the activity continues to be a personal endeavor rather than a source of money (e.g., see: Leblanc v The Queen, 2006 TCC 680).

This isn’t always true, however. There are two situations where gambling gains are considered taxable business income. The first is when gambling is a byproduct or occurrence of a business, such as when a casino owner gambles at his own casino or when a horse owner bets on horse races in addition to training and racing his horses. The second situation is when an individual utilizes their knowledge to support themselves while participating in a game of chance where talent is a major factor. An example of this would be a pool player who, when sober, challenges drunken pool players to a game of pool for cash.

Identifying Income Sources: Is it a Capital Gain, Investment Income, or Business Income?

Now that it has been established that the activity is a means of earning money, the following issue is: From what source? Is it a wage or salary from a job? Business income? Earning a rental income? A capital gain?

Because different revenue sources are subject to different tax laws, this topic is crucial. As an illustration, whereas investment income and business income are both completely taxable, only one-half of a capital gain is counted as taxable income. Both business and investment losses are completely deductible from all types of income. A capital loss, on the other hand, is only partially deductible, and the permitted amount of a capital loss is generally only allowed to be applied toward reducing the taxable portion of a capital gain.

We'll concentrate on defining investment income, business income, and capital gains (sometimes known as "income from property").

Property yield is referred to as investment income. For instance, dividends are paid on shares. Bonds produce interest. Royalties result from intellectual property. Rent comes from real estate. and so forth. In other words, investment income is passive income that results from the simple act of owning assets and doesn't need a major expenditure of time, effort, or attention. For instance, a person doesn't need to do any work to buy public shares and receive dividends. So, the dividends are revenue from investments.

Organization, methodical effort, and some level of engagement are required for business revenue, in contrast. Whereas a cryptocurrency trader actively looks for chances to buy and sell cryptocurrencies, an investment dealer, for example, might invest in and manage a portfolio of publicly traded shares. Both the dealer and the crypto trader run businesses that include investments and trading in cryptocurrencies. Businesses' income is derived from their respective revenues. A "business" is anything that is a "profession, vocation, trade, or undertaking of any sort whatever," according to the definition defined in subsection 248(1) of the Income Tax Act of Canada. So, the very term "business" suggests activity and a desire for profit. A business's representative traits include activity, enterprise, entrepreneurship, and commercial risk. The pursuit of profit is what a business is about above everything else. In fact, what separates a business from a simple hobby or leisure is the desire for profit (Stewart v Canada, 2002 SCC 46).

As a result, the difference between revenue from businesses and income from investments depends on the degree of activity involved in producing the income. Notwithstanding the fact that investment income is referred to as "income from property" under Canada's Income Tax Act, the mere use of a property does not in and of itself imply that the revenue therefrom is investment income. What matters is the degree of action. For instance, a taxpayer who leases a basement flat and a taxpayer who actively operates a hotel both make use of the same property and earn rental payments. Yet, the hotel management makes money from his or her active business while the homeowner makes money through rentals.

Although the use of property may result in either business or investment income, subsection 9(3) of the Income Tax Act clearly differentiates between investment income and capital gains. According to this paragraph, a gain from the sale of a property is not included in income from that property (also known as investment income). (It further stipulates that a loss resulting from property excludes a loss arising from the disposition of that property.) In other words, if you sell a property, the profit you get from it is either a capital gain or business income for tax reasons, not investment income.

When you sell an item that meets the definition of "capital property," you may have a capital gain (or loss). For tax purposes, only two major categories of property are recognized by the Income Tax Act of Canada:

  • an asset with a market value that, upon sale, generates a capital gain or loss; and
  • inventory, which is taken into account while calculating business income.

Whether a piece of property is considered a capital asset or inventory depends on the kind of revenue it produces when it is sold, such as capital gains or business income. To put it another way, characterizing the property comes after defining the type of revenue, not the other way around. Nonetheless, the decision is frequently murky and necessitates guidance from a knowledgeable Canadian tax lawyer who aids their client in accomplishing their objectives.

When attempting to resolve the ambiguity between investing, which results in a capital gain, and trading, which provides business income, Canadian tax courts have produced a vast body of case law over the years. When determining whether to classify a transaction's gains or losses as on a capital account or income account, courts consider a wide range of variables. These variables might consist of:

  • frequency of transactions,
  • duration of ownership,
  • market understanding;
  • relationship to the taxpayer's work or other company,
  • the length of time and effort put into the project,
  • the usage of funding, and
  • the use of promotion is a factor.

The most crucial factor that tax courts take into account when deciding whether the transaction resulted in a capital gain or business income is the taxpayer's purpose at the time of purchasing the property, In particular, the issue is whether the taxpayer bought the asset with the intention of trading. Yet, a court must consider the objective circumstances of both the acquisition and sale of the property in order to determine a taxpayer's purpose. In other words, by assessing the aforementioned variables, courts will be able to determine a taxpayer's purpose.

Axie Infinity Players' Canadian Income-Tax Repercussions

Two major lessons may be learned from the earlier parts. To start, just "income from a source" is included in a person's taxable income. A novice gambler's gains aren't taxed because of this. Due to the fact that amateur or casual gambling is often a personal endeavor and not a reliable source of money, it does not generate a source of income. Nonetheless, when gambling is a byproduct of another business or when a gambler makes his/her living from a skill-based game, gambling does qualify as a source of income, and its earnings are taxed as business income.

The second lesson is that a property can provide capital gains, business income, or investment income depending on how a taxpayer utilizes it. If the property produces revenue on its own, the income can be considered either business income or investment income (i.e., income from property). The type of action required to produce the revenue will determine the right tax classification: business income necessitates activity, whereas investment income suggests passivity. The profit may be categorized as either business income or a capital gain if it results from the sale of the asset. In this instance, whether the taxpayer purchased the property with the purpose to trade will determine the right tax categorization.

How do these conclusions affect Axie Infinity gamers in Canada?

First of all, playing Axie Infinity can either be or not be a source of money for a player. On the one side, Axie Infinity is a skill-based game that also advertises its play-for-pay model. Hence, for the determined player who logs sufficient playing, there is very likely a source of taxable business revenue to produce Axies NFTs and sell them on the open market. On the other hand, participation might be a purely personal endeavor and as such not an income source for a casual Axie Infinity player who, for example, earns SLP tokens but uses them for nothing other than his/her in-game purpose, or who breeds Axies NFTs but never rents them out or sells them—regardless of their market price.

The second lesson is relevant to Canadian taxpayers, for whom playing Axie Infinity is unquestionably a source of revenue. How to accurately declare revenue is the issue the taxpayer must confront when preparing tax returns. A property can produce business income, investment income, or capital gain, as was discussed above. It all relies on how that property is used.

And just to be clear, the term of "property" in the Income Tax Act encompasses intangible assets like cryptocurrencies and non-fungible tokens. Therefore, for tax purposes, when players of Axie Infinity sell or trade their Small Love Potion tokens, when players breed, sell, or trade their NFT-based Axie characters, or when managers rent out their Axie characters in exchange for a portion of player proceeds, they have all in some way used the property to earn income. Also, the way the property was used affects the nature of the revenue. For instance, according to the size of the operation and the degree of activity it required, the manager who leases out Axie characters may be making money from investments or running a business. For a player that raises Axies particularly to be sold, the sale of an Axie could result in financial gain. Nonetheless, the sale of an Axie might result in a financial gain for a manager who exploited it as an income-producing asset for years prior.

In the end, though, Canadian Axie Infinity players need to realize that no single tax-law analysis will cover every circumstance. Depending on the unique combination of circumstances for each taxpayer, the tax consequences will vary. This implies that Canadian taxpayers who earn money from playing cryptocurrency-based, pay-to-play games like Axie Infinity should get familiar with their tax responsibilities by seeking professional tax guidance from a top Canadian crypto tax lawyer.

Pro Tax Advice: Voluntary Disclosures Program for Unreported Income from Cryptocurrency-Based, Play-for-Pay Games and Legal Advice on Appropriate Tax Reporting of Axie Infinity Income

Canadian taxpayers who earn money from playing cryptocurrency-based, pay-to-play games like Axie Infinity will typically benefit from a tax memorandum examining whether their earnings constitute a source of income and, if so, whether those earnings should be reported as investment income, as business income, as capital gains, or as a blend of all three. Because of the newness of NFT-based, play-for-pay games, participating Canadian taxpayers will need skilled and specialized Canadian crypto tax lawyer guidance on a number of unresolved concerns.

For instance, you could be required to submit a T1135 form if the total tax cost of your assets in SLP tokens and NFT-based Axies reaches $100,000. The fact that NFT transactions, such as trading Axies, may result in GST/HST crypto duties, should also be noted, even though this article primarily addresses Canadian income tax problems.

Bitcoin, Ethereum, and Chainlink are examples of fungible cryptocurrencies that may fit the Excise Tax Act of Canada's definition of "money." Nevertheless, non-fungible tokens are not easily able to fit that criterion. Hence, while a cryptocurrency trading firm may qualify as a supply of financial services free from GST/HST, an NFT trading business may fall under the definition of a taxable supply. In such case, and if an NFT-trading company makes more than $30,000 in yearly income, it must apply for a GST/HST number, charge GST/HST on purchases, collect GST/HST from customers, and remit the net GST/HST to the Canada Revenue Agency.

A top Canadian crypto tax lawyer can provide guidance if you've earned money from playing Axie Infinity or any other blockchain-based, pay-to-win game.  Our knowledgeable Certified Expert in Taxation Canadian tax lawyer has helped various clients with concerns relating to the correct classification and reporting of cryptocurrency transactions, NFT transactions, and other blockchain-based activities.

The privacy that bitcoin users believed they had formerly enjoyed is coming to an end as a result of international tax authorities' advancements and collaborative efforts. Unreported earnings from crypto trades should be of great concern to Canadian taxpayers. NFTs on the blockchain is a relatively new development, but taxpayers who participate in any blockchain-based transactions, including those using NFTs, should be equally worried. If you submitted Canadian tax returns that excluded or underreported your cryptocurrency revenues or your gains from non-fungible tokens, you run the possibility of not only paying civil penalties like gross negligence fines but also of going to prison for evading taxes. In addition, the ordinary late-filing penalty can be as high as $2,500.00 for each unfiled form and the gross-negligence penalty can be as high as $12,000.00 per unfiled form if you failed to file T1135 forms for your NFT holdings.

The CRA's Voluntary Disclosures Program may entitle you to relief. The CRA will waive fines for egregious negligence and renounce criminal prosecution if your VDP application is approved (and may reduce interest). But, your application for a voluntary disclosure has a timeframe. A request will be turned down by the CRA's Voluntary Disclosures Program unless it is "voluntary," in which case any remedy would be denied. Basically, this implies that before the Canada Revenue Agency contacts you about the non-compliance you intend to reveal, the Voluntary Disclosures Program must receive your voluntary disclosure application.

Our Certified Specialist in Taxes Canadian tax lawyer has helped countless Canadian taxpayers with unreported cryptocurrency and blockchain transactions. We can carefully develop and prepare your voluntary disclosure application in a timely manner. If your voluntary disclosure application is wrongly denied by the Canada Revenue Agency, a well-designed designed disclosure application not only raises the likelihood that the CRA would award tax amnesty but also paves the way for a judicial review challenge to the Federal Court. Make an appointment for a confidential consultation with one of our knowledgeable Canadian tax lawyers to find out if you are eligible for the Canada Revenue Agency's Voluntary Disclosures Program.


I spend several hours every day playing Axie Infinity. I have bought and sold several axes. Do I have any Canadian income tax reporting requirements?

There is no simple answer to this question. The exact details of your activity will determine whether or not it is a hobby that is not taxable or it generates business income or capital gains. You will need to consult with an experienced Canadian crypto tax lawyer to examine the exact facts of your situation and to prepare a memorandum analyzing the tax implications.

I am an active player in Axie Infinity and I rent out various Axies. Do I have to report my income?

The answer to your question will really depend on a number of factors including the amount of time you spend and the number of Axies that you are renting out. A detailed analysis of your situation will be required to properly answer the question.

I have been involved in Axie Infinity and have earned income over the years. I never declared any of this income on my tax returns. What should I do?

You may or may not have incurred a tax liability as a result of your Axie Infinity activities. The first step is to determine what, if any, crypto tax reporting requirements you have. If in fact, you have unreported income then, provided CRA has not already approached you, a Voluntary Disclosure Program application will eliminate any penalties, may give you a break on the interest, and will avoid criminal tax fraud prosecution.


"Only general information is provided in this article. Only as of the publishing date is it current. It hasn't been updated, therefore it might no longer be relevant. It cannot or ought not to be relied upon because it does not offer legal advice. Each tax circumstance is unique to its facts and will be different from the instances described in the articles. You should contact a lawyer if you have specific legal inquiries."

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