Category: internet law

Is Playing Video Games for Real Money Legal? It May Depend on the Game.

Post author By Artaev at Law
Post date May 19, 2021
3 Comments on Is Playing Video Games for Real Money Legal? It May Depend on the Game.

Skill-based real-money gaming is a growing industry worldwide. Previously, I wrote about the legality of playing casual games like Solitaire and bingo derivatives for real money. But what about console or PC games like FIFA ‘21, NHL ‘21, Madden ‘21, NBA2K21, and PGA2K21? Shooters like Call of Duty, CS:GO, and Fortnite? Strategy card games like Magic the Gathering? Can those be played for real money as well?

We are not talking the official in-game cash cups or periodic tournament that a few games offer. Rather, head-to-head real money competition that makes any game a chance to win (or lose) cash. There is no shortage of websites and apps offering players this very service. The chance to wager real money on head-to-head video game contests or play in cash-prize leagues and tournaments is certainly attractive. But whenever there is any sort of betting or wagering, legal issues may come up. As a player, you want to make sure you are not breaking the law by wagering $5 on a Sunday Madden round robin. As an entrepreneur and app developer, you need to know what you can and cannot offer to your audience or how to plan for and resolve potential legal issues.

There are two distinct problems areas in the real-money gaming sector. First, is playing video games for real money considered illegal gambling?

Each of the 50 U.S. states has its own set of laws that define “gambling” and that definition determines whether real money playing video games for real money. Do not assume that a platform or app is legal just because it is not traditional, casino-style “gambling.”

You may have heard that if a game’s outcome depends on skill rather than chance, then it is not “gambling” and therefore allowed. This is false. Each of the 50 states have their own regulatory scheme for gambling and gaming, and while some states only regulate games where chance is the dominant factor (in other words, casino-style gambling), not all have the same laws. Certain states define gambling independent of whether chance or skill determines the outcome. They simply make it illegal to wager money in exchange for the possibility of winning money. Other states expressly regulate “games of skill,” either independently or as part of recent internet gambling legislation.

Note that even if a state allows participants to wager real money on a game of skill for a chance to win cash prizes, wagering on the gameplay of others is prohibited. Wagering on the play of others is akin to a sportsbook, which are tightly regulated as gambling across the board.

The gambling vs. game of skill analysis also depends on the particular game at issue. Some games are pure skill with no element of chance – such a game that pits two identical soccer squads against each other. Others have some element of chance, but the skill predominates over the outcome. For example, Fortnite has an element of chance (even presuming you are matched with players of equal skill) because the loot is randomized and the bus approaches the map from different directions, giving an element of luck at least at the start. Then there are games like Magic: The Gathering and Hearthstone or any other game that features cards and a random shuffle mechanism. While better players will certainly win over time, the randomness of the shuffle does affect the outcome. Thus, the specific nature of the game played also determines the legality of the wager on a state-by-state basis. Note that official in-game tournaments always have a “void where prohibited” disclaimer and generally do not require a real-money entry fee to participate to avoid legal issues.

The second problem is intellectual property rights – specifically the game copyrights and trademarks owned by studios like EA and Epic.

Game studios generally do not endorse any websites or apps that allow real-money wagering on their games. In fact, such wagering providers may face copyright or trademark infringement lawsuits from the game developer for misusing their intellectual property.

Many third-party wagering sites use the logos or cover art from the games that they support, but not many have the license or permission to do so. From a trademark perspective, the game studios could have a brand confusion claim, as players may assume that the game makers themselves endorse these wagering sites. The fine print (that nobody reads) disclaiming any endorsement is unlikely to prevent a trademark infringement action. Game developers spend millions of dollars on cultivating their image and will not hesitate to file a lawsuit to protect the integrity of their brand.

The game studios also own the copyright to their games, which means they get to control how their products are used, distributed, and portrayed. At least one studio, Epic Games, has publicly stated that any website or app that facilitates wagering on any of its games (including Fortnite) is violating Epic’s IP rights. Video game publishers – especially those that market to the under-18 crowd – do not want to be associated with anything that could be viewed as gambling (even if it is not gambling under the law). It is likely that there are lawsuits coming to protect the games’ “family-friendly” image and reassure parents that video games are a safe and wholesome hobby. It is also unlikely that any game studio – at least any major game studio – will enter into a licensing deal with a wagering website to specifically support real-money wagering on gameplay.

Plus, some studios themselves offer cash and prize competitions. For example, Fortnite hosts its own real money prize events. Call of Duty has league play. Magic: The Gathering periodically does an Arena tournament that awards a cash prize to the top players. “Official” competitions let the studios control their own IP and not have to share revenue and player base with any third parties. Further, most official competitions do not require a real-money buy-in to participate, making them more “family-friendly.”

There is no doubt that real-money skill gaming is a big draw worldwide, especially with the ubiquity of smartphones and fast cellular connections. Potential legal issues are there as well, and the wrong approach will attract the attention of local law enforcement and civil intellectual property lawyers. To add to the uncertainty, the United States is a dual-sovereign system, with regulations both on the federal level (that mainly affect the banking aspect of wagering) and the state level (that are constantly changing). Tread carefully and hire a lawyer.

Contact Dan Artaev by email or call or text to set up your initial consultation.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, investment, or tax advice. Every situation is different and faces its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

Tags bona fide contest, bona fide skill, fifa21, gaming, madden21, michigan video games, money games, nba2k21, real money gaming, real money skill games, streaming, video game copyright, video game law, video games, video games for money, wagering, wagering law

business law internet law

Can I Use Cryptocurrency in My Business? Yes, But Proceed With Caution. A Lot of Caution.

Post author By Artaev at Law
Post date May 13, 2021
3 Comments on Can I Use Cryptocurrency in My Business? Yes, But Proceed With Caution. A Lot of Caution.

Update: May 19, 2021 is seeing cryptocurrency values plummet, reacting to China banning financial and payment institutions from using cryptocurrencies. While individuals are not currently prohibited from holding crypto, China has effectively decimated crypto’s utility in the country. China has also officially warned investors against speculation. As of the time of this writing, Bitcoin value is down over 30% with other cryptocurrencies similarly disrupted. May 19th illustrates precisely why cryptocurrency – while an exciting technology with a lot of potential – is not a good replacement for traditional fiat currencies in day-to-day business.

Crypto is big news. Elon Musk’s Telsa, Inc. (TSLA) made news in early 2021 when it announced that it had invested $1.5 billion in Bitcoin and had plans to accept Bitcoin as payment for its vehicles in the near future. Tesla’s endorsement was a show of confidence in cryptocurrency that immediately boosted the market and added legitimacy to the emergent technology. However, on May 12, 2021, Tesla backtracked, announcing that it was no longer accepting Bitcoin due to concern about the electricity-hungry technology’s environmental impact. Predictably, the price of Bitcoin fell over 10% and took down many other cryptocurrencies or “altcoins” with it. China’s cryptocurrency ban on May 19th sent markets plunging further. United States federal regulators have also expressed skepticism about cryptocurrency, especially its price volatility and penchant for speculation. Treasury Secretary Janet Yellen (former Chair of the Federal Reserve) stated that a regulatory framework for cryptocurrency is being developed in the Biden administration. While Secretary Yellen expressed support for a digital dollar, she considers Bitcoin “extremely inefficient.”

Nevertheless, cryptocurrency is here to stay and it is (and will continue to be) a significant part of the global economy. As a business owner, you may be considering whether (and how) to integrate cryptocurrency into your business operations. Especially if you are in the technology sector, you may be interested in this decentralized exchange medium – whether to diversify your balance sheet or even integrate crypto as a payment option for your customers. Used the right way, there are certainly applications for cryptocurrency as part of your business. But it is anything but simple and using it requires hands-on attention from your legal and financial (including tax) advisors.

If you are considering using cryptocurrency, you should learn about it and not make assumptions. You may want to spend time learning the exact technology, but at a minimum you must understand that despite its name, “cryptocurrency” is not actually currency like dollars or euros. The best analogy is that it is an intangible asset, like stocks or bonds. In fact, that is exactly how the IRS treats it. This means you will have an interesting tax situation at year end – you will pay income tax when you acquire cryptocurrency (for example in exchange for goods and services) and then you also pay capital gains tax if you exchange the cryptocurrency for U.S. Dollars at a profit. Or, if the cryptocurrency loses value, you will not be paying capital gains tax, but essentially taking a loss due to volatility. Exchanging one cryptocurrency into another also has tax implications. The IRS has an informative FAQ about the tax treatment of common crypto transactions here. Obviously, when you take dollars for goods or services, the tax situation is much simpler.

Extreme volatility is inherent to cryptocurrency and poses a real challenge to any business considering its merits. In the past year, Bitcoin’s dollar exchange value increased from about $9,700 to $56,500, or more than $550%. Elon Musk’s tweet on May 12, 2021, instantly dropped Bitcoin’s exchange value to below $50,000. China’s ban has it trading below $35,000. This is obviously problematic, as the value of traditional currency does not fluctuate like this, and in fact, currency stability is a goal of a healthy economy. Such fluctuations in value do not make for a good transaction medium. If you sell $100,000 worth of goods for $100,000 worth of Bitcoin and overnight Bitcoin loses 10% of its value (because of a tweet), your business just took a $10,000 loss for nothing more than choosing Bitcoin as a medium of exchange. Obviously if you sell $100,000 worth of goods for dollars, you will still have $100,000 the next day and even next month and next year (slight inflation notwithstanding.) In that sense, it is exactly like using stocks as an exchange medium. Stablecoins offer one potential solution, as they are alternative “coins” tied directly to fiat currencies (like 1 to 1 with the U.S. Dollar) or other physical world assets, but they are not as mainstream and still carry the complex tax treatment.

What about wages? Can you pay wages directly in cryptocurrency? The Fair Labor Standards Act requires that wages are paid in cash or negotiable instrument payable at par (check). State laws also require payment of wages in U.S. currency. This means that you would have to convert Bitcoin to make basic payroll. However, it is possible to make discretionary bonus payments in cryptocurrency – but remember that the fair market value of the cryptocurrency at the time of payment must be reported on the W-2 and also requires the payment of payroll taxes. This can be administratively inefficient. You may also face liability if you fail to provide the appropriate disclaimers and disclosures to cryptocurrency recipients about volatility and tax implications.

Given all these pitfalls, why bother? While there are many risks and uncertainties, it might make sense to have your business be at least “crypto friendly” and educated about the new technology. First, it may be good marketing and branding to position your startup business as “high-tech,” innovative, and tech-friendly with cryptocurrency. Two, if you do a lot of business overseas, cryptocurrency is a great way to quickly and cheaply exchange money. There are no transaction fees or delays, both of which can be significant for international transactions. Three, the decentralized nature of cryptocurrency (meaning it is outside the fiscal policy of any central bank) make the currency less prone to inflation or government manipulation.

Additionally, more private businesses are trying to support cryptocurrency. WeWork announced that it would accept Bitcoin and some other major cryptocurrencies for membership fees, hold crypto on its balance sheet, and work with landlords and other partners to make payments in cryptocurrency more available. PayPal and its Venmo peer-to-peer payment services also indicated support for cryptocurrency transactions as well. The State of Ohio even had a short-lived pilot program to accept tax payments in cryptocurrency.

What does this all mean for businesses in general? To borrow the words (but not the title) of Mastercard’s Executive Vice President for Blockchain and Digital Asset Products:

“Our philosophy on cryptocurrencies is straightforward: It’s about choice. [We aren’t] here to recommend you start using cryptocurrencies. But we are here to enable customers, merchants and businesses to move digital value.”

The bottom line is if you choose to proceed, proceed with caution. A lot of caution.

Thinking about integrating cryptocurrencies into your business? Contact Dan Artaev by email or call or text to set up your initial consultation.

Tags cryptocurrency, investing

business law intellectual property internet law

Can a Self-Directed IRA (“SDIRA”) Invest in Cryptocurrency and NFTs?

Post author By Artaev at Law
Post date May 3, 2021
7 Comments on Can a Self-Directed IRA (“SDIRA”) Invest in Cryptocurrency and NFTs?

Self-directed IRAs (“SDIRAs”) can be a powerful investment tool when used the right way. Instead of relying on a bank or brokerage to hold and invest your retirement accounts, the SDIRA gives you direct control over what to invest in for your retirement. Best of all, the SDIRA is not limited to the traditional stock and bond market portfolios. Savvy and knowledgable investors willing to take on high levels of risk can direct their tax-advantaged savings into private companies, debt portfolios, real estate, and other non-traditional assets. While the personalized control and expanded investment opportunities may sound great, SDIRAs are subject to complex tax rules and other pitfalls, including extreme volatility and investment risk. The government rules and regulations ensure that individuals are not abusing the tax advantaged status of their retirement accounts. The Internal Revenue Code (“IRC”) governs what retirement accounts (including SDIRAs) can and cannot invest in.

What about cryptocurrency like Bitcoin? Can an SDIRA invest in cryptocurrency? Yes. In general, the IRC prohibits any IRAs (including self-directed ones) from owning life insurance, S-Corporation stock, and collectables. 26 USC 408. The term “collectable” includes art, antiques, collectable stamps, coins, alcoholic beverages, and “any other tangible personal property” specified by the IRS. Pursuant to Notice 2014-21, the IRS considers cryptocurrency to be intangible property for the purpose of taxation. This means it is treated the same as stocks or bonds – if you sell at a profit, you are paying capital gains tax. Note that cryptocurrency is not treated the same as cash – this also means that if you are paying for a product with Bitcoin, it is a taxable event. For the purposes of an SDIRA and retirement investment, you can certainly buy and hold (or HODL) cryptocurrency. Or sell it for a gain – the tax consequences are the same as they would be with a stock or bond portfolio (depending on whether you have a 401k or Roth-type setup). Remember that any profits that an SDIRA makes go right back into the SDIRA and may only be withdrawn for the benefit of the individual under certain conditions (like being 59 and a half years old) to retain the tax advantage. With cryptocurrency, it is critical to set up an SDIRA-owned LLC to establish and own the cryptowallet in conjunction with a bank account. The LLC structure allows the SDIRA beneficiary to act as a manager and direct investments right from the bank account rather than going back to the SDIRA custodian and waiting for an approval of a particular transaction. However, remember that the manager cannot receive compensation or commingle personal and SDIRA assets, accounts, or cryptowallets.

What about non-fungible tokens or NFTs? Can an SDIRA invest in those? Maybe. NFTs are digital property that exist only online, but unlike “traditional code,” NFTs are unique and cannot be copied. More accurately, they can be copied (like a print of the Mona Lisa can be copied), but there can be only one original. In that sense, they are like real-world property and their non-fungibility creates scarcity, and theoretically value. Although NFTs are based on the Ethereum blockchain (and Ethereum is a cryptocurrency like Bitcoin), cryptocurrency and NFTs are not necessarily treated the same way. As explained above, the IRS treats cryptocurrency the same as intangible property for the purposes of taxation – meaning like stocks, bonds, and mutual funds. Section 408 of the Internal Revenue Code prohibits any IRA from investing in art, antiques, collectable stamps, coins, alcoholic beverages, and “any other tangible personal property” specified by the IRS. 26 USC 408. Will the IRS treat NFTs like cryptocurrency and therefore permitted SDIRA investments? Or will NFTs be treated like restricted collectables?

The IRS has not issued guidance on this matter. Some commentators (including the top search result on Google as of the writing of this article) have concluded that the IRS treats NFTs as collectibles and therefore they subject to a “higher minimum gains tax rate of 28%.” This is simply not true. While the IRS certainly treats NFTs as taxable property, it remains uncertain exactly how the IRS will tax these digital assets.

At its core an NFT is code. Cryptocurrency is also code, which the IRS expressly treats like “property” for the purpose of taxation. It follows that NFTs are also “property” for the purpose of taxes. But what kind of property? Are NFTs always considered art or collectibles? Or are they cryptocurrency and can be owned by an SDIRA? What about NFTs that represent virtual real estate in “worlds” like Decentraland, Cryptovoxels, Somnium Space, Sandbox? What if the NFT is an avatar, a name, a virtual outfit? There are several possible ways for the IRS to treat NFTs:

One, the IRS can take a pragmatic approach and tax them in accordance with what they would represent in the real world. Some NFTs have real-world counterparts – for example, Forbes reported that a digital collectible startup called Ethernity is set to auction limited edition real world baseball bats that include an NFT counterpart. Nike also patented something called “CryptoKicks,” which presumably will tie real sneakers to some sort of digital authentication certificate. If an NFT represents art, then it is treated like art for tax purposes. If an NFT is a trading card, then it is treated like a collectible. If the NFT represents virtual real estate, it is treated and taxed like real estate (which raises a whole different set of questions).

Two, the IRS can take a simple approach and classify NFTs as “property” that is treated exactly like cryptocurrency regardless of what the NFT “represents.” This second approach avoids litigation over what how a particular NFT should be taxed – for example, is an in-game avatar “art”? The second approach also would give SDIRA investors the flexibility to invest in virtual assets, including virtual real estate.

Finally, is the IRS really going after unreported cryptocurrency and NFT transactions? Absolutely. In 2020, the IRS established the Office of Fraud Enforcement and announced in 2021 that a special investigative team was conducting “Operation Hidden Treasure” to identify individuals who failed to report cryptocurrency (and presumably NFT assets).

Investing in cryptocurrency and NFTs is a hot trend in 2021. Although these digital assets may “exist” only as part of the virtual blockchain, the IRS considers them very real and very taxable. This is a constantly changing and developing area, so it is especially critical to consult a tax and legal professional before making any investment decisions. As I pointed out in my earlier post about SDIRAs, even if you are right, you may still end up litigating against the IRS in Tax Court.

More questions? Thinking about investing in cryptocurrency or NFTs? Funding your retirement through an SDIRA? Contact Dan Artaev by email or call or text to set up your initial consultation.

Tags bitcoin, crypto, cryptocurrency, erisa, internal revenue code, investing, nfts, retirement savings, sdira, self-directed ira, tax law

intellectual property internet law

I Don’t Want to Wait…For My Rights to Be Over: Licensing and Streaming.

Post author By Artaev at Law
Post date April 26, 2021
No Comments on I Don’t Want to Wait…For My Rights to Be Over: Licensing and Streaming.

If you are a fan of 1990s and early 2000s TV shows like Dawson’s Creek, X-Files, Scrubs, etc., and you’ve revisited them on a streaming platform, you may have noticed that the music is not quite how you remember it. Sometimes the problem is obvious, like Dawson’s Creek is missing its iconic intro theme song! Other times, missing music creates plot holes (read more about the X-Files “Beyond the Sea” episode below”). While the beloved characters and stories remain the same, the music is not – and no, you are not imagining it.

The issue is copyright and licensing. Certain technologies like streaming simply did not exist at the time that intellectual property rights were determined and licenses were negotiated for those particular shows. Producers did not foresee the need for more expensive perpetual licenses when DVDs barely existed and streaming services were more than a decade away. Wanting to use a particular song but not having the budget led to compromises, such as limited-scope and duration licenses. It was not uncommon to get a particular song for “broadcast-only” play for 5 years. The license was sufficient to cover the show’s initial run (and any near-term reruns) and made it possible to feature some instantly recognizable tunes.

The limited scope licenses created unforeseen issues with streaming technology. A new market emerged for old TV shows through on-demand services like Netflix and Hulu. Simply put, the creators trying to negotiate the release of their series on streaming did not have the right to license the music. For example, a 5-year license for a 2001 show expires in 2006. In 2021, the show’s producer wants to release the show on Hulu, but the owner of the them song rights (most likely a corporation like Sony and not the individual artist) sees this as an opportunity to demand a significantly higher royalty fee. The creator then has a choice – pay whatever the licensor demands or replace the original song with something different (i.e. cheaper).

Predictably, fans are not happy with the alternatives. After all, music is an integral part of nostalgia, branding, and the viewing experience is just not the same without it. Theme songs, like Dawson’s Creek’s famous “I Don’t Want to Wait” by Paula Cole, are inextricably tied to the show. For instance, I have never seen an episode of the show, nor have I ever heard of Paula Cole, yet I have heard that particular song and know that it is the Dawson’s Creek theme song. That’s powerful branding.

In other cases, music copyright issues create nonsensical plot points. A 1994 X-Files episode titled “Beyond the Sea” featured a psychic serial killer who, during interrogation, sings a few bars of Bobby Darin’s “Beyond the Sea” – a song that was played at Scully’s father’s funeral earlier in the episode. The scene is meant to be disconcerting and leave the audience wondering whether the killer really possesses otherworldly powers. But in the streaming version, the song played at the funeral is “La Mer,” a jazzy tune sung in French. The killer singing “Beyond the Sea” (as well as the episode’s title) suddenly makes no sense – and instead of feeling spooked, the audience is left confused and questioning Scully’s reaction.

Cross-licensing and copyright considerations should be front and center for any modern content creator. Certain shows, like “Freaks and Geeks,” decided at the outset that the vintage soundtrack would be an integral part of the show and the producers invested in perpetual licenses. If you are a content creator, it is a good idea to decide whether the music is an integral part of your final product, and if so, whether you are willing to negotiate and pay for the right license. More expensive “in-perpetuity” licenses are now the industry standard and music budgets have expanded accordingly. If you are independent creator without a budget, look for independent artists, royalty-free or fixed-cost options, or be prepared to invest in the right intellectual property at the outset.

The licensing issue is not confined to TV shows. Similar problems exist with gaming – video games, music, and streaming rights are not all necessarily compatible, even though they intersect on online content platforms like Twitch and YouTube. Players broadcasting their games across the world, with commentary, personas, and other embellishments (like yes, music and sound effects) creates a whole host of potential issues. New technology breeds new intellectual property problems.

Finally, why does it matter? Even if you are not concerned about a DMCA takedown notice or litigation under the Copyright Act, licensing issues can impede the distribution and monetization of your creation down the line. A buyer, publisher, or distributor will be much more interested in your product if you have all the rights. In other words, as a businessperson, you should seriously consider investing in intellectual property at the outset, rather than trying to resolve issues only when they arise.

Have additional questions? Need a licensing deal reviewed or negotiated? You can email Dan or call or text him to set up your initial consultation.