US Tax Considerations for eSports and the Online Games Industry
18 February, 2021
Even before the start of the coronavirus pandemic, the entire eSports sector was experiencing rapid growth. Professional gamers are reaching and sometimes surpassing the popularity levels of traditional sports superstars. The richest eSports player N0tail, a Dota 2 professional, had an estimated net worth of USD 6.9 million in 2020. In 2019, Ninja, one of the biggest streamers in the industry, signed a deal with the Mixer streaming platform - a deal that is estimated to be worth around USD 30 million. One of the largest eSports tournaments, Dota 2's The International has a prize pool of USD 40 million, placing it in the same league as some of the biggest sports tournaments in the world. In recent years, eSports matured into a fully independent industry with an explosion in investment and revenue that's expected to surpass USD 1.5 billion by 2023.
While the increased popularity and profitability of professional gaming is good news for everyone involved, eSports teams, players, and companies are facing increasingly complex tax-related issues stemming from different factors. Firstly, the international nature of their business complicates the determination of which taxes to pay, how much, and to whom. This is further exacerbated in the US due to the country's infamously complicated tax system. Secondly, the growing revenue streams attracted the attention of tax authorities looking to fill the state's coffers. Lastly, the diversity of revenue sources, including merchandise, in-app purchases, sponsorships, prize money, are further exacerbating the problem.
Taxation of eSports Earnings
In the good old days, US eSports players could keep most of their winnings. That's because of considerably smaller prize pools and the limited popularity of video game tournaments. However, as incomes and popularity skyrocketed, Uncle Sam's tax authorities became much more interested in collecting their share.
So, what eSports income is actually taxable? The bad news is, almost all of it. Like all US residents, eSports players are required to pay federal taxes to the IRS on practically all of their worldwide income. Here are the most common income sources for eSport players and organizations as well as the tax rules for that income.
A significant portion of income for professional players is tournament prize money. The extent to which these winnings can be taxed depends on the country/state where the tournament is held. In the US, the IRS requires individuals to file Form 1099-MISC for all income exceeding USD 600. For tournaments held in the US, even non-US persons may be required to pay the federal income tax. The winners of the 2014 Dota 2 International, Newbee, had to pay a 30% tax on their winnings. In some cases, the players would have to pay taxes in their home country as well.
A similar thing happened to the US Fortnite player Bugha, whose USD 3 million in prize money shrank by half after he paid both state and federal taxes. It's paramount to read about specific tournament tax rules, both for tournaments located in the US and abroad, in order to know how much of your income will be taxed.
One especially troublesome form of taxation is the so-called jock tax. It's used by authorities in individual states to charge eSport players that aren't residents for income earned there. For example, a New Jersey-based player might travel to California in order to participate in a tournament or anything related to their profession. The problem here is what exactly constitutes income, as meetings, training, and matches are all counted as being part of a player's earnings. Of course, this jock tax wasn't enforced until states took notice of the sums that many professional gamers were generating.
Streaming on popular platforms, like Twitch or YouTube, represents a huge source of income for many professional gamers. As you might've guessed, this income is taxable as well. For example, Twitch automatically sends 1099 forms to both US and non-US residents, requiring them to pay up to 30% in tax for income over USD 600.
Taxable revenue includes advertising money, donations, and tips. You might be liable to believe that donations are tax-deductible. Since streaming donations are not considered traditional donations per se but part of your income, you're also required to pay taxes for them.
A majority of professional eSports players are a part of a team or organization that pays out regular salaries. This income is, of course, taxable. The amount of taxes you need to pay depends on whether you're classified as an employee or an independent contractor, and the exact taxes vary from state to state. For players registered as employees, their employer is responsible for deducting all applicable taxes from their salaries. Independent contractors, on the other hand, have to file and pay taxes on their own
There are several forms of interaction that can take place between players and sponsors. In situations where sponsors pay a certain amount of money to a player for them to sponsor their brand, VAT is applicable.
Various perks the players earn along the way, such as free merchandise, gear, and air miles, are also taxable. These benefits are taxed based on their fair market value.
This is more tailored to organizations and eSports companies than individual players. All in-app sales are subject to sales tax. However, not all states charge a sales tax on digital products, and therefore, it depends on where the organization is located.
Tips for Handling eSports Taxes
All of these taxes, coupled with the 'regular' ones we pay, can make your head spin. As such, the best advice we can give is for professional gamers to get a Certified Public Accountant or a lawyer specializing in eSports taxes. Many organizations already employ accountants tasked with helping their players handle taxes. While getting professionals to help you out will cost you a certain amount of money, it's definitely worth it considering the amount of time it takes to wrap your head around all the taxes you need to pay. Also, failure to pay all the taxes can lead to penalties or even jail time.
Additionally, eSports organizations might consider becoming C corporations, as they can receive significant tax deductions for some forms of foreign income such as viewership and in-app sales.
Once again, Benjamin Franklin's famous quote about death and taxes rings true. Whenever an industry gains recognition and increases its revenue streams, it also attracts tax authorities that regard it as a lucrative opportunity to fill state coffers. Similar to cryptocurrency activities, eSports attracted the ever-watchful eye of the IRS. The only thing left is for eSports players and organizations to make sure all their taxes are in order and avoid losing much more than a portion of their winnings.
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