Any time that you make an income, you are legally obligated to pay taxes. Income you earn while working a full-time job or as an independent contractor must be taxed. If you don’t pay it and the government finds out, you could be subject not only to taxes, but also to expensive fees, liens on your property, and withholding from future IRS returns. One area where tax law is not so clear-cut is the eSports and online gaming industry.
The eSports Industry Around the Globe
Over the years, eSports, which are organized video gaming tournaments and events that take place on regional, national, and international levels, have grown exponentially in popularity. According to Statista, the eSports market revenue worldwide is $1.08 billion, with an audience of 474 million people around the globe. Game developers have taken notice, and the industry will only continue to grow in the future. According to Business Insider, it’ll experience a 9% compound annual growth rate (CAGR) between 2019 and 2023.
Some of the games that people are playing and earning money on include Call of Duty, Overwatch, Fortnite, League of Legends, SMITE, Counter-Strike, Rainbow Six Siege, Dota 2, and PlayerUnknown’s Battlegrounds. Gamers can participate in regional, national, and international competitions, making money and building their profile and fan base at the same time.
Earning Money on eSports
There are a number of ways in which players can make money while playing eSports. The first is to participate in a competition, whether it’s local, in a different state, or another country. Players simply pay an entry fee, participate, and then have the chance to win money. In big tournaments, that can mean millions. For example, Fortnite players can sign up for a tournament on Esports Hub and win money playing the game for a few hours.
Additionally, players can earn an income from online games by playing on Twitch and getting money from fans, offering to coach other players who want to become better, and getting royalty payments if a company uses their reputation and brand name. One of the most famous Twitch players, Shroud, has a net worth of $17 million.
If you’ve earned even a few hundred dollars from eSports and online gaming, you’ll need to look into the tax implications because either way, you’ll need to pay taxes on your income.
Tax Issues with eSports
One of the main tax issues with eSports is how teams classify the players. Are they independent contractors or employees? That’s up to the companies that are throwing these competitions to decide. If you’re an independent contractor and depending on the income made, you’ll want to consider filing a Form W-9 so that the eSports company can issue you a 1099 at the end of the year. This can have a decisive impact on your tax liability.
Additionally, if you live in one place but a tournament is held remotely in another place, you could get double taxed on your earnings. Meaning you may pay taxes to your state as well as non-resident taxes to the state that hosted the tournament. However, many states allow a tax credit for taxes paid to other states on the same income which would reduce the effect of double taxation. Be sure to check individual state laws and tax rates so you’re not surprised.
You may also have to pay a jock tax if you physically travel to another state to play there. Even if someone lives in another country and comes to the United States to play in a championship, they would have to pay U.S. federal income tax on any money that they win.
If you earn money by coaching other players, getting royalties through sponsorships, selling merchandise, or any other outlet through gaming, then you’d have to pay taxes on all of it.
Ensuring You’re Staying on Track With eSports Taxes
When you file your taxes, you need to include all of your income, even income earned through eSports and online gaming. Since this can be a tricky area, it’s best to consult with one of the experts at TaxAct prior to filing on your own. Learn more about our File with Xpert Help service to get started.