Taxes on eSports income – everything nonresidents need to know
eSports are a form of competition where video gamers from around the world connect and compete for money.
Despite being around since the 1970s, eSports only began to truly take off in the late 2000s. In fact, it is estimated that nearly 500 million people tuned into Esports in 2020, whether as enthusiasts or occasional viewers.
From amateur level gamers to tournaments with millions of dollars in prize money on offer, eSports has blown up in a big way over the past decade.
But tournament play isn’t the only way to earn an income from eSports.
The outbreak of COVID-19 has empowered gamers to find opportunities to earn an income from live-streaming and even ‘influencer’ marketing!
Many US universities are jumping on the eSports bandwagon too!
In fact, more than 60 education institutions in the US have introduced an eSports program and the NCAA are reportedly considering a role in the sport.
However, the IRS does not consider tax evasion to be a game.
So if you are in the US as a nonresident and have eSports gaming earnings, it’s important to keep in mind that you are obliged to declare this income for tax.
Determining how to include your eSports income on your tax return can be tricky.
With that in mind, we’ve put together this guide on everything you need to know about your eSports tax requirements.
Are nonresidents entitled to earn income from Esports in the US?
The answer to this question largely depends on your visa and immigration status.
While many nonresidents will be entitled to earn an income from eSports, it is important to be aware that you will need to obtain the proper immigration status before you earn an income.
How much tax will I have to pay on my eSports income and will I have to file a tax return?
As eSports becomes increasingly popular and a greater number of individuals earn income, it is easy to imagine that the IRS will put a larger emphasis on the taxation of this industry.
With this in mind, it is wise to correctly determine your tax liability early so that you can avoid a tax bill (and potential fines) from the IRS later on.
Exactly how much you will pay in tax will depend on the type of income you earned. There are two options to consider: if you are paid to participate and play a number of hours daily, then your income will be treated as personal services and it may be taxed at a graduated rate.
However, if you win a one-off prize, the amount is taxable at 30% nonresident rate, unless it is covered by a tax treaty between your home country and the US. More on that here.
However, things may get confusing if you earn income from a tournament held in one state but play it remotely from the state in which you live.
To examine this in more detail, let’s take a look at a case study.
Case Study – Abdul
Abdul is a 23-year old Esports gamer, originally from Pakistan, but living in California on an F-1 visa. Abdul does not meet the Substantial Presence Test and is therefore deemed a nonresident for tax purposes.
In March 2021, he took part in an online tournament from his bedroom in California. He ended up finishing the tournament in first place and pocketing the prize money.
However, the tournament was held in New York.
Abdul may have to pay taxes on his Californian tax return as well as a New York tax return.
Abdul will be entitled to pay what is known as ‘jock tax’.
This is used by a state tax authority in order to charge eSport players that aren’t residents for income earned there.
How to include eSports income on your tax return
Firstly, it depends on how you received the money.
If you entered a competition and won the money by yourself, you will technically have won a prize or award, which still needs to be taxed.
In general, nonresidents who receive this are taxed at a rate of 30%. You should complete a W-8BEN in order to confirm your foreign status and treaty eligibility with the payer of the award from this tournament.
If you are a nonresident in the US, and you are employed by a gaming company and received the money as salary, you will be required to file a form 1040-NR in order to pay tax on esports winnings.
On top of this, if you are hired by a company to play games professionally, which many gamers are, income will need to be added to your W-2 form by your employer.
The W-2 form should be issued by the company that hires you. Dependent personal service income (wages, salaries) are taxed at a graduated rate to NRA, unless these are not covered by a tax treaty agreement.
Depending on where the tournament took place, you may also be required to file a state(s) tax return.
Where to include it on your tax return will also depend on how much money you made from it.
If you only earned a small amount of money, you can claim it as additional income on your tax return.
What happens if I don’t file my tax return
It’s hugely important that you comply with US tax regulations.
After all, with the growth of the eSports industry, the IRS is stepping up its approach to the taxation of Esports income.
The message from the IRS? File your taxes!
You will need to file before the US tax deadline (April 15).
By not filing or declaring all of your income, you may receive penalties and fines from the IRS.
In general, you will be hit with the late-filing penalty of 5% for each month left unfiled.
If, after 60 days have passed and you still haven’t filed, the minimum penalty is $435 or 100% of the unpaid tax, whichever is less.
There is also a chance that any future US visa and Green Card applications may be affected as a consequence.
The good news is that you can easily prepare your US tax documents online with Sprintax!
Who can help me with my US tax return?
Sprintax Returns can help you take care of your tax responsibilities!
If you are a nonresident in the US, our software will ensure that your income is properly declared, meaning you won’t end up paying any more income than you need to.
In fact, we are the only online Federal and State self-prep tax software currently available for nonresidents in the US!
If you are confused about any aspect of your tax obligations, we also offer 24/7 Live Chat.
If you have any questions about your tax situation, feel free to reach out to our team at any time.
