Skip to content
global trade management

US tax considerations for eSports & the online games industry

Even before the pandemic struck, eSports was experiencing surging viewership. And now that COVID-19 has left hundreds of millions of people homebound around the world and shut down many traditional forms of sport and live entertainment, further acceleration of this industry trend is expected.

Indeed, eSports viewership was expected to grow at a compound annual growth rate (CAGR) of 9% between 2019 and 2023, with a projected increase of 192 million viewers for a total of projected viewers of 646 million by 2023.

Online gaming and entertainment is a global marketplace. Gamers can compete on servers that could be anywhere against other gamers who may be next door or around the world. Technology and software development companies also can be based anywhere and use software engineering talent from around the world. As such, there are international tax issues that these newly emerging game companies need to consider, especially as the market for their products and services rapidly expands.

Game companies, eSports teams, and gaming platforms can face a multitude of complex tax issues in the age of post-Wayfair for state taxation, state marketplace rules for virtual income tax nexus (e.g., California), evolving global tax guidance on the relation to nexus and allocating income from intangible property, and growing aggression from tax authorities around the world seeking a share of revenue from such property. All of these issues can impact eSports and on-line game tax concerns, especially around: i) in-app or in-game sales/fees; ii) application of the foreign-derived intangible income (FDII) deduction for US C-corporations that generate income from serving foreign markets; and iii) various outbound payments to non-US persons and entities.

In-app sales/fees

The availability of in-app or in-game virtual items add to the game play and experience of gamers and competitors, who can purchase (for real currency) these items — everything from game currency, upgrades and boosts to costumes, weapons, added skills, and virtual property such as houses, vehicles, and castles. A significant challenge from such transactions is the general characterization of the transaction itself. These sales are likely to be characterized as sales of (virtual) property, but in some cases, may be viewed as a service. Arguably the good is sold where the gamer is located, but there are also arguments supporting the sale taking place where servers are located (which is indeterminable in a Cloud-based ecosystem), and possibly where the provider is based.

These characterization factors are relevant in considering a range of tax issues including: i) income tax nexus between countries under established principles; ii) digital service tax issues (as more countries adopt digital service taxes); iii) state sales and use tax collection and filing obligations; and iv) state income tax nexus and liability (e.g., marketplace states such as California).

Corporate tax incentive for FDII

eSports organizations and on-line game companies based in the United States should consider becoming a C-corporation and utilizing the FDII incentive tax regime if the business will or already does generate income from serving foreign markets. FDII allows C-corporations a notional tax deduction for foreign-derived income, resulting in an effective federal income tax rate as low as 13.125%. US-based eSports organizations should consider this strategy if they have any of the following streams of foreign-derived revenue:

  • foreign-source income from viewership of tournaments and competitions;
  • license fees for the use of a platform, brands, designs, or logos from non-US persons outside of the United States;
  • sales of in-app items to non-US persons outside of the United States;
  • sale of actual merchandise (apparel, accessories) to non-US persons outside of the United States;
  • organizational and promotion service fees from non-US companies outside of the United States;
  • game, character(s), builds, tools/weapons, etc. design and development, for non-US persons’ use or enjoyment outside the United States; and
  • services fees (such as marketing, promotion, advertising, playing, tournament/game moderating and commentating, competing) received from persons located outside the United States.

Payments to non-US persons & entities

US game companies and eSports organizations may need to make payments for:

  • tournament winnings;
  • advertising expenses on eSports channels and platforms;
  • services by moderators, commentators, and live video editors;
  • game and eSports team wages and salaries;
  • sponsorships and endorsement payments and related “fringe” benefits to gamers, players, and influencers;
  • royalty payments for use of a player’s brand name and reputation;
  • branded or specialty game-related merchandise; and
  • license payments for the design and creation of game or eSports team logos, digital labels, branding, etc.

In the international context, the nature or classification of these payments becomes paramount to potential withholding tax obligations, informational reporting, and the collection of withholding tax documentation from the foreign payees and recipients of such income. In many cases, the IRS may require that companies secure the relevant IRS withholding tax documentation (e.g., Form W-8BEN, -E) for withholdable payments to non-US persons as well as timely file the required annual reporting (e.g., Forms 1042).

A US-based eSports team organization or an online fighting game league (e.g., Capcom, Evolution) should consider that a royalty or license payment and service fees to a non-US person or company may result in very different US source withholding tax liability and reporting obligations. For example, a Swedish citizen and resident that is a promoter, and social media and marketing influencer can perform all the virtual marketing services from his or her laptop in Sweden. If a US-based eSports organization pays the Swedish person fees for these services performed wholly outside the United States, then such a payment would not be subject to US source withholding tax or annual withholding tax reporting.

In summary

The rapidly growing world of eSports and on-line gaming connects gamers and competitors from all over the world and allows companies to participate in this evolving industry and the global marketplace.

US-based eSports organizations and on-line game companies should review and look to optimize their business structure and transaction flows by considering the various tax issues outlined above.


This article was written by Adnan Islam and Ryan Dudley, both partners and co-practice leaders of the International Tax group at Friedman LLP.

More answers