How Esports Tournament Winnings Are Taxed | Monaco CPA

You win $15,000 at a LAN tournament. The tournament organizer hands you a check and a 1099-MISC. Now what?

Esports prize money has its own tax rules, and they differ from streaming income, sponsorship income, and salary income. The form is different, the box is different, and the deductions available depend on whether you are a hobbyist or a business. I work with esports and gaming professionals on exactly this.

How Tournament Winnings Are Reported: 1099-MISC Box 3

Tournament prize money is reported on 1099-MISC, Box 3 (Other Income), not Box 7 and not on 1099-NEC. This is an important distinction. Box 3 is used for prizes and awards. Box 7 (pre-2020) and 1099-NEC are used for nonemployee compensation, which is payment for services.

Why does the box matter? Because Box 3 income is not automatically classified as self-employment income by the IRS. However, if you are competing as a business (more on this below), you still report it on Schedule C and it is subject to self-employment tax. If you are a hobbyist, it goes on Schedule 1 as other income and is not subject to SE tax, but you also lose the ability to deduct expenses against it.

Tournament organizers are required to send you a 1099-MISC if they pay you $600 or more in prizes during the year. If you win smaller amounts at multiple events that individually fall below $600, you may not receive a 1099 from each organizer, but the income is still taxable and must be reported.

Team Organizations: W-2 vs. 1099-NEC

If you are signed to an esports organization, the tax treatment of your org income depends on your relationship with the org.

W-2 Employee

Many major orgs classify their players as employees. You receive a W-2 showing your salary, and the org withholds federal and state income taxes, Social Security, and Medicare from your paycheck. Your tournament winnings may be included in your W-2 compensation if the org receives the prize money and distributes it to you as part of your employment arrangement. In this case, you do not receive a separate 1099-MISC for those winnings. The org handles the reporting.

Independent Contractor (1099-NEC)

Some orgs, particularly smaller ones, classify players as independent contractors. You receive a 1099-NEC for payments from the org (salary, bonuses, revenue share). Tournament winnings that flow through the org may appear on your 1099-NEC from the org, or you may receive a separate 1099-MISC directly from the tournament organizer, depending on how the prize money is distributed.

Team Splits

In team-based games, the prize pool is often awarded to the organization, which then splits it among the players according to the team contract. The org may issue each player a 1099-NEC or W-2 for their share. If the tournament organizer pays the team prize directly to the org, you will not receive a 1099-MISC from the organizer. Your income comes through the org and is reported on whatever form the org uses for your compensation (W-2 or 1099-NEC).

If the tournament pays each player directly (common at smaller events and open tournaments), each player receives their own 1099-MISC from the organizer.

International Tournaments and Foreign Tax Credits

Competing overseas creates additional tax complexity. Many countries withhold tax on prize money paid to foreign (non-resident) competitors.

Foreign Withholding

If you win prize money at a tournament in South Korea, Germany, China, or another country, the tournament organizer or local tax authority may withhold a percentage of your winnings for that country's income tax. Withholding rates vary by country and may be reduced by a tax treaty between the U.S. and that country. Common withholding rates range from 10% to 30%.

Example. You win $20,000 at a tournament in South Korea. South Korea withholds 22% ($4,400) for Korean income tax. You receive $15,600. The full $20,000 is still taxable on your U.S. return.

Foreign Tax Credit (Form 1116)

To avoid double taxation, you can claim a foreign tax credit on Form 1116 for the taxes withheld by the foreign country. The credit directly reduces your U.S. tax liability dollar-for-dollar, up to the amount of U.S. tax attributable to your foreign-source income. In the example above, you would claim a foreign tax credit of up to $4,400 against your U.S. tax on the $20,000 of Korean-source income.

Keep all documentation of foreign tax withholding: tax receipts, withholding statements from the tournament organizer, and any correspondence with foreign tax authorities. You need this to substantiate the credit on your U.S. return.

U.S. Reporting of Foreign Winnings

You report the full gross amount of foreign tournament winnings on your U.S. return, even if taxes were withheld abroad. The foreign tax credit compensates for the foreign tax, but the income itself must be reported in full. Convert foreign currency amounts to U.S. dollars using the exchange rate on the date you received the payment (or a reasonable annual average rate).

Entry Fee Deductions

If you are competing as a business (not a hobby), tournament entry fees are a deductible business expense on Schedule C. This includes online qualifier fees, LAN event registration fees, and league buy-ins. Entry fees paid for events you did not win are still deductible. The deduction is not limited to your winnings.

If you are classified as a hobbyist under IRC Section 183, entry fees are not deductible. This is one of the key reasons the hobby vs. business classification matters.

Travel and Equipment Deductions for Pro Players

Professional esports players who compete as a business can deduct the ordinary and necessary expenses of competing.

Travel

Airfare and ground transportation to tournaments
Hotels during tournament weekends or bootcamps
Meals while traveling for competition (50% deductible)
Baggage fees for transporting equipment

Equipment

Gaming PC or laptop (business-use percentage if also used personally)
Monitor(s) (including high-refresh-rate competitive monitors)
Peripherals (mouse, keyboard, headset, mousepad, controller)
Capture card and streaming setup (if you also stream your practice or tournaments)
Gaming chair and desk (if used in a dedicated practice space that qualifies as a home office)

Other Deductions

Internet (business-use percentage)
Game purchases and subscriptions required for competition
Coaching fees
Team house rent (if you live in a team house, the portion attributable to practice space may be deductible)
Health and fitness expenses are generally not deductible unless prescribed by a doctor for a specific medical condition

Hobby vs. Business: IRC Section 183

The hobby vs. business classification is the single most important tax question for competitive gamers. It determines whether you can deduct your expenses against your winnings.

If You Are a Business

You report all income and deduct all ordinary and necessary expenses on Schedule C. If your expenses exceed your income (you have a net loss), you can use that loss to offset other income on your return (W-2 wages, streaming income, etc.). You pay self-employment tax on your net Schedule C profit.

If You Are a Hobby

You report all income on Schedule 1 as other income. You cannot deduct any expenses against that income under current law (the Tax Cuts and Jobs Act suspended miscellaneous itemized deductions through 2025, and the OBBBA extended the suspension). You still owe income tax on the full amount of your winnings. You do not owe self-employment tax on hobby income.

The IRS Factors for Business vs. Hobby

The IRS uses a multi-factor test (the Section 183 factors) to determine whether an activity is a business or a hobby:

Do you carry on the activity in a businesslike manner? (Records, separate bank account, business plan)
Do you devote significant time and effort to the activity?
Do you depend on the income for your livelihood?
Are your losses due to circumstances beyond your control or normal startup costs?
Have you changed methods of operation to improve profitability?
Do you have knowledge or advisors in the field?
Have you made a profit in some years? (Profit in 3 of the last 5 years creates a presumption of business intent.)
Can you expect to make a future profit from the appreciation of assets used in the activity?
Is there personal pleasure or recreation involved?

No single factor is decisive. The IRS looks at the totality. For competitive esports players who practice daily, travel to events, track results, and treat competition as their primary occupation, the business classification is usually defensible. For casual players who enter a few online tournaments per year, hobby classification is more likely.

New Jersey Taxes All Tournament Income as Ordinary

If you are a New Jersey resident, NJ taxes tournament winnings as ordinary income at rates from 1.4% to 10.75%. NJ does not offer a preferential rate for prize income and does not distinguish between hobby and business income for state purposes. All of it is taxable at your marginal NJ rate. NJ estimated tax payments (NJ-1040-ES) should include your expected tournament income.

Key Takeaway

Tournament winnings go on 1099-MISC Box 3, not 1099-NEC. Org payouts depend on whether you are a W-2 employee or 1099 contractor. International winnings may be subject to foreign withholding, and you can claim a foreign tax credit on Form 1116. The hobby vs. business classification determines whether you can deduct your expenses. If you are competing seriously, treating it as a business is usually the right call, but you need to operate in a businesslike manner to defend that position. NJ taxes it all as ordinary income regardless. If you need help structuring your competitive gaming income, I handle this for esports players. Many players I work with also have crypto holdings that need coordinated tax planning.

Technical Details: 1099-MISC Box 3 and IRC Section 183

Per IRS Instructions (Rev. 4-2025), tournament prize money is properly reported on 1099-MISC Box 3 (prizes and awards), not on 1099-NEC. The 1099-NEC is reserved for payments made for services performed, while Box 3 covers prizes, awards, and other types of income not classified as nonemployee compensation. When prize money flows through an organization and is split among team members, the org typically issues 1099-NEC or W-2 to each player for their share. For international tournaments, the Foreign Tax Credit on Form 1116 requires documentation of the foreign taxes paid and a calculation showing the credit cannot exceed the U.S. tax attributable to that foreign-source income. IRC Section 183 (the hobby loss rule) is the gatekeeper for deducting expenses: if your competitive gaming does not qualify as a business under the nine-factor test, you cannot deduct entry fees, travel, or equipment against your winnings.

How Tournament Winnings Are Taxed: A Guide for Esports Players