Tournament Prize Money: Legal and Tax Considerations

Winning a gaming tournament can be life-changing—until you realize how much of that prize money goes to taxes, fees, and contractual obligations. Understanding the legal and tax implications of tournament winnings protects you from unpleasant surprises and helps you keep more of what you've earned.

Prize Money is Taxable Income

All tournament winnings are taxable as ordinary income by the IRS, regardless of: The size of the prize. Whether it was a team or individual competition. Whether you received cash, cryptocurrency, or other prizes. Whether the tournament was in the US or internationally. You must report all winnings on your tax return and pay applicable taxes.

Tax Withholding on Prizes

Some tournament organizers withhold taxes from prize payments before distributing them to winners. Withholding rates vary: US tournaments often withhold 24% for federal taxes. State taxes may also be withheld. International tournaments may withhold based on local tax laws. If taxes are withheld, you'll receive a W-2G or 1099-MISC reporting the withholding. The withheld amount is a credit toward your total tax liability—it doesn't eliminate your tax obligation, just prepays part of it.

Self-Employment Tax Considerations

If gaming is your profession or primary income source, tournament winnings may be subject to self-employment tax (15.3%) in addition to income tax. This applies if: You compete regularly in tournaments. Gaming is your business or source of livelihood. You're not an employee of a team (or your team contract doesn't cover prize money). Self-employment tax significantly increases your tax burden. Plan accordingly.

Team Contracts and Prize Splits

If you compete as part of a team, your contract likely dictates how prize money is split: Common splits range from 50/50 to 70/30 (player/team). Teams may take a percentage to cover training, travel, coaching, and management. Contracts should specify whether the split is before or after taxes. Understand your split before competing—don't assume you're keeping 100% of the prize.

Deductible Expenses

Professional gamers can deduct ordinary and necessary business expenses related to tournament participation: Travel costs (flights, hotels, meals). Entry fees and registration costs. Equipment and gear. Coaching and training. Software and subscriptions. Keep detailed records and receipts for all expenses to maximize deductions.

International Tournament Tax Issues

Winning tournaments in other countries creates additional tax complexity: You may owe taxes to the country where the tournament was held. The US taxes worldwide income, so you owe US taxes on foreign winnings. Tax treaties may reduce or eliminate double taxation. You may be able to claim a foreign tax credit for taxes paid to other countries. Consult a CPA experienced in international taxation if you compete abroad frequently.

Cryptocurrency and Non-Cash Prizes

Some tournaments award prizes in cryptocurrency or non-cash items (equipment, trips, etc.). Tax rules: Cryptocurrency is taxed at fair market value when received. Non-cash prizes are taxed at fair market value. You owe taxes even if you don't convert crypto to cash or sell the prize. Keep records of fair market value at the time of receipt.

State and Local Taxes

Don't forget state and local taxes on tournament winnings: Most states tax prize income. Some cities have additional income taxes. If you win a tournament in a different state, you may owe taxes there and in your home state. Check state tax laws and plan for multi-state tax obligations if you compete nationally.

Amateur vs. Professional Status

Your tax treatment may differ based on whether you're an amateur or professional gamer: Amateurs report winnings as 'other income' and may have limited deductions. Professionals report winnings as business income and can deduct business expenses. Professional status requires regular, sustained income-producing gaming activity. The distinction affects your ability to deduct expenses and claim business losses.

Record-Keeping Requirements

Maintain detailed records of all tournament activity: Dates, locations, and names of tournaments. Prize amounts and payment documentation. Contracts and prize split agreements. Travel and expense receipts. Tax withholding forms (W-2G, 1099-MISC). Good records support your tax filings and protect you in an audit.

Planning for Taxes

Don't spend all your winnings without accounting for taxes: Set aside 30-40% of prize money for federal, state, and self-employment taxes. Make quarterly estimated tax payments if you have regular tournament income. Work with a CPA to project tax liability and plan payments. Failing to plan for taxes can leave you with a massive tax bill and no money to pay it.

Legal Issues Beyond Taxes

Prize money also involves non-tax legal considerations: Tournament rules and eligibility requirements. Age restrictions and parental consent for minors. Dispute resolution if prize payments are delayed or withheld. Contractual obligations with teams or sponsors. Read tournament rules carefully and understand your rights and obligations.

Protecting Your Winnings

Maximize what you keep from tournament prizes: Understand tax obligations and plan accordingly. Negotiate fair prize splits with teams. Deduct all eligible business expenses. Work with professionals who understand esports taxation. Consider business structures that optimize tax treatment. Winning is only the first step—keeping your winnings requires smart planning.

Schedule a consultation and we'll help you navigate tournament prize taxation and contract negotiations to protect your earnings.