The tax challenges to be dealt by video gaming and streaming professionals

Alessandro Martinelli unvails the often overlooked tax issues for eGamers

eGamers and streamers should pay attention to the tax implications of their video gaming business, which are often unclear.

This article was drafted by my tax partner at DLA Piper (and obsessed video gamer), Alessandro Martinelli, on tax issues for professional video gaming players and streamers.

The tax hurdles often ignored by video gaming professionals

The tax regime applicable to the “new” Italian online entertainment and video gaming professionals (the so-called eGamers and streamers) is often superficially treated. This scenario happens, on the one hand, because of the lack of knowledge of experts for this young and rapidly changing market and, on the other hand, because of the inexperience of young video gaming streamers who are not familiar with the administrative and bureaucratic tax aspects that the transition from a hobby to a professional activity can lead to.

Streamers and eGamers create virtual communities taking advantage of their gaming and communication skills through different platforms (e.g., Twitch, YouTube, or the more recent Mixer, a Microsoft’s platform that will soon cease its activities to start a partnership with FacebookGaming). These platforms are organized and monitored by moderators and allow users to follow the live broadcasting of their favorites video gaming players (real companions of their days, especially now, in a phase of Covid-19 lockdown), interact with them, exchange opinions, all in real-time. It is estimated that the ten most well-known online eGamers (including “Ninja” with 15 million dollars of annual turnover) earn a total of about 120 million dollars per year, very high figures for a fast-growing business.

The streaming video gaming activity can lead to economic income in different ways. From the very beginning, the streaming activity is encouraged by the same platforms through different partnership/affiliation methods, depending on the number of users connected live or though other variables. Let’s see how.

The different sources of income for eGamers

The incentive scheme requires the affiliation to the relevant media platform. For example, Twitch allows eGamers with 50 followers to access a program through which he/she can (i) switch to a paid subscriptions to the channel (the platform ensure greater visibility for the “gold” user), (ii) enable the “bits”, a virtual exchange currency through which users can root for other gamers and support them also economically or (iii) allow the sale of the game directly from the channel (e.g., a “live” promotion of the title played or of any add-on related to the broadcast media).

Furthermore, incentive schemes generate income in favor of all the players involved. Streamers will receive either (i) part of the subscription prices, or (ii) the “bits” used by the user on its channel and also (iii) a percentage of the sale price of the videogame.  Moreover, the platform will generate income from (i) the sale of the subscriptions, (ii) the sale of the “bits” and (iii) the distributed game. Besides, the most performing streamers will be able to access advanced “partnership” programs, through which they gain greater visibility to stimulate and customize sales.

Also, eGamers can obtain additional benefits through sponsorships (e.g., traditional banners on the channel, usually related to the brands of hardware used, but also associated with the direct consumption of goods and services during the live streaming). Moreover, they could generate income also through cash winnings for participation in eSports events (live and/or online) and also through voluntary incentive mechanisms (outside platforms) which allow users – regardless of the subscription to the channel – to make cash donations. This controversial form of remuneration will be discussed below.

The tax implications for eGamers of the different sources of income of the video gaming market

Such different forms of remuneration can generate taxation for the Italian streamer and eGamers.  According to the Italian tax law provisions, for income tax purposes, any person who has his usual place of residence or his vital center of interest in Italy for more than 182 days a year is liable to pay taxes in Italy wherever the income is generated.

Moreover, it is necessary to point out the nature of the performance carried out by the streamer to delineate his/her tax profile. Indeed, streamers and eGamers can provide “occasionally” or “habitually” (i.e., professionally) activities. Generally, for income tax purposes (the so-called “IRPEF”), the occasional service is identified by reference to occasional activities carried out for no more than 30 days a year with the same client. In this case – and only in this case – it will be possible to avoid the opening of the VAT number and the start of the actual professional activity. In this scenario, if the remuneration is less than 4,800 Euro per year, streamers and gamers might not submit the tax return. However, it is always required the application of the 20% withholding tax if the client is a company.

This tax regime is difficult to apply. Indeed, even if the 4,800 Euro limit is respected by the most, there is still a problem linked to continuity (i.e., “habitually”) of the performance. Indeed, it is noteworthy that first incomes, although not materially significant, come from a stable relationship with the platform (which downgrades part of the subscriptions and/or purchases made by users on the channel), which may lead to a continuity in the performance. Moreover, remuneration from sponsorships (strictly linked to the use of the platform) and from the participation to professional eSports events, even if occasional, usually take place at advanced levels, i.e., when the streamer is well-known in the web (due to his/her “live” presence or for the diffusion of his/her name). All these factors might indicate continuity in the performance, and they could negatively affect the occasional and unprofessional streamers’ performance. Consequently, these factors could give rise to the necessity to open an ad hoc VAT (and tax) position, to be able to declare all professional income and fulfill all tax obligations.

The uncertain treatment of donations to eGamers under a tax perspective

It is necessary to go into the long-standing question of donations received. In particular, as far as streaming concerned, donations could account for a significant amount of income. According to the Italian provisions, a donation of money must not provide for a counter-performance by the person who receives it, i.e., it must be qualified as a gift. In the streaming channels, such sums of money can be freely donated without any kind of obligation either in terms of quantum or in terms of obtaining benefits as a result of the transfer. Therefore, they would appear to be real direct donations, excluded from income formation for Italian IRPEF purposes.

Nevertheless, controversial interpretations may arise in the future about donation in the streaming channels.  Indeed, on the one hand, donations do not generate taxable income for the person who receives them, but, on the other hand, the Italian Revenue Agency may be attracted by the several numbers of low-value donations transferred through streaming channels that could lead to a considerable amount of money potentially subtracted from taxation. As a result, there could be administrative and, when certain thresholds are exceeded, also criminal penalties.

The boundary between donations (tout court) and payments of a counter-performance in the world of streaming is blurred. Indeed, for example, the amount of money that a user of the platform “donates” to follow a particular player during a game at Fortnite, although not mandatory, is perhaps a different qualification of the payment for the entertainment enjoyed. In this case, the Italian Revenue Agency may try to retrain these sums into professional income, with the (unpleasant) consequences mentioned above.

To understand some of the additional legal issues of the video gaming market, I recommend reading DLA Piper Esports Laws of the World.

Image Credit Glenn Batuyong

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Giulio Coraggio

I am the head of the Italian Technology sector and the global head of the IoT and Gaming and Gambling groups at the world-leading law firm DLA Piper. IoT and artificial intelligence influencer and FinTech and blockchain expert, finding solutions to what's next for our clients' success.

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