Must the winners from on-line games and gambling make a tax contribution to society?

This week the news was full of the 16-year- old American, Kyle Giersdorf, who won US$3mn in the World Cup online game, Fortnite Battle Royale. His win raises an interesting tax question: if he was a South African playing a South African game would he have to contribute to the welfare of his fellow South Africans by paying tax on this sum? And, although I don’t want to be seen to put a game of dedication and skill like Fortnite (which is an e-sport) in the same category as gambling, this same question might be asked about winnings from gambling (on-line or not), for which one obviously has to be a little older than 16. (I believe that successful gamblers argue that they, too, need dedication and skill to win).

Kyle Giersdorf, 16, wins $3 million

It is important to understand that the principles of our tax laws apply to all income, however derived.

The first question to ask if you receive any money (not repayment of a loan) is: How did I come to receive this money? You may answer by asking: did I pursue it by working hard towards earning it? or, did I place it in an investment to derive income therefrom? or did I sell something to make a profit? or did the amount simply arrive on my doorstep ‘out of the blue’- as a ‘gift’ or by luck?

If the answer to any of the first 3 sub-questions is ‘yes’ then, subject to any specific law that makes it non-taxable (like dividends), generally the receipt will be taxable. If you only answer ‘yes’ to the last sub-question the amount might not be taxable.  (There are some specific capital gains tax rules that may apply to wins from gambling (if it is not regulated under South African laws), but that is not what we are looking at here).

Broadly, to establishing the taxability of winnings (or deductibility of losses), you need to determine whether you have worked towards the income or embarked upon a ‘profit-making scheme’. 

Applying these rules to an on-line e-sport like Fortnite or to gambling, if you are someone who occasionally plays or gambles, for example, spending a few hundred Rand at a casino as part of your evening’s entertainment, any winnings you derive may be viewed as ‘fortuitous’ and, therefore treated as capital and non- taxable in your hands.

However, there is a point at which the level and methodology of your gaming results in it ceasing to be a form of entertainment (as an occasional gamer) and starting to be a form of business (as a ‘professional’ gamer). One of the Judges in a Special Court income tax case set out what you could look at to establish if you have crossed this line when he said:

.. where an ordinary punter simply lays a bet, or bets habitually, this conduct is so irrational from a business point-of-view that its gains cannot ordinarily be subject to payment of income tax’ but where ‘persons…have specialised knowledge and sources of particular information which may make their occupation less irrational by reducing substantially the purely arbitrary results of their efforts’ this becomes more of a taxable business or trade activity. (ITC 765 (1951)).

Applying these same rules to Kyle Giersdorf and his $3mn win, since it is clear he worked hard practising and considering strategies in order to win – he is quoted as saying that he ”plays 6 to 8 hours a day, at least 5 days a week, in his room”. (To emphasise the point, 16-year-old Shane Cotton of California, who came third, said he “stepped up” his practising to 10 hours a day during the summer!). Thus, if Kyle Giersdorf were in South Africa there would be a strong case for him to be legally obliged to make his contribution to the public goods via the tax system.

Most people tend to think that if they win when they are playing games for money, or gambling, any winnings won’t be taxable.  In the majority of cases this perception is probably correct.  But it is important to be aware that there are exceptions, and you need to know if you fall into one of them in order to do the right thing when it comes to paying your tax

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