Are my in-game expenses deductible?

Over the last five months, I’ve gotten into playing Puzzles and Survival on my phone. It’s a combo sanctuary building/deck building/match 3 puzzles situation loosely wrapped in a zombie apocalypse. It also involves cooperative play, and it turns out that some light chat banter while following other people’s plans with uncomplicated objectives is a really satisfying counterpoint to the relentless nuanced decision-making of being self-employed.  Naturally, this being filing season, someone joked about deducting their in-game purchases. And being me, I outed myself as a CPA and I asked if they wanted a serious answer about it. They did! So here it is. 

Note: this information pertains to US tax law as of February 2023, and is intended as general education only. Your facts and circumstances are specific to you, and you should consult a qualified tax professional to assess what you deduct. If you’re not sure what constitutes a qualified tax professional, I have a blog post about that and also a booklet on how to hire one.

The short version: it’s unlikely that you can deduct your in-game purchases. However, if they:

1. Are ordinary and necessary business expenses AND
2. Are not for client entertainment purposes

then yes, you probably can deduct them.

The long version:

The starting point of US tax law is these key principles:

1. Income is taxable unless it is explicitly allowed to be tax-exempt
2. Nothing is deductible unless it is explicitly allowed

First we need to back up and define a business, because that’s going to be important later on. Conveniently, the IRS has a pithy summary for us:

“A trade or business is generally an activity carried on for a livelihood or in good faith to make a profit. The facts and circumstances of each case determine whether an activity is a trade or business. Some of the important facts and circumstances used to make this determination include:

1. regularity of the activities,
2. regularity of the transactions,
3. production of income, and
4. ongoing efforts to further the interests of your business.

You do not need to make a profit to be operating a trade or business but you do need to have a profit motive.”

IRS.gov Small Business homepage, retrieved 12 February 2023

Also from the IRS and worth the three minutes to read: Earning side income: Is it a hobby or a business?

Next, we need to talk about ‘ordinary and necessary’. The IRS again: “An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business.” Finally, an important note: your business is a business even if it is an illegal business or legal but shady (as in a scam or a violation of a game’s terms of service). If it’s federally illegal, most expenses can’t be deducted but you are still required to report the income and pay taxes on it. (Fun fact: there are a shit ton of accountants who work for the FBI using tax fraud charges to prosecute organized crime. One of their most notable successes? Al Capone.)

Okay, so now that we have a common framework to discuss this, let’s walk through some scenarios where in-game purchases might be business expenses and analyze them.

The Streamer/You-Tuber

Let’s use a real example here: Valence Ring is a Puzzles & Survival YouTube Channel. Are they a trade or business? 

1. Regularity of activities? They create and post new videos at least weekly, and often more frequently. They host a Discord server where they post near-daily. This is a definite yes.
2. Regularity of transactions? Hard to tell from the outside, but they’ve been putting in this level of effort since 2020, so I’m going to vote yes.
3. Production of income? Again, hard to tell from the outside, but they have:
   • YouTube ads
   • Affiliate links in their Discord content
   • Donation buttons
   • Paid recurring supporter roles in their Discord server
   • Paid advertiser roles in their Discord server

so they are certainly giving it a go. Again, this is a yes for me.

4. Ongoing efforts to further the business? With all the above and evidence of their income practices evolving, yes. 
5. Profit motive? I don’t know Valence Ring personally, so I couldn’t tell you, but let’s assume yes.

Are Valence Ring’s in-game purchases ordinary and necessary? For their public-facing accounts, I think this is clear yes. They are in the business of educating people about strategies within the game, and that includes strategies of what purchases give you the most bang for your buck. They have to make in-game purchases in order to asses that information. For accounts that are not public-facing, I think this is a more nuanced question. If I were their accountant, I’d want to see a written plan describing the business purposes of the expenditures (for example, researching the best way to use $50 at the start of a new account to increase account growth) and evidence that the research was used later on in the public-facing parts of the business.

The Resource Pirate/Scammer

This is a fun one. If you haven’t played a sanctuary builder before, you may not have run into this phenomena (I sure hadn’t), but here’s roughly how it works. The marginal cost of each upgrade increases the higher you level up, meaning you need more and more resources. In Puzzles and Survival, there are four mechanisms for gaining resources: you can gather them peacefully, you can attack other sanctuaries to steal them, you can earn them from events and quests, or you can buy them in-game. There is also a mechanism to transfer peacefully between accounts, so some folks, myself included, have extra accounts they use to gather. Resource pirates attack in inactive states, then immigrate to active states and message players offering to make unofficial trades of in-game resources for real dollars. You can scout them to verify their inventory, but you have no recourse if you transfer them money and they do not transfer you the resources back. 

If a pirate does, in fact, meet the business tests for regularity of transactions and activities, successfully scams people for income, makes ongoing efforts to be a more skillful pirate and has a profit motive… then that’s a business. To the best of my knowledge this is shady, violates the games terms & conditions, but is not federally illegal. (I’m not an attorney though, FYI). So if a pirate is getting some of their inventory via in-game purchases, or more likely buying the tickets to immigrate between states, then yes. Their in-game purchases are a deductible business expense.

The Account Flipper and/or Power Leveler

Puzzles & Survival accounts are transferable, which of course means there is a secondary market in selling built-up accounts. There are also folks who sell the service of Power-leveling, which means you hand over your account temporarily along with some dollars and they use some of those dollars and some of their time to level you up, then (in theory) give your account back. (Obviously there’s another opportunity for scams here). Again, assuming you pass the trade or business and profit motive tests, there’s potential deductibility here. In this case however, the accounts you are buying or selling (or being paid to improve) would be your inventory, and you’d need to keep your in-game purchases organized by Puzzles & Survival account in your business records so that you could keep your Cost of Goods Sold sorted out.

The Business Networker

Finally, there’s the family of “it’s part of my regular business activities” argument. These fall into three categories:

1. The people you play with are your clients and your in-game purchases are client entertainment. This may well be the case… but client entertainment is not deductible. (You can do fun things with your clients, but the costs you incur for them are not deductible. Those corporate boxes at sporting events? Not deductible to the corporations.)
2. The people you play with are potential clients, and the relationships you form playing naturally lead to you marketing your business’s products or services to them. Your in-game purchases are part of your marketing efforts, as it’s quite difficult to keep up with the game without spending some money. (There would be no trouble establishing a profit motive for the Puzzles & Survival developers…). This one is a stretch… but if you can show a regular pattern of client recruitment resulting from your game relationships and those clients result in substantially more revenue than your in-game purchases, I’d be willing to argue this one is deductible with a straight face. [Cough, cough. If any of my fellow players would like a financial coach to help them line up their in-game spending with their other financial priorities, LET ME KNOW.]
3. Novel arguments. My favorite one here is brought to you by the player formerly known as Doc Chuckles, who argued that the stress and drama of interstate warfare and the difficulties of negotiating non-aggression pacts (NAPs) and then corralling people into respecting the NAPs should constitute training for his work as a clinical psychologist. I wouldn’t personally sign a tax return that contained deductions under that argument, but I don’t think it’s entirely far-fetched, especially if Chuckles’ practice involved a preponderance of gamers, gambling addicts and/or diplomats. Even with an accountant who was on board with that argument however, under current law Doc Chuckles would need to be self-employed; if he is an employee, the expenses would be unreimbursed employee business expenses. There is a provision that allows deduction of unreimbursed business expenses to the extent they exceed 2% of your gross income…. but all 2% deductions are currently suspended through tax years ending December 31, 2025.

Got another argument you’d like to make and have analyzed? I’m game*. Drop ‘em in the comments below. If you’d like to know when I next drop an accountant-inspired take on life, I have an erratic newsletter for that.

*buh dump ching