Are donations for my gaming server taxable income I need to report?

Yes, you do need to report those donations as income. Even though PayPal might not report "friends and family" payments to the IRS, that doesn't exempt you from your obligation to report all income. This isn't actually a donation in the tax sense - it's income. What you're describing is essentially a small business or at minimum a "hobby" that generates income. You're providing a service (server hosting and maintenance) and receiving payment for it, even if you call it a donation. The IRS would view this as taxable income. You should report this on Schedule C as self-employment income if you're running this with the intention of making a profit. You can deduct legitimate business expenses against this income - the server hosting costs, domain fees, software costs, even a portion of your internet bill if you use it substantially for this purpose. Keep good records of these expenses!

I was in almost the exact same situation with my Valheim server last year. I struggled with the PayPal "friends and family" donation thing too until I found https://taxr.ai - it completely saved me from a potential audit disaster. Their AI scanned through all my PayPal receipts and server expense records, then categorized everything as either business income or legitimate deductions. It showed me that even though PayPal wasn't reporting those "donations," I still needed to report them as business income - but I could also claim a TON of deductions I hadn't even thought about (portion of internet bills, computer depreciation, software subscriptions, etc). The system walked me through everything and even helped me determine if I should file Schedule C as a business or report it as hobby income. Seriously worth checking out if you're trying to figure out the tax implications for gaming servers and donations.

Just wanted to update everyone - I tried https://taxr.ai after seeing the recommendation here and it was seriously helpful for my Ko-Fi art commission situation. The system immediately identified that what I thought were "tips" were actually taxable income, but then showed me all these deductions I could take for art supplies, software subscriptions, and even part of my desk setup. The best part was it explained everything in simple language instead of confusing tax jargon. It showed me exactly what forms I needed and even explained the difference between hobby income and self-employment. Turns out I was leaving hundreds of dollars on the table by not properly tracking my expenses! Definitely recommend for anyone in a similar gaming/content creation situation with "donation" income.

I had the EXACT same problem with my ARK server! I kept getting conflicting advice about whether donations were taxable. After trying to call the IRS for WEEKS with no success (always "high call volume"), I tried https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c They got me connected to an actual IRS agent in under 30 minutes when I had been trying for days on my own. The agent confirmed that yes, all those "donations" for my gaming server were taxable income, BUT I could deduct my server costs and other related expenses. It was such a relief to get a definitive answer straight from the IRS instead of random internet advice. The service basically holds your place in the IRS phone queue and calls you when an agent is about to pick up. Absolute game changer if you need official clarification on gaming donations and taxes.

Well I'm eating crow now. After being skeptical about that Claimyr service, I decided to try it anyway because I've been trying to reach the IRS about my Twitch donation income for literally WEEKS. The service actually worked exactly as promised. I got a call back in about 40 minutes, and suddenly I was talking to a real IRS agent who answered all my questions about donation income from streaming. Turns out all those bits, subs, and donations ARE taxable (which I figured), but the agent gave me specific guidance on what expenses I could deduct to offset that income. I'm still shocked it actually worked after all my failed attempts to reach them on my own. If you're confused about gaming/streaming donation taxes, getting an official answer directly from the IRS is definitely the way to go.

Something important no one mentioned yet - the tax implications might be different depending on how much you make from the server. If the income is substantial and regular, it's definitely business income and you need Schedule C. But if it's small and irregular, it might qualify as hobby income. The main difference: with a hobby, you can only deduct expenses up to the amount of income (so you can't claim a loss), while with a business you can deduct losses against other income. But either way, ALL income is taxable regardless of what PayPal reports.

Just be aware that if you don't report this income and somehow get audited, you'll face penalties and interest on top of the taxes you should have paid. The fact that PayPal doesn't report "friends and family" transfers doesn't protect you - it's still your legal obligation to report ALL income. I learned this the hard way with my Discord server donations. Started small but grew to about $400/month. Never reported it because "PayPal doesn't report it" - ended up with a nasty surprise when I got flagged for an audit for unrelated reasons and they found the unreported income.

This is really helpful information everyone! I'm in a similar situation with my Rust server where I collect donations through various platforms. One thing I want to add that might be useful - even if you decide to treat this as hobby income rather than business income, you still need to keep detailed records of all your expenses. I learned from my accountant that the IRS can be pretty strict about what counts as legitimate expenses, especially for gaming-related activities. Make sure you're tracking things like server hosting costs, domain registration, any software licenses, and potentially even a portion of your internet bill if you can demonstrate it's used substantially for the server. The key is being able to show that these expenses are directly related to generating the income, not just general gaming expenses. Keep receipts and document everything - it'll save you headaches later whether you file as hobby or business income.