Jordan Mathewson, known as Kootra online, was playing popular title Counter-Strike when several officers entered the room and arrested him.
According to ABC News, he was later released without charge.
Officers said they were now trying to trace what they believed was a hoax call, possibly targeting the gamer.
"The caller claimed to have shot two co-workers, held others hostage, and threatened to shoot them. He stated that if the officers entered he would shoot them as well," the Littleton Police Department said in a statement.
"There were no victims or any evidence that a shooting had taken place.
"If the investigation determines that today's incident was a hoax, those involved will be prosecuted to the fullest extent of the law."'Swatting'
As is popular with many gamers, Mr Mathewson had been live-streaming his game online.
At one point, Mr Mathewson told people listening that he thought the building was "being swatted".
Moments later, several armed officers enter the room, shouting and ordering Mr Mathewson to the ground where he is handcuffed.
The full video of the incident, which contains strong language and video game violence, was posted on YouTube.
In it, Mr Mathewson can be heard telling police: "I'm sitting there playing a game, people are watching it, and I guess a joker thought it would be funny to call you guys in."
As the incident played out, the game continued to take place without Mr Mathewson taking part.
"Swatting" is a growing issue for police in the US, in which hoax calls are made with the intention of sounding serious enough to provoke the SWAT - Special Weapons And Tactics - team into deployment.
Several cases of disgruntled gamers making hoax calls have been reported this year. Littleton police warned that hoaxes could have serious consequences.
"Fortunately there were no injuries today," the statement said.
"But a massive law enforcement response wastes resources and greatly increases the chances of innocent people being injured or killed."
At the end of the match, the game can be heard declaring: "Terrorists win."