Its Azure cloud computing services also got a boost due to a surge in working and learning from home.
The gains helped push the firm's overall revenue up 17% to a record $43.1bn (£31.4bn).
But its growth came as the virus continues to weigh on other industries.
Microsoft boss Satya Nadella said the firm is benefiting from a long-term shift in behaviour.
"What we have witnessed over the past year is the dawn of a second wave of digital transformation sweeping every company and every industry," he said.
Xbox sales jumped 40% in the three months to 31 December while Azure services soared 50%.
The pandemic has prompted many firms to switch to remote working, while keeping many entertainment options outside of the home off-limits.
Microsoft has seized on the changes, focusing energy on updating its remote work software options.
The firm also released two new Xbox consoles in November, helping to boost the performance of its personal computing unit.
Microsoft's gaming business topped $5bn in quarterly sales for the first time ever due to gaming subscriptions and sales as well as new consoles.
The firm said profits in the quarter rose 33% compared with last year to $15.5bn.
Its shares - which climbed roughly 40% last year - were up another 4% in after-hours trade,
"These were blow out numbers that will be another feather in the cap for the tech sector as the cloud growth party is just getting started," said Dan Ives, an analyst at Wedbush Securities.