Tax Exposure for Fantasy Sports

02 September 2021

Football season will be kicking off soon. Beware: If you participate in fantasy sports leagues for money, there may be tax implications related to these activities. For instance, you may enter fantasy sports competitions offered by sponsors like FanDuel and DraftKings where you can win or lose money daily or weekly based on the performance of your team. Fantasy football is the most popular fantasy sports contest. But there are also fantasy forums for other sports and individual activities, including golf, bowling and even birdwatching! Are you playing for pleasure or money? The answer can make a big tax difference in the eyes of the IRS.

Review the Tax Rules for Gambling

The federal tax law on fantasy sports is still evolving. Although there's nothing definitive written into the tax code, the IRS has consistently maintained that fantasy sports and gaming competitions involving payments constitute gambling activities for tax purposes. The IRS reinforced this position in a recent private letter ruling.

Gambling winnings are considered taxable income for federal tax purposes. It doesn't matter how and where you win. For example, income from gambling could be earned at a racetrack, a casino, church bingo or an online fantasy sports event.

Important: State income tax laws vary, but gambling income from fantasy sports activities may also be subject to state income tax.

An amateur gambler's wagering losses can be claimed only as a miscellaneous itemized deduction for federal tax purposes. Amateur gamblers who don't itemize can't claim gambling loss deductions. (See "Are You a Pro?" below)

In addition, the itemized deduction for wagering losses is limited to the amount of gambling winnings. Any excess losses for a year can't be carried forward. For a married couple filing jointly, the wagering winnings of both spouses are combined to determine the allowable itemized deduction for combined wagering losses incurred by both spouses.

There's no requirement for losses to be from the same types of gambling activities as winnings. For example, slot machine losses can be deducted against fantasy football winnings, subject to the losses-can't-exceed-winnings deduction limitation.

For example, suppose you won $10,000 playing poker and blackjack in Las Vegas in March 2021. Later in the year, you have a cold streak playing in a fantasy baseball league and lose $15,000. On your 2021 federal tax return, you must report the $10,000 of winnings as miscellaneous income. You can then report the $10,000 allowable wagering loss (equal to your winnings for the year) as an itemized deduction. However, the $5,000 excess loss can't be deducted in 2021 or carried forward.

Tax Tip: Start tracking your winnings and losses as soon as possible. Waiting until year end to recreate the required records can be difficult and time-consuming.

Only the cost of an amateur gambler's losing wagering transactions are considered gambling losses. Out-of-pocket gambling-related expenses — such as transportation, meals and lodging — don't count as gambling losses and can't be written off. They're considered nondeductible personal expenses.

Previously, most miscellaneous expenses were deductible only to the extent the annual total exceeded 2% of your adjusted gross income (AGI). The Tax Cuts and Jobs Act suspended miscellaneous expense deductions from 2018 through 2025. But the 2%-of-AGI limit doesn't apply to gambling losses, and those losses continue to be deductible.

Report the Winnings

If you win big playing fantasy sports, the IRS will stake a claim on those winnings. Don't think you can fly under the radar and not report the income. Online gaming forums have a legal obligation to report annual winnings of at least $600 on Form 1099-MISC. If you're paid through a third-party source, such as PayPal or Venmo, you'll receive a 1099-K.

The IRS will also receive copies of these forms and may flag your return if you don't report the income. Even if you don't receive any 1099s, you're still required to report your fantasy sports profits on your federal and, when applicable, state income tax returns.

Generally, the fantasy gaming organizer will calculate your net profit under a simple formula. The taxable amount is your winnings, minus the entry fee, plus any bonuses. Then this amount must be reported as other income on your individual tax return, along with other items such as trustee fees and jury duty pay.

Reminder: To offset some of the tax liability, if you itemize, you can claim gambling losses up to the amount of winnings.

Are You a Pro?

Different federal tax rules apply to professional gamblers than amateurs. If you can convince the IRS that you're in the business of gambling, you can deduct the full amount of your losses, plus certain other business-related expenses.

To qualify as a professional gambler, you must show that you have a legitimate intention of turning a profit. Under the prevailing regulations, the profit motive, or lack thereof, is determined by the following nine factors:

1. The manner in which you carry on the activity,
2. Your expertise and the expertise of your advisors,
3. The time and effort you expend in carrying on the activity,
4. The expectation that the value of assets used in the activity may appreciate,
5. Your success in carrying on other similar or dissimilar activities,
6. Your history of income or losses with respect to the activity,
7. The amount of occasional profits, if any, which are earned,
8. Your financial status, and
9. The elements of personal pleasure or recreation.

No single factor, or group of factors, is persuasive. However, you face an uphill fight when trying to persuade the IRS that you're a pro. Contact your tax advisor for more information.

Don't Gamble with Your Taxes

There's no place for gambling when it comes to preparing your federal tax return. Play it safe and contact your tax professional today about how to accurately track gambling-related winnings, losses and expenses on your 2021 federal tax return.

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