Fantasy sports keep growing in popularity. They can range from casual leagues to heavy betting for high stakes. Strategy: Understand the tax consequences. If you don’t, you could land in hot water with   the IRS.  Although the tax law is still evolving, fantasy sports are generally treated as

a form of gambling where payoffs are concerned. Here’s the whole story: To play fantasy sports, you might sign up with an online forum like FanDuel or DraftKings that offer winnings based on daily, weekly or season-long performance. Or you can enter into a league of friends or family hosted by websites such as Yahoo and ESPN. Virtually all athletic pursuits are represented—even bass fishing! If you play fantasy sports for money and win, however, the IRS will want to claim its share. Fantasy sports websites are legally obligated to report annual winnings of at least $600 on form 1099-MISC. If you’re paid through a third-party source (e.g., PayPal), you’ll likely receive a 1009-K instead. Don’t think that this is flying under the radar. IRS computers may flag discrepancies if you don’t report 1099 income on your return.  Typically, a fantasy sports entity will calculate your “net profit” as being equal to the amount of your winnings minus entry fee plus any bonuses. For instance, if you hit jackpot this year with a $25,000 payout and a $5,000 bonus and it cost you $1,000 entry fee, your net profit is $29,000.  The income should be reported on your 1040 along with other random income like jury duty pay and trustee fees.  Silver tax lining; Income from gambling activities can be offset by gambling losses, but only up to the amount of your winnings.  Thus, if you have losses elsewhere, you can at least use those to offset your winnings. If you are in the “business” of playing fantasy sports, you are treated like a professional gambler who can deduct out-of-pocket expenses on Schedule C.  However, you can only deduct gambling losses to the extent of gambling winnings.  To support your position that you are a professional gambler, you may have to prove that the activity isn’t a hobby, based on the nine factors listed in the regulations. Notably, you must show that you legitimately intended to turn a profit and generally acted in a business-like manner. Tip: State laws govern income taxation on the state level.

Small Business Tax Strategies

August 2019