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The tax season is in full swing, and you most likely received all of your tax documents by now. Hopefully you found success in DFS/sports betting for 2022, but with success, comes paying taxes. The tax rules surrounding DFS and sports betting can be confusing, and at times, don’t make sense. The goal of this article is to hopefully make things clear for you; that way filing your taxes can still be easy.
There are several documents you will receive or have received this tax season that are specific to DFS and gambling. It is important to understand what that income is, how it is calculated, and why you received the tax form. This article will provide a road map on how to report this income on your tax return. Please understand everyone’s tax situation is completely different and the following information provides a standard approach to reporting your winnings, but it may not be applicable to your specific tax situation. If you believe your tax situation is complex or if you still have questions, I suggest you reach out to a tax professional or DFS Accounting at [email protected].
1099-Misc = DFS
– The DFS sites will calculate your net winnings using a yearlong “session”, and if your net winnings are over $600, you will receive a 1099-MISC.
– DFS income will be shown in Box 3 on the 1099-Misc, called “Other Income.”
– Sites that will send 1099s: DraftKings, Yahoo Sports, FanDuel, Monkey Knife Fight, PrizePicks, etc.
– Recreational players: Report this income on Schedule 1, Line 8 “Other Income.”
– Professional players: Report this income on Schedule C – Profit and Loss from a Business. You can directly deduct your DFS/gambling losses and applicable business expenses to offset your income.
W-2G = Sports Betting
For those who are sports betting, a W-2G gets generated on bets that are considered reportable gambling winnings. In the world of sports betting, gambling winnings are considered reportable if:
– The winnings are more than $600 and at least 300 times (+30000) the amount of the wager.
– The winnings have federal income tax withholdings taken out.
– Operators may mandate players to withhold 24% in federal taxes on large value bets, whether or not the bet has 300-1 odds. If you noticed your winnings were reduced because taxes were taken out, a W-2G may be generated on that wager.
– The amount reported on the W-2G only reflects the winnings off the wager in which triggered the W-2G.
– The W-2G does not reflect the net result within a session. It is merely one side of the equation, the income side.
– Recreational bettors: Report this income on Schedule 1, Line 8 “Other Income.”
– Professional bettors: Report this income on Schedule C – Profit and Loss from a business. You can directly deduct your DFS/gambling losses and applicable business expenses to offset your income.
1099-K = DFS and Gambling
– Document is generated by 3rd party payment settlement entities (PSEs), mainly PayPal.
– Amount reflected on 1099-K are deposits into your personal PayPal account from the sportsbooks and DFS operators.
– Amount reported on 1099-K is considered income, whether or not it is a return of capital or bank roll. The burden is on the taxpayer to prove that it is duplicate income. The filing threshold for 1099-K was recently changed with passing of the American Rescue Plan of 2021. The new reporting threshold is $600, instead of the previous threshold of 200 transactions and excess of $20,000. There was much to do with this new reporting threshold, and on December 23, 2022, the IRS announced that the calendar year 2022 will be treated as a transition year. Thus for 2022 ONLY, the reporting threshold reverted back to $20,000 gross payments and 200 transactions. Keep in mind, this is the federal reporting threshold for 2022. There are several states that have adopted different reporting thresholds that are much lower and mirror the soon to be reporting threshold of $600.
Here is a link for a list of state reporting thresholds.
Starting in 2023, the 1099-K reporting threshold will revert to the $600 minimum as stated in the American Rescue Plan of 2021. The issuance of a 1099-K can pose a real problem to your tax situation, and the IRS will be looking for that income on your personal tax return. How to report this income differs on a case-by-case basis, and should you receive a 1099-K, we suggest you reach out to your tax advisor immediately.
In general, the rules for reporting sports betting, DFS, or gambling are vague and archaic. The IRS allows you to report your gross gambling winnings and gross gambling losses (up to your winnings) separately on your individual tax returns:
Reported on “Other Income” line 8 on the Schedule 1 of your individual tax return.
Reported as “Other Miscellaneous” deductions on the Schedule A – Itemized Deductions. This method of separating your wins and losses is detrimental to the taxpayer. With the increase of the standard deduction, the “floor” to use your gambling losses is much higher. Many taxpayers won’t be able to use their gambling losses (because they are not more than the standard deduction) and get stuck paying taxes on gambling wins.
The IRS introduced the concept of a gambling “session”, which is applied for individuals who partake in gambling (and DFS). This concept was developed from several court cases but was applied in the court case Schollenberger vs. IRS.
A session is typically the time you spend gambling at the casino or racetrack. During this time, the taxpayer is placing wagers in an attempt to create an “accession to wealth.” The wins and losses are netted during this “accession” or “deaccession” until the “taxpayer has redeemed their tokens (chips) and can definitively calculate their wins or losses.” At that point, the taxpayer can define their session and report their net wins or net losses accordingly on their tax return.
These concepts are easy to apply when you are physically at a casino and cash your chips/winning tickets at the cage. But what if you are continuously betting on your phone through several sportsbooks and can’t definitively calculate your net wins/losses? This is where the concept of sessions becomes ambiguous. The IRS places the onus of setting a session on the taxpayer. Thus, it is on you to review your betting volume and determine what session period is appropriate for you.
In addition to reviewing your betting volume, you may want to determine a withdrawal cadence that corresponds with your betting strategy. Part of the IRS determination of a session is the “taxpayer redeeming their tokens.” This can be interpreted as your withdrawals from the sportsbooks. If you are continuously betting every day and have not withdrawn your funds from the sportsbooks, then a taxpayer can bolster their position of an ANNUAL gambling session.
Recreational vs. Professional Gambler
Unfortunately, the IRS does not give clear guidance as what constitutes a player as casual vs. professional. This can be seen with the court case Groetzinger vs. IRS.
In this court case, the court could not decide on a specific test to determine what qualifies as a trade or business. Each decision needs to be made on a case-by-case basis. For professional gambling purposes, the court concluded that “if one’s gambling activity is pursued full time, in good faith, and with regularity, to the production of income for livelihood, and is not a mere hobby” it is a trade or business within the meaning of §162(a) of the Internal Revenue Code.
For those taxpayers who believe the above facts represent their DFS/gambling situation, you will report your DFS/gambling activity on the Schedule C – Profit or Loss from a Business of your individual tax return. This allows the taxpayer to directly apply applicable business expenses, entry fees, and gambling losses against their DFS/gambling winnings. This means you can take losses from one book and apply it to wins from another.
We wish you the best of luck this tax season. Remember to be proactive when it comes to your taxes and plan! As you can see, the tax rules and forms surrounding DFS and gambling are confusing. It is crucial to gain an understanding of your tax situation to avoid a large tax liability. If there is one takeaway from this article, it is not to use PayPal to withdraw your funds from sportsbooks/DFS operators.
Other tips are to set aside funds to pay for taxes on any big wins and don’t hesitate to reach out to your tax advisor to prepare a tax projection. Whether you are a casual DFS player or a professional, keep accurate records and supporting documentation to substantiate the amounts reported on your tax return. Should your tax situation become overwhelming, and you need help, do not hesitate to reach out to us today.
Any tax advice or counseling provided by DFS Accounting are not the views or recommendations of RotoGrinders and are those of DFS Accounting alone. Any such tax advice or counseling provided by DFS Accounting may not be endorsed, sponsored or attributed to RotoGrinders, any company in the BC Group, or any of their agents or representatives.