2020 Daily Fantasy Sports Tax Reporting
Hello RotoGrinders Community!
2020 was a tumultuous year to say the least. But the year also brought several states to the forefront of online sports betting and DFS and sports betting are finding themselves at the fingertips of many taxpayers. Many of you have reaped the fortunes of winning a 10-team parlay or hitting the Sunday million. As you refresh your DraftKings or FanDuel app to see your bankroll, keep in mind Uncle Sam will want a piece of the action too. With so many individuals playing both DFS and sports betting, you will have to pay special attention to your tax situation this year. In this letter, we will touch on various tax issues that affect the DFS and sports betting community and provide the basics to get you through tax season. Now more than ever, is important to be proactive with your taxes and gain a good understanding of your tax situation.
If after this article you believe your tax situation is more complicated than you thought, please feel free to reach out to us for a free consultation.
1099-Misc = DFS:
To jog your memory, for those playing DFS, your DFS income will be shown in Box 3 on the 1099-Misc. Criteria for reporting DFS income on the 1099-MISC are:
- Net winnings are above $600. – The DFS sites will calculate your net winnings, using a year long “session.” – The 1099-MISC figures is a culmination of your activity during the year.
W-2G = Sports Betting:
For those who are sports betting, a W-2G gets generated on bets that are considered reportable gambling winnings. Gambling winnings are considered reportable if:
- The Winnings are more than $600 and at least 300 times the amount of the wager. – The winnings are subject to federal income tax withholdings. – The Winnings are above a certain value such as $1,200 and $1,500, requiring federal income tax withholdings.
The first requirement is the standard approach to determining if a W-2G is reportable. Though based on several discussions with site operators, operators may mandate players to withhold 24% in federal taxes on large value bets, whether or not the bet has 300-1 odds.
It is at the option of the payer (sports betting sites) to determine their “big bet” value threshold for backup withholding.
For example, one site can deem any wager that wins over $1,200 will need to report backup federal income tax withholding, making the gambling winnings reportable and you will get a W-2G for that single bet. Other sites can deem a $1,500 or $5,000 value threshold to report backup federal income tax withholding.
We suggest you reach out to the sites you predominantly bet on and ask what their backup withholding threshold is.
Daily Fantasy Sports:
Many of you will play DFS casually and will report it as “Other Income” on your individual tax return. If this is the case, you will report your DFS income shown in Box 3 on your 1099-Misc, on line 8, on Schedule 1 of your individual tax form 1040. This type of reporting is reported as hobby income. DFS players classifying their income as hobby income are not allowed to reduce their income/winning for expenses incurred or losses.
For those individuals who spend more time than the casual DFS player or who play professionally for a living, will typically report their DFS activities on Schedule C – Profit or Loss from a Business. This type of reporting allows the DFS player/business owner to reduce the income earned by expenses incurred or losses from one daily fantasy site while another daily fantasy site had winning/income.
Unfortunately, the IRS does not give any clear guidance as what constitutes a player as casual vs professional. We believe that determining the proper tax position (casual vs. professional) is important know before heading into tax season. Which is why we have developed a Tax Determination Questionnaire (https://dfsaccounting.com/tax-treatment-determination/) that will assist you in making this decision. Selecting the correct tax position is critical. Miss-steps could result in IRS tax notices and significant interest and penalties.
The rules for reporting sports betting or gambling in general 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:
Gross Winnings – Reported on “Other Income” line 8 on the Schedule 1 of your individual tax return.
Gross Losses – Reported as “Other Miscellaneous” deductions on the Schedule A – Itemized Deductions.
This may seem easy to do but calculating your gross winnings and gross losses can be rather difficult. The IRS introduced the concept of a gambling “session” which is mainly applied for individuals who physically go to the casino or a racetrack. A session will typically be the time you spend at the casino or racetrack gambling. Your net result during that session will determine if you are reporting a win or loss.
For sports betting, this can be rather difficult. You are no longer physically going to a casino to place your bets and staying a specific amount of time but are now continuously placing bets at the palm of your hand on various betting sites. This makes determining your session rather difficult. 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. Determining your session, will be crucial in determining your reportable gambling wins and gambling losses. This is because, during a session, you can NET your gambling wins and losses to arrive to your gross gambling win or gambling loss for that session.
Example 1- Monthly Session – If you set your session to be a month long and you had seven months where you had a net win of $1,000 each month and you had five months where you had a net loss of $1,000 each month you will report the following:
Gross gambling wins – $7,000 – Line 8 on Schedule 1
Gross gambling losses – $5,000 – Other Deductions on Schedule A
Example 2 – Annual Session – If your session period, is on an annual basis, you report the net result for the year on your tax return, similar to DFS income.
In addition, a session is created for each sports betting site you bet on. Thus, if you elect to have an annual session and bet on both DraftKings and Fan Duel, you will have two sessions. If you won $5,000 on DraftKings, but loss $3,000 on Fan Duel, you would report $5,000 in gambling winnings and $3,000 in gambling losses.
The 1099-K Issue
We have fielded several questions regarding the issuance of 1099-K. Many of you use Paypal or other 3rd party payment settlement entities (PSEs) to transfer monies to and from your online accounts. Doing this may cause you to hit the minimum reporting thresholds of a 1099-K, they are as follows:
- Transactions settled through a third-party network (PayPal), the total of these transactions exceed $20,000 and the aggregate number of such transactions exceeds 200.
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.
If you do not have one, you can reach us at: Info@dfsaccounting.com
We know it can be very confusing when it comes to reporting your DFS and gambling income. The IRS does not provide clearly defined rules to follow and many of the tax codes are up for debate. Here are some quick positions we took on key issues:
- DFS and gambling income are reported separately, and we do not advise you to offset your DFS wins with your gambling losses. – Gambling Sessions – Depending on your betting volume and for ease of reporting, we suggest you set your sessions as “yearlong” and create a session for each site you bet on. Be advised* this is broad interpretation of the rule and should be applied on a case-by-case basis. – Include any and all income on your tax return that came from a W-2G, 1099-K, and/or 1099-MISC – For both DFS and sports betting, get the annual transaction history and keep for your records. Each site should provide a csv. file.
We wish you the best of luck this tax season and hope 2021 will be a better year. Remember to be proactive when it comes to your taxes. Any large DFS or gambling wins, set aside funds to pay for taxes, reach out to your tax advisor to prepare a tax projection and whether you are a casual DFS player or a professional, keeping support for your expenses and amounts reported on your tax return is vital. Should your tax situation become overwhelming and you need help, do not hesitate to reach out to us today.