So through some miracle, you ended up with enough healthy players at the end of your season to triumph in your fantasy football championship. Although you may still be riding that high, like yours truly, it’s good to know how this may or may not affect your tax return for this year. With fantasy football becoming ever more popular year after year, it’s becoming a larger target to the IRS.
I Finally Won For Once, Now What?
This question is going to depend on a variety of factors, first of which, is whether the fantasy football league you were in is a gambling activity. If your league is considered to be a wagering pool, your fantasy football winnings will be considered gambling winnings. To be considered a wagering pool, the league has to constitute “an arrangement to pool bets into a common fund, which are wagered on a sports event or contest, with the successful bettors receiving the proceeds, less selling commissions.” Essentially, if the prize isn’t fixed regardless of the size of your league, any winnings will be considered gambling winnings. However, if you operate a fantasy sports gambling site, in which the payouts are fixed regardless of the number of participants, it would not be considered a wagering pool, and therefore, not considered gambling. These sites often classify their operations as games of skill, in which the bettor’s success is determined by skill as opposed by chance.
Typically, if you win more than $600 in gross winnings, or more than $600 net of your entrance fees, the business with which the wager was placed must issue you a 1099-MISC or W-2G. Make sure to note that if you are receiving a copy of this form, the IRS has received a copy as well, and will be looking to match figures on your return with figures reported on the above forms.
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Example: Non-Gambling Fantasy Games
Let’s assume you play the online daily fantasy football games. Based on the fact that no matter how many people enter the games the payouts remain stagnant, and do not constitute a wagering pool. There are two different circumstances that could change how any income from this activity should be reported.
Most casual players will fall under the hobby category, subject to the hobby loss rules. This category would be for those individuals who casually play the games and are not reliant on the income produced from this activity for their livelihood. In this circumstance, any hobby income (winnings) would be reported on Line 21 – Other Income. If you itemize your deductions, you could also include any expenses or losses associated with the game of skill, up to the amount of your winnings, as a miscellaneous deduction, not subject to the 2% of Adjusted Gross Income (AGI) threshold.
The hobby loss rule limits the deductions that can be taken when an activity is determined to be a hobby, as opposed to a trade or business. If the IRS determines that your activity is not being engaged in for a profit, then your allowable deductions will be limited to your gross income from the activity, thus eliminating the opportunity to offset your other income with losses.
To help taxpayers and the IRS decide if an activity is entered into for profit or a hobby, the regulations under Section 183 (the section covering the hobby loss rule), provide nine factors, which are indicative of a business.
- Do they complete accurate books? Were records used to improve performance?
- Did the taxpayer study the activities business practices? Did they consult with experts?
- Do they devote much of their personal time and effort?
- Is the plan to generate profits through asset appreciation?
- Have they converting them from unprofitable to profitable?
- Has the taxpayer become profitable in a reasonable amount of time?
- Has the activity turned a profit? Even a single year of profits can be a strong indication that an activity is not a hobby.
- Does the taxpayer have other income sources that are being offset by the losses of the activity?
- Does the activity lack elements of personal pleasure or recreation?
The more questions above you are able to answer “yes” to, the more likely it is that your activity is a trade or business, as opposed to a hobby.
On the other hand, let’s assume your full-time job is coming up with algorithms to aid you in winning these games with some level of consistency, at least enough to support yourself without seeking out other significant employment. In this scenario, your daily fantasy game “job” would be considered your own self-employed business, which would be reported on Schedule C of your Form 1040. As you would with any other business, you should be sure to maintain detailed and accurate books and records and continuously strive to turn a profit. Although you could reduce your gambling winnings by any losses and fees paid on a dollar-to-dollar basis, any profit realized from self-employment would be subject to self-employment tax, in addition to the income tax. Please note, professional gamblers and those seeking to claim an activity involving “elements of personal pleasure and recreation” are typically highly scrutinized by the IRS and could be reclassified as a hobby upon audit.
Example: Gambling Fantasy Games
If you’re like me and only allow fantasy football to monopolize your free time for part of the year, you’d fall under the casual gambling category, again, subject to the hobby loss rules mentioned above. In this scenario, you would own a business or are employed elsewhere, and aren’t reliant on your gambling winnings for your livelihood. As in the first example, you would report any winnings on Line 21 – Other Income and report any fees or losses under miscellaneous itemized deductions not subject to the 2% of Adjusted Gross Income (AGI) threshold, if you itemize your deductions. The same would apply to all other casual gambling winnings and losses.
For those few who participate in numerous fantasy sports leagues in multiple sports throughout the year, you may qualify as a professional gambler. Again, it should be noted that the IRS tends to scrutinize those attempting to call themselves professional gamblers. However, assuming you keep detailed and accurate books and records and do, in fact, qualify as a professional gambler, you could then report all of your fantasy gaming activity on Schedule C of Form 1040. You would report any winnings as gross income and you would also be able to reduce this income, dollar-for-dollar, for any necessary business expenses or losses you would incur as a result of your gambling business. Again, any net profit reported on your Schedule C of your Form 1040 would be subject to self-employment tax as well as income tax.
This upcoming fantasy football season, make sure to remember a few important things:
- Make sure your all of your picks are currently employed on draft day
- Watch out for questionable trades
- Make sure to scour the waiver wire regularly and frequently
- Disregard the mediocre fantasy advice from the “experts”
- And last, but not least, make sure to properly report your fantasy sports gaming activities on your tax return.
For more information on the income tax reporting of gambling activity and/or questionable fantasy football advice, contact us at info@zinnerco.com or 216.831.0733. I'm ready to start the conversation.
