gambling

How The Tax Cuts and Jobs Act (TCJA) Affects Fantasy Sports

Fantasy sports is becoming increasingly popular, with 59.3 million people playing in the United States and Canada, creating a $7 billion industry. With this though, comes tax implications for winners.  The Tax Cuts and Jobs Act (TCJA) provides tax opportunities and drawbacks that fantasy players should understand.

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There is currently an ongoing debate how winnings should be classified and where they should be reported. Are the winnings considered gambling income or hobby income? The TCJA does not clarify the definition of gambling and to date the IRS has not weighed in as to whether fantasy sports winnings are hobby or gambling income. If fantasy sports are not considered gambling, then the hobby loss rules would apply. In this case, the TCJA eliminates the taxpayers’ ability to deduct any fantasy expenses even if there is fantasy income. Prior to the TCJA, hobby losses were deductible as miscellaneous deductions subject to the 2% adjusted gross income (AGI) floor.

Many have argued that fantasy sports are ‘wagering transactions’ thereby allowing fantasy sports losses to be deductible to the extent of their winnings. Previously, gambling losses were assumed to be the cost of placing the wager, but TCJA suggests that other expenses that are ordinary and necessary to execute wagering transactions are deductible. For traditional gamblers, this includes the ability to deduct expenses related to travel, lodging, etc., to the extent of winnings – but fantasy players may have different ‘ordinary and necessary’ expenses. Potentially deductible fantasy sports expenses under TCJA include: fantasy-related online subscriptions and magazines; cost of any office equipment/space exclusively dedicated to fantasy sports; 50% of food costs at fantasy sports draft parties; and cost of any punishments for losing in a fantasy sports league. Losses from other gambling activities, like traditional casinos, could also be used to offset fantasy sports winnings.

For casual fantasy players, the increase in the standard deduction under the TCJA will reduce the number of taxpayers that itemize, thereby eliminating any potential benefit of fantasy-related expenses, since the deductions allowed are classified as “other itemized deductions” on the schedule A.

For the serious fantasy player, treating gambling as a trade or business may be useful. It is important to remember that taxpayers who recognize profits on their schedule C will be subject to both income and self-employment taxes, so it may not always be beneficial to consider yourself a professional. In the case of the serious professional fantasy player, income and expenses will be reported on schedule C, negating the need to itemize in order to take advantage of the deductions.  The TCJA does have one downfall for professional gamblers; prior to the new tax law, gambling expenses such as travel and lodging were not considered gambling losses, which meant they were not limited to gambling winnings. This allowed professional gamblers to have a net loss on gambling activities. Under the TCJA, these expenses are defined as wagering losses, therefore are limited to the extent of gambling winnings. Those who identify themselves as professionals have the burden to prove their activity is regularly pursued full-time, and to produce a livable income. Taxpayers should expect to hear from the IRS when claiming to be a professional.

Whether a taxpayer is a professional or a casual player, it is very important to keep all records as the burden of proof is on the taxpayer. While gambling is reported on W-2G, fantasy sports sites typically issue 1099-Misc to players winning more than $600. The IRS suggested that the net method of reporting (reports winnings from contests less the entry fees for any contest won) was the appropriate way to calculate winnings, but not all fantasy sports sites comply. It is important for a taxpayer to know how the site they are using reports winnings.

In summary, under the TCJA, fantasy players may benefit by treating their fantasy sports as gambling and claiming fantasy-related expenses that were not previously deductible.

Football and some fantasy sports games are back

By Bankrate

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

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The 2016 Summer Olympics are underway, but fans of American football — not the soccer being played in Rio — also are celebrating.

The National Football League kicks off its 2016 season this week with preseason games across the country.

That also means that fantasy sports leagues are shaping up. And there’s some good news for players of the daily fantasy games.

More states are saying the daily games are good to go within their borders.

Fantasy sports comeback

In 2015, daily fantasy sports, or DFS, came under fire from most states’ attorneys general. The states’ top legal officers generally contend that DFS represent illegal gambling, not games of skill as the fantasy sports operators argue.

In many states, the game companies stopped accepting players from those locations.

DraftKings and FanDuel, the two biggest DFS operations, took their cases to state legislatures and are seeing some success.

So far, 12 states — Colorado, Indiana, Kansas, Maryland, Massachusetts, Mississippi, Missouri, New York, Rhode Island, Tennessee, West Virginia and Virginia — have legalized daily fantasy sports. Legislation to do the same has been introduced in most of the other states across the country.

Those pending bills could pick up steam now that New York, the state that thrust the DFS-gambling controversy into the spotlight last year, has officially sanctioned the games. Before DraftKings and FanDuel pulled out of the Empire State, there were more New York daily fantasy players than in any other state, according to research firm Eilers & Krejcik Gaming.

Fantasy sports’ state payoff

Some lawmakers remain concerned about the cost of problem gambling. A 2011 Baylor University study found that each additional pathological gambler costs society more than $9,000 per year.

Anti-gambling groups argue that assembling virtual line-ups of athletes in order to win money on the fantasy teams is tantamount to gambling.

But other lawmakers see how popular sports and betting are with their constituents. Viewed from a cold, fiscal perspective, these legislators see how this convergence presents financial potential for their states.

Where DFS have been legalized, there is corresponding regulation. The states will issue permits and collect licensing fees from the operators.

Many state treasuries also will collect, or at least try to, taxes from the winners of DFS games. Like other gambling proceeds or prize winnings, the Internal Revenue Service and most state tax collectors view fantasy sports payouts as taxable income.

Given the state of many state budgets, look for fantasy sports to continue to make inroads.

Do you play fantasy sports? Has your participation been curtailed by your state? Most importantly, do you pay taxes on your winnings?

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.