Tax Considerations for Fantasy Sports Fans
Fantasy sports leagues can yield hefty winnings if Lady Luck smiles on you. If you win big—or even not so big—you'll need to save a portion of that money for the Internal Revenue Service (IRS). What many don't realize, is that those net winnings constitute taxable income.
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Key Takeaways
- Fantasy sports organizers must send both you and the IRS a Form 1099-MISC if you take home a net profit of $600 or more for the year. You might receive a Form 1099-K as well.
- Fantasy sports organizers use a formula to determine when a player hits the $600 level.
- Some individual states have already begun to use the lower reporting threshold of $600.
- Even if you don't receive a 1099 form, you’re still required to report all income earned from fantasy sports either as "other income" on Schedule 1 for Form 1040, or as business income on Schedule C.
Fantasy sports winnings of $600 or more are reported to the IRS
If it turns out to be your lucky day and you take home a net profit of $600 or more for the year playing on websites such as DraftKings and FanDuel, the organizers have a legal obligation to send both you and the IRS a Form 1099-MISC. If you receive your winnings through PayPal, you might receive a Form 1099-K.
The 1099 tax forms report your winnings to the taxing authorities and also gives you information for completing your taxes. Even if you don't receive a 1099 form, you are still required to report all of your income on your federal and state income tax returns.
The IRS is gradually phasing in new 1099-K reporting requirements for payments from third-party processors like Venmo and Paypal. In 2021, Congress changed the reporting threshold from over $20,000 in payments and more than 200 transactions to over $600 in payments regardless of the number of transactions. But instead of using the new $600 threshold right away, the IRS applied the previous reporting threshold for the 2022 and 2023 tax years. For the 2024 tax year, the IRS is using a $5,000 threshold, regardless of the number of transactions. The threshold will drop to $2,500, regardless of the number of transactions, for the 2025 tax year. Starting in 2026, the $600 threshold will apply.
Organizers typically calculate players' net profits using a formula
Fantasy sports organizers have to figure out players' net profits in order to determine who gets 1099 forms. They use a formula to determine when a player hits the $600 level: Prizes won minus entry fees plus bonuses = net profit.
Another way to calculate this is:
- (Withdrawals + Year End Account Balance) - (Deposits – Beginning Year Account Balance) = net profits.
TurboTax Tip:
If you can establish that you play fantasy sports as a business, you can report your net profit as business income on Schedule C and potentially deduct losses.
Reporting income or loss from fantasy sports on Form 1040
You are required to report all income earned from fantasy sports either as "other income" on Schedule 1 for Form 1040, or as business income on Schedule C. If you use the first approach, your fantasy sports is considered a hobby and you can't deduct any of your expenses or losses.
Reporting income or losses from fantasy sports as business income
If you can establish that you play fantasy sports as a business, you can report your net profit as business income on Schedule C. The great advantage to this is that you can typically report your losses as well. If you have a net loss for the year, you can use that loss to reduce other taxable income from jobs you hold or other businesses you run.
The IRS typically allows you to claim fantasy sports as a business if you can convince them it is not a hobby and that you both:
- engage in fantasy sports regularly
- treat it as a business activity with the intention of earning a profit
The IRS may consider an activity to be a business if it earns a profit at least three out of last five years.
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