What to know when reporting your fantasy football winnings – or losses
Editor’s Note: It is fantasy football season again, which means some of you might have questions about the money that’s changing hands. To answer your questions, we thought it would be a good time to breathe some new life into this article, which was originally published in 2016. We’ve also updated the tax rules to adhere to the modifications that were made as a result of the Tax Cuts and Jobs Act. Enjoy!
When you sit down with your CPA to go over last year’s taxable income and they ask you how your fantasy football team did this year, they aren’t just looking to engage you in casual conversation. In fact, how well (or how poorly) you did over the last year might make a difference in the size of your tax bill.
According to research from the Fantasy Sports & Gaming Association (FSGA), about 59.3 million people were playing fantasy sports in the USA and Canada in 2017 – about 78 percent of them were fantasy football players. And, on average, over a 12-month period, players spent about $556 on league-related costs, single-player challenge games and league-related material. In short – fantasy sports has become a serious business and, as with most business matters, you should be prepared to report your fantasy sports winnings (or losses) to the IRS on Form 1040.
Listen to episode 170, “Let’s Talk About Tax, Baby!” on Rea’s award-winning podcast, unsuitable on Rea Radio,” for more great personal finance tips from Cindy Kula.
Fantasy Money Spends The Same As Real Money
Just because your football team is fantasy doesn’t mean your money is, and when real money is being exchanged, you have an obligation to report it on your tax forms. However, because the IRS has yet to identify proper treatment of fantasy sport income and losses, the jury is still out on the “proper” way to report these fantasy winnings/losses on tax returns. And, from a state perspective, while most state departments of taxation are struggling to identify the proper treatment of these funds, a few have issued guidance focused on fantasy sports operators.
Not Just A Hobby?
How your fantasy sports activity is classified will affect how your income (or lack thereof) is reported. Specifically, taxpayers need to know whether or not the IRS considers their fantasy football activity to be gambling and whether “the activity is not engaged in for profit (i.e., a hobby activity, if it is not gambling, or casual gambling, if it is gambling) or if the activity rises to the level of being a trade or business.”
The 2017 Tax Cuts and Jobs Act (TCJA) made some significant changes to the taxation and deductibility of certain expenses in this area. These changes will impact tax filings for years 2018 to 2025.
Ultimately, at this time, how your CPA will classify your fantasy football activity depends on your own facts and circumstances. While you may consider fantasy football to be a hobby, someone else may be using it has a significant source of income.
A Hobby Activity
For most people, fantasy football will be classified as a hobby – meaning that it doesn’t receive the level of activity required to qualify as a trade or business. In this case, your reporting would be guided by hobby loss rules and income is reported on Schedule 1, line 21 of your IRS Form 1040. Under the TCJA, for years 2018 to 2025, deductions are no longer able to offset income.
A Nongambling Activity – Trade Or Business
Do you keep accurate books and records and conduct your fantasy football activity in a businesslike manner? Then it may qualify as a trade or business. Final judgment, however, is left to the IRS, which will determine if the activity contains elements of personal pleasure or recreation. If you do qualify for this classification though, your ordinary and necessary expenses could be deductible and your net income would be subject to self-employment tax. Your activity will be reported to the IRS on Schedule C.
Casual Gambling Activity
Would you consider your fantasy football gambling? If so, then you will need to refer to the usual rules governing gambling activities, which means that your entrance fees for losing contests should be reported as gambling losses and allowable only if you itemize your deductions. Different from hobby activity, your deductions are generally allowed only up to the amount of income you secured as a result of the activity and only if you itemize your deductions. Your expenses are reported as miscellaneous itemized deductions, not subject to the 2 percent-of-adjusted-gross-income (AGI) floor on Schedule A, Line 16. The expenses are allowed for alternative minimum tax (AMT) purposes. Your expenses would include your entrance fees for losing contests and other expenses you incurred as a result of the activity.
Professional Gambling Activity – Trade Or Business
If you consider your fantasy football activity to be gambling, and you consider you level of involvement to be “full-time,” and as a means for producing income to sustain a livelihood, you could be considered a professional gambler in the grade or business of gambling. You will need to report your winnings and losses on Form Schedule C. However, under TJCA, a loss is not allowed to be created. In other words, your expenses are limited to your income. Your losses in excess of your gains cannot be carried over to another year. Ordinary and necessary business expenses include all expenses incurred to engage in the gambling activity. When a joint return is filed, the combined gambling losses of the spouses are allowed to the event of their combined gambling gains.
By Wendy Shick, CPA, CFP (Mentor office)