Accounting Issue/Question

[CASS]

Running into some issues here that I assume everyone does and would love some feedback. NFBC issues a 1099-misc which is a gross payout #. After reviewing my financials with my accounting he was explaining that total amount is taxable based on how this is issued/structured which in my mind made no sense since my entry fees actually exceeded my payout. I found a section of code that looks to be exactly where we fall into as an entity:

To be consistent with the games’ being defined as not gambling, the fantasy sports league operators based in the United States report participants’ prize money as income using Form 1099-MISC, Miscellaneous Income, typically in Box 3—Other Income. They do not report using Form W-2G, Certain Gambling Winnings.

The income can be reported to the players using one of two principal reporting methods: the net payments method or the net earnings method (see Letter Ruling 200532025). The obligation to report is triggered using the 1099-MISC threshold of $600 when net payments or net earnings reach that amount.

Net payments is defined as the amount of payouts to the player in excess of the deposits during the year. This method does not accurately represent winnings if the player carries over a balance from one year to the next, which is then distributed.
Net earnings is defined as the amount equal to earnings in the account (winnings plus bonuses plus referral income) less fees paid.

So based on the above the number should be reported to us using one of the 2 methods (both which are a net #). As you can see the reporting now is costing us a ton in taxes.

Any feedback on the above or how anyone handles this would be appreciated.

[Captain Hook]

When you get a 1099 misc with the total earning you can make deductions against that which would include all your entries, preparations, and associated expenses...... so WTP?

Not sure when you are getting that language but it actually looks more like it is for daily contests than NFBC type contests

[CASS]

Found it in a few places - accounting sites. The issue is the specific place to deduct. I assumed there would be no difference between daily and annual contests. My point was the reported # should be a net - and if you ask 10 people I bet more than half are not deducting entry fees based on how it's reported to us. I know several that don't. Just want to get it right and make sure we are getting the correct value from the NFBC based on the current tax structure.

[mdecav]

I had the same questions/points last year.

The accounting works a little differently for daily versus NFBC. Daily does net because there are so many entry points to account for. If your total cost throughout a season is 100k and you win 110k, then you're taxed on 10k.

A full season league like NFBC you're taxed on the gross, but you can deduct expenses subject to a 2% floor of your AGI (on the federal level - it varies by state)

[Top Dawg]

I process the deduction the same way. Basically as a "hobby expense" but it is subjected to a deduction after 2% of my adjusted gross income. So, effectively, you don't get dollar for dollar spent on the deduction side. Feel free to add in costs of sites you pay for, travel expenses and perhaps even hotel costs if you stay overnight to draft. Not sure how that would be treated on an audit basis, but it makes sense to me.

That said, the "net" would be a very welcome addition to this tax reporting problem.

[Cocktails and Dreams]

I know Greg was planning to look into this at some point. I know full season companies are certainly allowed to net the amounts. Not sure why they have generally opted not to exactly. NFBC did when they were owned by the fanball people.

[CASS]

Thanks guys yeah I spoke to my accountant again and he's actually shocked at how it's reported. I can't even process the deductions it would just get thrown out due to my agi. The issue is why the NFBC is not reporting based on the NET options I detailed before. If that was the case we'd have no issue and be in line. How they report it to us is brutal and I'm shocked how this isn't a larger issue or people are getting "creative" on their own. I mean basic example...entry fee 1K..you win 1K and break even. But the NFBC reports 1K on your 1099 and your expected to pay taxes? I mean that's just nuts to me - unless I'm missing something (very possible this is a major issue that affects everyone. Interested to get Tom/Greg's take on Saturday as I've been with the NFBC a long time and know they are quality guys.

[Cocktails and Dreams]

That is a bummer if people are being penalized by this accounting procedure and actually unable to deduct expenses. I think the full season companies ought to look to do it how daily does it if people are being prevented from even writing off entry fees.

[mattjb]

I prefer the daily sites way of handling it but I've not had any issue writing off entry fees as expenses with NFBC.

[Deadheadz]

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If/when NFBC and NFFC go ahead with allowing you to roll over winnings into use for entry fees for other contests it stands to reason they would issue a 1099 showing only what you choose to cash out.

Greg has said something to the effect of STATS not wanting to play the role of a bank but they do have plans to allow players to keep some (or all) of their winnings on account for use toward entry fees in future games.


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[Cocktails and Dreams]

1099 would not be only what you chose to cash out. Just like daily sites you get taxed no matter if you leave it there or not. Wins-losses plus bonus funds earned.

[Gekko]

i wonder if anyone (who has been issued a 1099 for money won via DAILY games) has been audited by the FEDS recently

[Deadheadz]

1099 would not be only what you chose to cash out. Just like daily sites you get taxed no matter if you leave it there or not. Wins-losses plus bonus funds earned.

I have to assume any game provider is going to issue just one 1099 per year so it would seem likely with any site providing year round contests that those with a large balance might try to "shelter" their winnings by buying into future contests and thus reduce the net balance leading up to the date when the 1099 figure is assessed.

Early registrations would be something the game provider would really like to see, I would guess. There might be tax evasion implications if you register early before 1099s get processed and then deregister a month later.


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[EWeaver]

this is not advice, and i'm probably wrong...just repeating something i heard once

you're taxed on accessions to wealth

that is net, not gross

pay-out (revenue) minus pay-in (expenses) = taxable amount (with no deduction below winnings, i.e. offset is to the extent of winnings alone, you can't shelter ordinary income by being a derelict gambler, or, as here, a NOT gambler).

i heard about a guy who saved his credit card statements and simply paid taxes on net, if any, rather than the gross amt reported on his 1099 misc, and wasn't worried at all

[HarryTheK]

My recent tax experience aligns with what I am hearing from others on this thread. I will share my recent example as I did a few months back with Greg and Tom. Keep in mind that I am not a big time player but enter a few NFBC contests per year and also play some daily gaming through Draft Kings. For 2014, I entered 3 NFBC tournaments - $1300 AL Auction, $400 DC, $350 Rotowire Online ($2050 in entry fees). I won a total of $1500 on the DC league which I was issued a tax form. Even though I had a net loss in the NFBC for 2014 of $550, as far as the government is concerned, I won/earned $1500.

My tax liability for the $1500 was limited, but only because I itemize my taxes. By doing so, I was able to claim the associated expenses up to my $1500 in winnings. If I had ended with a net earnings, I would have also been able to claim additional entry fees, professional subscriptions and even my trip to Vegas. But obviously you can not claim expenses to the point of showing a loss. Keep in mind these expenses are subject to the 2% of AGI. Because of this, I did not have to pay federal taxes on the $1500. However, from a state of Ohio standpoint, these deductions don’t come into play. With a state rate of 2.88%, I paid $43 in taxes to Ohio on the $1500.

Consider, however, the impact to a player that does not itemize their taxes, using my case as an example. If I did not itemize, I would not be able to claim any associated expenses. At a 15% tax bracket, I would have paid $225 to the federal government while still paying $43 to the State of Ohio. Collectively, $268 would be a HUGE penalty to someone that in reality lost $550 in NFBC competitions. Thankfully, my tax liability was only the $43. This is why issuing tax statements only on net winnings is so crucial. I also played DFS on Draft Kings and won over $600. I was issued a 1099 and had no problems paying taxes on those earnings.

I know that Greg and Tom are looking into this and taking the matter seriously. They are currently saying that their CFO is advising them that they are properly reporting things to participants as simply earned income (and not earned net income). I echo everyone's sentiments as to why the seasonal leagues would differ from the daily ones. This is the primary question that needs to be answered. If the NFBC is reporting things properly, then are DFS sites reporting things improperly? As the industry continues to grow, dealing with taxes will continue to be a primary issue. I just don't want to see participants pushed away from seasonal fantasy leagues due to paying taxes, especially if they are truly deemed unnecessary.

[CASS]

The issue is how they report kills anyone who makes decent money (real world). And the tax laws state they need to report as a fantasy company in 1 of 2 ways (which they do neither of) both which are net. The more I investigate this the more it's clear how big a loser this is for the player. Think about it it's actually insane to have tax ramifications structured this way and expect to be a winning player (which I am but have not dealt with the tax side till this past year). I have played in the NFBC since the early 2000's....and I love the company...but I can tell you without a change asap I'd be a fool to continue doing business here and sadly will take a long hard look as this is absurd. And like I said before anyone in my tax shoes (who is not "creative") will get crushed with how they report. Wonder if their reporting method benefits them

[EWeaver]

are you guys kidding?

i'd look for a new CPA and/or stop doing your own taxes if your 1099 misc from fantasy sports is giving you (or somebody you apparently pay to prepare your taxes) problems.

[HarryTheK]

EWeaver - The issue is real and very simple. If you file your taxes legally, NFBC participants currently must pay some level of tax on any gross winnings. It doesn't matter whether you do your taxes by yourself or use a CPA. Finding a new CPA doesn't change the issue.

[Steel Lugnuts]

If you win $600 and you spent $600 on entry fees, you can itemize your taxes to pretty much cancel each other out and not pay anything or limit what you owe. If you spent $1000, and only won $600, I'm pretty sure you can only put down you spent $600, cannot put loses down more than the winnings.

If you win $1000 and only spent $400 on entry fees, you can put $400 down as a loss. Now let's say you also buy lottery tickets every day, you can add this amount to the $400 and get as close to the $1000 you won, thus limiting the amount of taxes you pay. Just make sure you have the lottery receipts as a backup should you get audited.

[Top Dawg]

I doubt you can add lottery losses (a form of gambling) to NFBC winnings. That said, keep in mind, you have to be able to "itemize" your deductions to get any offset of costs. If someone is taking the "standard" deduction then they are paying taxes on full "gross" winnings and not able to deduct any entry fees. Even those of us itemizing taxes can only offset our entry fees after taking 2% or our income out of the amount we can deduct. If your AIG (married couple) is say $100,000; then the first $2,000 of your entry fee is not allowed as a deduction. In a 25% tax bracket, that costs you $500 in extra taxes.

Bottom line - it would be great if your 1099 reported "net" winnings.

[Bama]

Bottom line is the 1099 should report the net winnings. If your doing your taxes for this year there is a couple of options to correct this on your 1040 and in most instances will be fine but it raises your chance of audit slighty but if audited and you explain it correctly then there is no problem. biggest problem is getting audited because stats refuses to report it correctly in the first place.

[Steel Lugnuts]

I doubt you can add lottery losses (a form of gambling) to NFBC winnings. That said, keep in mind, you have to be able to "itemize" your deductions to get any offset of costs. If someone is taking the "standard" deduction then they are paying taxes on full "gross" winnings and not able to deduct any entry fees. Even those of us itemizing taxes can only offset our entry fees after taking 2% or our income out of the amount we can deduct. If your AIG (married couple) is say $100,000; then the first $2,000 of your entry fee is not allowed as a deduction. In a 25% tax bracket, that costs you $500 in extra taxes.

Bottom line - it would be great if your 1099 reported "net" winnings.

Yes you can, I've done it...look it up, lottery is gaming as is fantasy sports, they fall under the same category. Offsetting your entry fees (as well as any other gambling losses) with gross winnings pretty much = getting taxed on net winnings.

[Steel Lugnuts]

I had this same issue with cbs sports a while ago, anytime you win over $600, you have to declare it on taxes...but I argued I only WON $500, less the $100 entry fee. Doesn't matter...

[Deadheadz]

Yes you can, I've done it...look it up, lottery is gaming as is fantasy sports, they fall under the same category. Offsetting your entry fees (as well as any other gambling losses) with gross winnings pretty much = getting taxed on net winnings.

I'm curious, does the place that redeems winning lottery tickets give you a 1099 if you win over $600 and how can they know how many small prizes you cashed which may have totaled over $600? I'd hate to try and answer the IRS about those things in an audit. I guess anyone would hate an audit.

Perhaps you suggest lottery tickets with mostly huge prizes so if you did win by sheer luck you'd be too wealthy to care about paying the full tax on it.

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[TheKing]

I was issued a 1099 for $100 which really surprised me since I hadn't won anything last year. I did get a $100 check from NFBC, but it was for the FanDuel refund. Not complaining, but it just caught me off guard.