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Online Gambling Tax Traps: Forms 1099-MISC and W-2G

Online Gambling Tax Traps: Forms 1099-MISC and W-2G

Aug 23, 2024 | Tax Issues, Tax Law

With the recent explosion in popularity of online sports and casino gambling, we have seen an uptick in questions from those who have received Forms 1099-MISC and/or W-2G from DraftKings, FanDuel, and the like. Here’s what you need to know about each:

Form 1099-Misc

For those lucky (or skilled) enough to have received this, it means your net winnings for the year with the issuing sportsbook/casino exceeded $600. You report the amount shown in Box 3 of the 1099-MISC as other income on your tax return. Easy enough.

But what if you place wagers at multiple sportsbooks/casinos and have a good year with one, but a bad year with another? Are you not allowed to offset your overall gambling winnings with gambling losses?

The short answer is, yes, you are, but with a big caveat: under the tax code, gambling losses do not directly offset gambling winnings; instead, gambling losses must be claimed as an itemized deduction on your tax return. However, you can only claim your losses up to the amount of your winnings. So in the scenario above where you receive a 1099-MISC from DraftKings (because you were up on the year) but do not receive one from FanDuel (because you were down on the year), you must report the net winnings with DraftKings as income, and claim the net losses with FanDuel as an itemized deduction. If your allowable gambling losses + other itemized deductions do not exceed the amount of the standard deduction, you essentially lose the tax benefit of your gambling losses. This is why we say gambling losses do not directly offset gambling winnings.    

Form W-2G

This is typically only issued to those who receive big payouts from casino slot games, but it can also be issued on sportsbook payouts greater than $600 with long shot odds (+30000 or longer). Unlike Form 1099-MISC which is issued based on your yearly net winnings, Form W-2G is issued based on individual payouts you receive during the year, regardless of what your net winnings are for the year.

In other words, you could be down $2,000 for the year with FanDuel (and therefore not receive a 1099-MISC), but if you won a slot payout of $1,250 you will receive a Form W-2G. In that scenario, you are essentially in the same position discussed above where you must report the $1,250 as other income on your tax return and then claim an itemized deduction (up to $1,250) for your gambling losses.  Once again, if your allowable gambling losses + other itemized deductions do not exceed the amount of the standard deduction, you will essentially lose the tax benefit of your gambling losses.

To help you keep track of how much you’ve won or lost over the course of a year, it is best to keep a record of your gambling activities. These records should include the dates and types of specific wagers or gambling activities, the name of each casino/sportsbook or other gambling establishment, and the amounts you won or lost.

IRS Civil Penalties: Don’t Pay Without First Trying to Abate

IRS Civil Penalties: Don’t Pay Without First Trying to Abate

Aug 5, 2024 | Tax Issues

It may come as no surprise that during its fiscal year 2022, the IRS assessed a whopping $73.6 billion in civil penalties against taxpayers. But what may surprise you is during that same time period, the IRS also removed, i.e. abated, $50.9 billion in civil penalties that had been previously-assessed against taxpayers.

Given how rigid and technical the IRS can be in applying its rules, coupled with how aggressive it can be in collecting its money, an annual abatement rate of more than two-thirds of all penalties assessed almost seems excessively gratuitous on the part of the IRS. However, the reason for the high abatement rate is not at all attributable to the IRS’s generosity; instead, it is attributable solely to the IRS’s official policy that the purpose of assessing civil penalties is to “enhance voluntary compliance.” See IRS Policy Statement 20-1.

Stated differently, the IRS does not assess civil penalties for the purpose of generating revenue. This explains why the abatement rate is so high.

So how exactly does one obtain abatement of a civil penalty assessed by the IRS? There are four main avenues to civil penalty relief: (1) statutory/regulatory exceptions; (2) administrative waivers; (3) correction of IRS errors; and (4) reasonable cause. As with many things under the law, which avenue or avenues may be available to argue for abatement depends on the facts and circumstances of the penalty that was assessed.

So if you have been assessed a civil penalty by the IRS, we recommend contacting a qualified tax professional with experience working with the IRS to achieve positive outcomes for their clients, such as Eyet Law. We can efficiently analyze and assess the unique facts and circumstances surrounding your case to determine whether a penalty abatement request is right for you, and the various options for resolution.