Tax Tip: It may be fantasy football, but tax implications are real

As football season begins, so too does fantasy football, a $3.6 billion industry that consumes almost nine hours a week for the average player. Whether it’s a one-day or one-week league, or season-long commitment, both the cost and the winnings of fantasy sports have real financial implications, including income taxes for players. Taxpayers not only need to report prizes as income on their tax return, but also may be able to deduct certain expenses or losses.

Players must report, pay taxes on prizes

Many taxpayers are familiar with income sources like wages, salaries, interest, dividends and tips. They probably also know to report them on their tax return. But other income comes from a variety of sources: gambling, prizes, barters and hobby income. The IRS requires taxpayers to report these as miscellaneous income.

The income or prizes from fantasy football have tax consequences that will most likely be treated as hobby income. This includes non-cash fantasy sports prizes like gift cards, tickets to a game, travel or anything else of value. If a player wins at least $600, they – and the IRS – will receive Form 1099-MISC reporting their winnings. But money from fantasy sports may be taxable even if the recipient doesn’t get a Form 1099-MISC. Therefore, players should track and report all their income, not just what equals or surpasses $600.

Players can deduct fantasy football expenses

One of the largest expenses is often the entrance fee. If a player’s prize is $5,000 and the entrance fee was $1,000, he can report $4,000 of net income and then deduct other associated expenses. Hobbyists are allowed to deduct their expenses up to the amount of their hobby income.

There are a few important caveats. To deduct expenses other than an entrance fee, hobbyists must itemize their deductions. Also, their hobby expenses and any other miscellaneous itemized deductions must exceed two percent of their adjusted gross income (AGI) – and they may only deduct the amount over two percent of their AGI.

Finally, even though they may spend a lot of time on it, a fantasy football player should not report their activity as a business activity. The difference between a hobby and business depends on a number of factors, not a simple formula. At the most basic level, a hobby activity is an activity that is not done to earn a living.

When fantasy football is gambling

Participating in most pay-to-play fantasy leagues, including popular one-day or one-week leagues, is usually not gambling. Playing a fantasy sport is not gambling if the team is not based on a real team and the awards or prizes are disclosed up front, independent of the number of participants. Also, winning should depend on a player’s knowledge and skills and the average results from multiple events, not the scores or performances of a real team or individual athlete.

“Pick-em” contests that rely on the results of actual teams and with a prize based on how many people enter may constitute gambling. This is true whether players use an online commercial platform or informal office pool. Reporting gambling income and losses is different than hobby income and expenses.

Taxpayers who are unsure which rules apply to their situation or how to report fantasy football income accurately should ask a tax expert.