The PayPal 1099 Sports Betting Tax Guide: What You Need to Know

Sports betting is an explosively popular pastime in America today. Since the federal ban was lifted in 2018, sports betting has grown into a multibillion-dollar industry. The appeal is easy to understand—it brings together the thrill of gambling and the pride of skill and analysis (in case you were wondering, that’s how it’s legal in states where it is: it’s considered a game of skill, not of chance).

As the cherry on top, popular online sports betting apps have made it easier to wager your money and collect winnings. These days, you can quickly connect an account through PayPal, Venmo, or other third-party payment apps, all in the name of convenience. A PayPal account facilitates quick transactions and enhances security, making your betting experience smoother and safer. But before you set it and forget it, there are some crucial things you need to know about how PayPal reports to the IRS that could bring some major headaches come tax season.

The PayPal Sports Betting Tax Guide for 2023

Understanding Sports Betting Taxes

Navigating the world of sports betting taxes can be daunting, but understanding the basics is crucial to avoid any issues with the Internal Revenue Service (IRS). In the United States, sports betting winnings are considered taxable income, and the IRS mandates that sports bettors report their winnings on their tax returns.

The sports betting industry has grown significantly since the Supreme Court’s 2018 decision to overturn the Professional and Amateur Sports Protection Act (PASPA). This ruling allowed states to legalize sports wagering, leading to a boom in the industry. However, with this growth comes increased tax implications for sports bettors.

Keeping meticulous records of your sports betting activities, including wins and losses, is essential to reporting your taxable income correctly. A spreadsheet or a dedicated app can help you track your bets and calculate your net winnings and losses accurately. This diligence will help you comply with IRS regulations and avoid tax issues.

How Gambling Winnings Are Taxed

The IRS has always required you to pay taxes on gambling income, which is what any payout from sports betting is considered. Winnings from placing bets are classified as taxable income, and you must report them on your tax return. That remains true of any winnings you receive, including but not limited to:

• Online sportsbook winnings
• Fantasy league winnings
• Raffles
• Lottery or sweepstakes prizes
• Mobile gambling

Depending on the type and amount of money won and the payer, you may receive a Form W-2G (Certain Gambling Winnings) or a Form 1099-MISC (Miscellaneous Income) during tax season. However, using a third-party payment app, you’ll get a Form 1099-K: Payment Card and Third Party Network Transactions.

Form 1099-K reports transactions from online platforms, payment card processors, and apps. Although these forms aren’t new in 2023, more people are expected to receive them this year than ever before.

What’s Changing? 

Before this year, platforms like PayPal only had to send a report to the IRS when an account exceeded $20,000 and 200 transactions. Now, that threshold is set to drop dramatically.

In 2021, a new tax law was passed requiring 1099-Ks to be generated anytime a user receives $600 or more in payments on any platform. That rule was delayed in December 2022, so it would not apply to 2022 returns. However, it is set to be in effect for 2023 returns, which means the upcoming tax season could make filing feel like a gamble in its own right.

When reporting gambling income, it’s important to understand the difference between taking the standard deduction and itemizing deductions. Individuals who opt for the standard deduction cannot deduct gambling losses, whereas itemizing deductions allow such deductions.

What’s the Problem?

The IRS isn’t taxing gambling winnings any more or less than other income forms. But the problem lies with confusion surrounding:

1. What types of transactions will trigger a Form 1099-K, and how will they be distinguished (e.g., payments for goods or services vs. personal payments to friends)?
2. The fact that PayPal only reports gambling winnings, not losses

That second factor is key to sports betters. Gambling winnings are taxable income; anything reported to the IRS will increase your total income. If you have offsetting gambling losses, you will need to file itemized deductions—and if you don’t have enough itemized deductions to exceed the standard, then your losses won’t have any effect. Accurate recordkeeping is crucial to substantiate gambling losses for tax deductions.

That’s not changing, but avoiding IRS red flags could get much harder with an extra form involved.

Do Sports Betting Apps Report to the IRS?

If your net profit exceeds $600, online sports betting apps like DraftKings, FanDuel, and other popular organizations are legally obligated to send you a Form 1099-MISC or W-2G. PayPal betting offers advantages such as seamless deposit and withdrawal processes, security, speed, and promotional offers, enhancing the overall betting experience. This is true no matter how you handle the financial side of things.

Now, PayPal Will Report, Too

Keeping meticulous records is important at any time gambling income is concerned. However, if you use PayPal as a cashout option, it will consider each withdrawal a form of income. Unlike the reporting that the sports betting organizers have to do, third-party vendors will not calculate or offset your losses. So, in reality, only a few winnings could look like a significant increase in your total income for the year.

Even if you operate at a net loss, the IRS will only see the winning side. If you win $25,000 in various transactions over the year but then lose that same amount and break even, you’ll still have $25K of taxable income added to your adjusted gross income. This could majorly affect your eligibility for deductions, credits, and more.

Of course, how and when third-party vendors send a report to the IRS shouldn’t theoretically change the legal amount of taxes you owe. However, it could very easily trigger discrepancies in the system that the IRS doesn’t have the capacity or capability to sort through, leading to incorrectly inflated tax obligations. Because of that, these new rules could also mean a significant increase in IRS audits.

What to Do If You Receive a Form 1099-K

You’ll have to be incredibly diligent about filing the 1099-K you get from PayPal, Venmo, etc., and any W-2G or 1099-MISC forms you may receive from the sports betting platform. Accurate recordkeeping is crucial for substantiating gambling losses for tax deductions, as these losses can only be deducted if itemized and cannot exceed the total reported winnings. This year, a lot of confusion is expected around getting taxed twice, determining whether or not you can or should itemize, and providing precise records to prove offsetting losses.

To prevent confusion, correctly understanding and recording costs and losses is essential. But if you end the year with missing records or get hit with a massive tax debt that you can’t afford, contacting a licensed tax resolution professional is your best bet!

How to Pay Taxes on Sports Betting Winnings

Paying taxes on your sports betting winnings is a straightforward process if you follow these steps:

1. Report Your Winnings: If your winnings exceed $600, the sportsbook or online sportsbook will send you a Form W-2G. You must report these winnings on your tax return.
2. Complete Form 1040: On Form 1040, Schedule 1, report your sports betting winnings. Include the total amount of your winnings and any tax withheld.
3. Pay Any Additional Tax: If you owe additional tax on your winnings, pay it by the tax filing deadline to avoid penalties and interest.
4. Keep Records: Maintain accurate records of your sports betting activities, including all wins and losses, to ensure you report your taxable income correctly.

By following these steps, you can ensure you meet your tax obligations and avoid any potential issues with the IRS.

Deducting Losses and Claiming Credits

While your sports betting winnings are taxable, you can reduce your taxable income by deducting your losses. Here are the key points to remember:

1. Itemize Deductions: You can only deduct your sports betting losses if you itemize your deductions on Schedule A of your tax return.
2. Limitations: You cannot deduct more than the amount of your winnings. You cannot claim a refund for the difference if you have a net loss.
3. Professional Gamblers: You can deduct your losses as business expenses if you are a professional gambler. This requires a different tax approach, so consulting a tax professional is advisable.

Understanding these rules can help you manage your taxable income more effectively and ensure you are taking advantage of all available deductions.

State Taxes on Sports Betting

State taxes on sports betting can vary significantly across the United States. Some states impose higher tax rates than others, and additional reporting requirements may apply. Here are some tips to navigate state-specific tax implications:

1. Check State Tax Rates: Research the tax rate in your state and any other states where you place your bets.
2. Understand Reporting Requirements: Familiarize yourself with the reporting requirements in your state and any other states where you place your bets.
3. Consult a Tax Professional: If you are unsure about the tax implications in your state or where you place your bets, consulting a tax professional can provide clarity and ensure compliance.

By understanding the tax landscape in your state, you can better manage your sports betting activities and avoid any unexpected tax liabilities.

FAQs

Q: Do I need to pay taxes on my sports betting winnings?

A: Sports betting winnings are taxable income, and you must report them on your tax return.

Q: Can I deduct my sports betting losses?

A: Yes, you can deduct your sports betting losses, but only if you itemize your deductions on Schedule.

Q: What is the tax rate on sports betting winnings?

A: The tax rate on sports betting winnings depends on your income tax bracket.

Q: Do I need to keep records of my sports betting activity?

A: Yes, it is essential to keep accurate records of your sports betting activity, including wins and losses, to ensure you report your taxable income correctly.

Q: Can I use PayPal to fund my sports betting account?

A: Yes, many online sportsbooks accept PayPal as a payment method. However, suppose you haven’t already done so. In that case, you may need to provide tax information, such as an Employer Identification Number (EIN), Individual Tax ID Number (ITIN), or Social Security Number (SSN).

Addressing these common questions can help you better understand your tax obligations and ensure compliance with IRS regulations.

Get Help from a Tax Professional

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