Paypal 1099-K for online gambling

[dianejhart]

My client received a 1099-K from Paypal for online gambling. He said the amount shown is incorrect because it includes his deposits and are not all winnings. How/where does this go on the Federal tax return and how do you break out his deposits vs. winnings? Thank you in advance.

[ERIC J · Accepted solution]

It depends.   If he would be determined to be a professional gambler, it would go on a Schedule C, Other Expenses, as gambling losses (or technically I would describe as "buy-ins") that offset the gross 1099-reported income.  If not a professional, two options - if he itemizes, I'd report as gambling losses/buy ins on Schedule A.  This is cleanest and would match the gross 1099 IRS reporting.  if he doesn't itemize, this leaves you with reporting contrary to the gross 1099 that may result in CP2000 correspondence from IRS.  I would add an explanatory footnote/sub schedule to the Other Income line of 1040  showing the gross 1099 less his own buy in contributions.  If he is absolutely certain of this 1099 accounting, then I would go for it - and advise him it may get scrutinized and to keep good documentation of it, then you fight it in a CP2000 correspondence audit if necessary.  Good luck, Eric J

[qbteachmt]

1099-K is for financial Activity, not Income. 1099-M would be Gambling income. Both of these forms are informational and only are required to be issued when the activity meets a reporting threshold. There is no reconciliation of 1099-K amounts to income.

[dianejhart]

Thank you for your reply I appreciate it.

[dianejhart]

So just to clarify- your saying this does not go on the tax return? I have had instances where the 1099-K was left off and the client received a letter from IRS. Thank you!

[qbteachmt]

A 1099-K is activity and not income. For a retail establishment, it includes amounts collected from customers for sales taxes, further evidence this is not an Income reporting form.

https://www.irs.gov/payments/general-faqs-on-new-payment-card-reporting-requirements

"Separate reporting of these transactions is not required. However, you should follow the return instructions on the form you are completing to report your gross receipts or sales. You should report items that qualify as a trade or business expense on the appropriate line item of Schedules C, E and F."

https://www.irs.gov/businesses/understanding-your-form-1099-k

PayPal will likely have issued this to your taxpayer who is using the Business side of PP for their transactions. They opened this door.

[Christina1]

A new client is in this boat right now! She accidentally funneled her online gambling winnings to her business account since her credit card was linked to the same account and she just received a $36,000 bill for it. Now, I'm trying to figure out how to get her out of it. Do you have any words of wisdom that could help?

[qbteachmt]

@Christina1 

What bill? From what agency or company? A 1099-K does not relate to a Bill. And having run something through PayPal means they would take a percentage, unless you post it as Friend/Family. That means it was already paid from a taking of each transaction. There would not be a Bill to pay, later.

[Christina1]

The IRS is accessing a $36,000 tax bill for it. 

[IRonMaN]

"She accidentally funneled her online gambling winnings to her business account"

Funneling has an interesting connotation when dealing with tax related issues.  She never looked at her statements during the year to see that the funnel needed to be pulled out?

[Christina1]

"accidentally funneled". This client is the proverbial "head in the sand". All she knows is she went online to gamble and the gambling site (operating from Australia, btw) sent her winnings to her paypal account (which ended up being a business account and not personal) because it was also linked to her credit card. And she pulled money out from her credit card to pay for her gambling. Now the IRS is accessing a bill for it.

[IRonMaN]

Get all the records you can showing that the deposits were from gambling and get her and the IRS on the phone.  

[Christina1]

As of right now, that's my plan. 🙂

[IRonMaN]

Good plan.  

If your client is religious, tell her to spend Sunday morning watching church services on TV --------------- she is going to need all of the help that she can get.