Please Help: IRS is Taxing Gambling Losses from 2019
Hello,
I have been on this since 2021 when I got a notice for underreported income. I have tried my usual accountant, HR Block, another accountant and after 2+ years they suggested I go to a tax advocate for help.
In 2019 I did a lot of online gambling and used PayPal for the bulk of the deposits and withdrawals. I suffered significant losses, and have been working hard the last few years on recovery, but that's not my biggest issues right now.
I had about $181k in total deposits via PayPal and $127k in total withdrawals, so I lost $54,000. The issue is that PayPal is reporting that $127k as "Sales From Goods/Services" and sent me a 1099-K for it. Essentially, I sit down at a poker table, I buy in for $1000, I leave with $500 every day. PayPal thinks and is reporting that $500 as profit, despite it being a loss.
No one has been able to determine how to properly write that off or match that on my return. We tried Gambling Wins equal to Gambling Losses and that was rejected. We tried putting it on Schedule C and then doing matching Business Expenses and Revenue and that got rejected.
In the latest update the IRS is asking us to provide WG-2, but those are only issued when there are profits or large wins, and there were none of those.
Here is what I do have:
- A log of every single PayPal transaction, inward and outbound. They all say "DraftKings" "Golden Nugget" etc. There is no one that would think these are sales of goods/services.
- I have conversations with every vendor saying that they do not process withdrawals as "Payment For Goods/Services". This is a PayPal error, yet PayPal has lied and said that this decision comes from the vendor.
- I have Win/Loss statements from almost all of the sites (a few of them went out of business) showing the losses for that year.
I do not know what to do. I wish I could get five minutes with an IRS agent to explain this as they would easily see this is not sales revenue, but I have gone to the the local office several times and they just accept documents, they refused to talk about my situation.
Is a tax advocate the only path forward? Thank you for any help.
Comments
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Hi bobcobb301,
Thanks for joining our Community and writing in. It sounds like you have a couple of issues going on.
You may need to hire the help of a tax professional that specializes in gambling issues. The Taxpayer Advocate may or may not be the path forward. They don't necessary prepare tax returns to address your specialized situation, and it sounds like that's what you have in particular, since you can't change or force PayPal to issue you a form different than the 1099-K, or even a corrected 1099-K.
You have two issues I think: 1) the reporting of gambling income on Form 1099-K, which will take additional steps to properly report; and 2) the correct reporting of your gambling wins and losses.
FreeTaxUSA software can provide some workarounds for our customers, but we may not be able to accommodate your situation.
Based on your description, you may fall under the provisions of what's known as Sessions Gambling. We'll have an article posted to our Community on this topic very soon. I recommend in the meantime however, you google 'sessions gambling' and read up on this as it may apply to your overall gambling wins/losses and is reported in a particular manner.
As a simple definition, sessions gambling is considered the player’s time spent in a single session of gambling when the player has supporting documentation for the session. It's not new. The gain is measured by comparing what you brought in, considered your buy-in, and what you walk out with, considered your cash-out.
Here's an example of what this means for a player walks into a casino, so you can understand the basic concept. George walks into a casino with a $500 buy-in and wins $2000 in a Jackpot. He keeps playing for another four hours and eventually walks out with $1600. His session gain is $1100 (1600 – 500) with supporting documentation on his player-card, not $2000, or zero.
Does this describe your situation? If so, you will almost certainly need the help of a licensed tax professional to help you with this. Especially if multiple years of returns need correcting and filing.
Supporting documentation includes a player-card, ledger, tracking on an Excel spreadsheet, bank records, Form W-2G, etc.
Schedule C is only used by professional gamblers who regularly pursue the activity full time and in good faith for their livelihood. Are you a professional gambler? Does this describe your situation? If not, don't use Schedule C.
Many forms of gambling don't issue a Form W-2G, you're correct.
Draft Kings is on online platform and they don't issue the form. Your Wage and Income transcripts inside your IRS account online show all income reported to the IRS under your name and SSN. These transcripts typically show 10 years of history.
However, if no W-2G is submitted to the IRS, you can't submit a form you don't have. Therefore, detailed records are very important when filing your tax return. Your PayPal log is going to be very important.
If sessions gambling applies to you, in addition to properly reporting the 1099-K information, you'll also need to fill out Form 8275, Disclosure Statement. This is almost certainly why no one has been able to help you properly report winnings and losses.
Since FreeTaxUSA doesn't support Form 8275, and if sessions gambling applies, you'll want to either use another platform that does support the form, or hire the services of a professional that understands and specializes in sessions gambling. They'll also be able to help you properly report the Form 1099-K.
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Hi Kristine,
Thanks for sharing. It is Session Gambling most likely, but again, it isn't wins so I will need to find a way to right it off.
Essentially I am giving DraftKings $1000 and getting $500. So, it is a lot of losing getting reported as wins.
What constitutes a professional gambler so that I can put it on Schedule C? I have a full-time job, but the money wagered far outweighs that and the time spent was nearly as much.
If I was able to do it through Schedule C would Form 8275 be appropriate? It sounds like I need to do that regardless of what method I use.
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You'll need to use good judgment on defining being a professional gambler. We can't make that determination for you. Do you regularly pursue the activity full time and in good faith for your livelihood? It doesn't sound like it if you also have a full-time job. What would a reasonable and prudent person off the street say if they looked at your situation?
Sessions gambling accounts for wins and losses and the true income must be determined first, before you can exclude losses up to the wins. For 2025 and earlier, losses are deductible up to 100% of winnings. For 2026 and later, new rules apply.
The gambling sessions method requires you to use Form 8275.
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