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Arthur Rubin
Arthur Rubin, Tax Preparer
Category: Tax
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Experience:  22 years of tax preparation experience, including individual, trust, and estate returns.
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I live in North Carolina and I play on this tournament site

Customer Question

I live in North Carolina and I play on this tournament site called WorldWinner. Well after I won over $600 they asked me to fill out this W-9 or let them take out 28% tax out of each game to send to the IRS. Here is my 2010 statement so far:

Cash and Merchandise Winnings: $1,108.10
Entry Fees Associated with the Winnings: $498.21
Net Winnings: $609.89
Additional Entry Fees: $124.25
Withholding: $0.00

I'm really nervous about continuing to play on worldwinner because even though I only won $600 I think I'm being taxed for $1,108.10, I'm in college so I'm pretty new to taxes and have not filed taxes before. Could someone please explain to me about this? Would the entry fees and looses be taking off? I mind you that the company says that they're a gaming site and not a gambling site as well.
Submitted: 4 years ago.
Category: Tax
Expert:  Arthur Rubin replied 4 years ago.
There are three possible ways the information could be reported on your tax return, depending on the details of the games and your contract with WorldWinner.

1) In spite of the fact that they say they're not a gambling site, it could be considered gambling income. In that case, your net winnings should be what is reported to the IRS (incorporated on the miscellaneous income line), and the entry fees not associated with your winnings could be deducted as a miscellaneous itemized deduction not subject to the 2% limit on Schedule A line 28, up to the amount of winnings. "Gambling lossses" cannot exceed gambling income, but any expenses other than entry fees might be deductible on Schedule A line 23.

2) If it's a hobby for you, then the then the net winnings, again, would be reported on the miscellaneous income line, and the "additional entry fees" would be deductible as miscellaneous itemized deductions subject to the 2% limit, on Schedule A line 23. Expenses cannot exceed income for a hobby.

3) If it's considered a business, then it would be reported on Schedule C line 1, and possibly on Schedule SE for self-employment income. It doesn't really matter whether the net or gross amount is reported on line 1, because the entry fees could be deducted as expenses on Schedule C line 27. (If also considered "gambling", the entry fees could only be deducted to the extent of income.)

Unfortunately, in cases (1) or (2), the deductions wouldn't help you unless you have other itemized deductions.

Edited by Arthur Rubin on 5/2/2010 at 4:09 PM EST
Arthur Rubin, Tax Preparer
Category: Tax
Satisfied Customers: 1233
Experience: 22 years of tax preparation experience, including individual, trust, and estate returns.
Arthur Rubin and 5 other Tax Specialists are ready to help you
Customer: replied 4 years ago.
Thank you so much for this answer it's helped me out and made me want to continue playing on Worldwinner but to clarify what you said, so instead of putting in the "miscellaneous income line" the Cash and Merchandise Winnings: $1,108.10, I would put instead Net Winnings: $609.89 and then the deduction for the additional entry fees. So that means I'm only taxed for what I won right? Cause other places made it sound like I was taxed on the whole $1000 even though I only made $600
Expert:  Arthur Rubin replied 4 years ago.
Well, if you don't report what they specify on the W-2G or 1099, or whatever form they report your winnings to you and to the IRS at the end of the year, then you have to add a statement explaining the discrepancy, but the correct amount to report on line 21 is the net winnings (which would the excess of the payout over the entry fee), rather than the gross payout.

In theory, you're only taxed on the net winnings, anyway, but itemized deductions may not do you any good if you should take the standard deduction, instead.

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