Cash is cash.
The issue is that sometimes, you might win a prize and get a 1099 for the "manufacturers' suggested retail price", but if you know that it is never actually sold for that price and the real fair market value is less, you are taxed on the real FMV and not the MSRP. But cash is cash. There's no adjustment.
If this was gambling specifically, you can list gambling losses (up to the amount of your winnings) as an itemized deduction, and you might or might not get a tax benefit depending on your other itemized deductions. But things like raffles and radio station prizes are not considered gambling for this deduction.
This cash prize was the result in winning in a Horse Racing Handicapping Contest.
You needed to pay money to enter many other contests in order to win your way into this National Championship contest which the money was won in There is not a direct buy-in to the National Championship. I believe because no direct money for the entry went into this Tournament they called it a cash prize on 1099-misc. I was hoping to offset some of the winnings with other contest/tournament entry fees that needed to be paid to get into the tournament where the money was won. I figured because it wasn't on W2-G I might be up the creek on using other gambling losses against the 1099-misc.
Your thoughts on the entry fees involved to win my way into the National Championship Tournament would be appreciated.
I also saw a post regarding 1099-misc vs W-2 G taking losses by dakreb siting a case Libutti vs. The Commissioner dated March 7, 1996 where a judge sided with Libutti saying his prizes were based on his volume of gambling to earn the prizes.
Lubetti discusses casino "comps". The taxpayer reported them as gambling income so he could offset them with losses. The court ruled this was reasonable because the comps would not have been paid except for their connection to his wagers. " The comps are sufficiently related to his gambling losses for purposes of section 165(d). We hold that petitioner’s comps are “gains from * * * [wagering] transactions”under section 165(d)."
Your situation seems to be different. It sounds like a contest of skill, rather than wager. If it is not a wager, the costs are not deductible. (see the bottom for quotes from the court case).
Consider a professional golfer. Their tournament fees, travel, etc. are deductible as schedule C business expenses, not as gambling losses. The pro athlete is not involved in a wager, they are involved in a contest of skill with prizes at the end. If you engaged in this activity with regularity and a profit motive, you might be allowed to treat it as a business.
You know the event better than I do. If you deduct the entry fees and other costs as gambling losses, you would need to show (if audited) that these were wagers, and not a skill contest. And if you deducted the expenses as a business, you would need to show the IRS that it really was a legitimate business.
From Lubetti:
Section 165(d) provides that an individual may deduct his or her “Losses from wagering transactions * * * to the extent of the gains from such transactions”. Neither the Code nor the regulations define the phrase “gains from such transactions”. We apply the “plain, obvious, and rational meaning.” Liddle v. Commissioner, 103 T.C. 285, 293 n.4 (1994), affd. 65 F.3d 329 (3d Cir. 1995); see also Boyd v. United States, 762 F.2d 1369, 1373 (9th Cir. 1985) (sec. 165(d) interpreted according to its “ordinary meaning”).
According to Webster’s New World Dictionary 551 (3d coll. ed. 1988), the primary meaning of the word “gain” is “an increase; addition; specif., a) [often pl.] an increase in wealth, earnings, etc.; profit; winnings”. (Brackets in original.) A primary meaning of the word “from” is “out of; derived or coming out of”. Id. at 542. The word “wager” means “bet”, id. at 1500, which, in turn, connotes “an agreement between two persons that the one proved wrong about the outcome of something will do or pay what is stipulated”, id. at 133. The word “transaction” is the noun of the infinitive “to transact”, which means “to carry on, perform, conduct, or complete (business, etc.)”. Id. at 1419.
Thanks again Opus 17.
What you are saying makes sense.
Reporting this as a business is up to interpretation. I do this all you long with the intent to win prize money in other tournaments and the National Championship. (think of as you would the World Series of Poker)
I'm retired with a small schedule C consulting business on the side. Using this as another business is again up to IRS interpretation. Not sure if it makes sense to try it as Schedule C.
@JCAP25 wrote:
I'm retired with a small schedule C consulting business on the side. Using this as another business is again up to IRS interpretation. Not sure if it makes sense to try it as Schedule C.
Only you can answer, perhaps with an opinion from your own tax advisor.
The professional gambler analogy is not your friend. In the 2017 Tax Cut and Jobs Act, Congress changed the law on gambling expenses. The expenses of a professional gambler (travel, etc.) are only deductible up to the amount of their wins, in combination with wagering losses, and are not separately deductible as business expenses. https://www.irs.gov/pub/irs-wd/202111012.pdf
If you are not wagering on horse races, but trying to show skill in handicapping, then I think you are better off thinking about this like pro bowling or pro golf where you have to pay entry fees to enter a tournament, and may or may not win a prize based on skill rather than luck. But even then, it's only a business if you are engaged in the activity regularly and with a profit motive. Here are some other links that discuss the issue, although it's mostly restating the same concepts with slightly different wording. I would pay most attention to these three questions (and as always, seek your own professional advice):
https://www.irs.gov/newsroom/hobby-or-business-heres-what-to-know-about-that-side-hustle
https://www.irs.gov/newsroom/know-the-difference-between-a-hobby-and-a-business
https://www.taxpayeradvocate.irs.gov/news/tax-tips/hobby-vs-business-income/2025/01/