How do I handle a 1099-K from PayPal with several different items in it (including non-taxable)?

[AmyC]

I am going to assume that you are a casual gambler rather than this is your business. I have added hobby versus business at the bottom. Please determine if you are in fact a casual gambler before proceeding.

Grab a calculator or make a spreadsheet. Next, go to the income section, scroll down to Other Common Income. Select income from 1099-K. 

Since you received a 1099-K for multiple things, you have to break it down for each category.

• If you had hobby income, select that button, enter the 1099-K information except the income. Instead, use your calculator determine all income related to hobby and enter that amount.
• Next, personal item sales, enter the 1099-K information again except for the income. Use the calculator and determine the personal item sales.
• Continue doing this through all of the options that apply to you. Gambling is not listed so the majority of your transactions will be lumped into other taxable income, the last option.

Topic No. 419 Gambling Income and Losses for the casual gambler notes:

You may deduct gambling losses only if you itemize your deductions on Schedule A (Form 1040) and kept a record of your winnings and losses. The amount of losses you deduct can't be more than the amount of gambling income you reported on your return. Claim your gambling losses up to the amount of winnings, as "Other Itemized Deductions."

Earning side income: Is it a hobby or a business? states:

What the difference between a hobby and a business? A business operates to make a profit. People engage in a hobby for sport or recreation, not to make a profit.

Here are nine things taxpayers must consider when determining if an activity is a hobby or a business:

• Whether the activity is carried out in a businesslike manner and the taxpayer maintains complete and accurate books and records.
• Whether the time and effort the taxpayer puts into the activity show they intend to make it profitable.
• Whether they depend on income from the activity for their livelihood.
• Whether any losses are due to circumstances beyond the taxpayer’s control or are normal for the startup phase of their type of business.
• Whether they change methods of operation to improve profitability.
• Whether the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business.
• Whether the taxpayer was successful in making a profit in similar activities in the past.
• Whether the activity makes a profit in some years and how much profit it makes.
• Whether the taxpayers can expect to make a future profit from the appreciation of the assets used in the activity.

[InLikeFlynn1]

I'm in the same situation. I used paypal to both deposit and withdrawal gambling money. I'm got a 1099K for over 200K yet I did not actually get 200K and basically broke even. I was also received a W2G from the state lottery, which includes these paypal winnings withdrawals and deposits. A clear answer from someone would be awesome otherwise we will be taxed twice. 

[DaveF1006]

it depends.  Does your 1099K just include gambling money or are there other transactions reported?

@InLikeFlynn1

[InLikeFlynn1]

Just gambling.  I would withdrawal the winnings through paypal and deposit into with paypal either using the winnings or from my bank account.  My casino account for the year shows a negative $7k.  The 1099K also includes winnings I received from the online lottery, however, the lottery also sent me a W2G which includes these monies.

[JamesG1]

You had gambling receipts that will be recorded on W2-G's.  The receipts were only deposited and withdrawn from the the Paypal account.  So the Paypal account performs the same function as a dedicated checking account.  Am I correct?

A 1099-K that reports income that is not accurate should still be entered into your tax return but then backed out.  It is important that you retain records of what you did should a taxing authority ask questions about this income down the road.

To report Other income, follow these directions.

• Down the left side of the screen, click Federal.
• Down the left side of the screen, click Wages & Income.
• Click Show more to the right of Other Common Income.
• Under Your income and expenses, click the Edit/Add button to the right of Form 1099-K.
• At the screen Did you get a 1099-K? click Yes.
• At the screen How would you like to enter your 1099-K? click Type it in myself.  Click Continue.
• At the screen Choose which type of income your 1099-K is for, select the button for Other income.  Click Continue.
• At the screen Let’s get the info from your 1099-K, enter the information.      Click Continue.
• At the screen Your Other 1099-K income, you enter further information for the Other income.  Click Continue.
• At the screen Your 1099-K summary, notice that the income relates to Other income.  Click Done.

Other income may need to be reversed if some or all the income reported on the 1099-K is not accurate.  Post the negative entry as follows:

• Down the left side of the screen, click Federal.
• Down the left side of the screen, click Wages & Income.
• Click Show more to the right of Less Common Income.
• To the right of Miscellaneous Income, 1099-A, 1099-C, click the Start / Revisit button.
• To the right of Other reportable income, click the Start / Revisit button.
• At the screen Other Taxable Income, enter a description such as “Other income reversed” and a negative amount. 

The entries will be reported:

• on line 8z of Schedule 1 of the Federal 1040 tax return, and 
• on line 8 of the Federal 1040 tax return.

Make sure that you keep records of all transactions. Later, you may need to demonstrate to the IRS that this is not taxable income.

[Edited 1/29/2023 | 7:46 am PST]

@InLikeFlynn1

[RJDPA]

I'm not sure that answer makes sense to me.  I have the same situation where I have received both w2g's and a 1099k for the same winnings as wellas deposits I madethrough PayPal.  You say to offset the w2g's with a negative number in misc income and claim the 1099k income.  Doesn't it make more sense to offset the 1099k amount and claim the w2g income?  My thought is that all of the 1099k income would be included in the w2g amount, but all of the w2g income isn't necessarily in the 1099k amount as that would only be money that was cashed out.  Gambling winnings are income even if you don't cash it out right?  Maybe I'm wrong, but I thought that was the point of the w2g being issued as soon as you win an amount above the threshold.

[BrittanyS]

You will need to report both forms.  You will follow these steps to enter the 1099-K and Form W-2G in Less Common Income.  

To enter your personal 1099-K items, sign in to your TurboTax account if it is not open and follow these steps:

1. Select Income & Expenses.
2. Scroll down to Less common income and select show more.
3. Scroll to  Miscellaneous Income, 1099-A, 1099-C, and check start.
4. On the page Let's Work on Any Miscellaneous Income, scroll to " Other reportable income " and click start.
5. On the page Any Other Taxable Income, select yes.
6. On the page Other Taxable Income, enter a description indicating Personal 1099-K and amount.
7. Select continue.
8. Select done on the next page

Repeat the above steps this time; in step 6, add the amount as a negative value.  Repeating steps 6-8 is to reduce the items that were received for personal use.  For example, payments to friends and family, coffee& donuts, amounts to a local store, etc.  

To report the gambling winnings and losses, follow these steps:

1. Scroll down to the last category, Less Common Income
2. Gambling Winnings  and Start
3. Follow the interview and report the winnings and Continue
4. Report the losses on the next screen
5. You can deduct gambling losses as an itemized deduction up to the amount of your gambling and prize winnings. And select Done

@RJDPA

[RJDPA]

Thanks for the  clarification, one more question though.  You say to deduct personal payments such as coffee with friends, but what about the duplicate income that was also reported on the w2g's?  Do I also deduct that so I'm not reporting it twice?

[KrisD15]

Yes

when income is reported on more than one tax form, you'll need to enter the forms, and then enter an adjustment.

Use the description "Duplicate income reported" or something similar so the IRS will understand why the adjustment is being made.   

[drewcrawford03]

But what if it's not reported  in 2 places?

For instance, I did not receive a W2-G or a 1099 MISC, just a 1099K similar to other posters (for $160k)

I had losses across the board.  Fantasy sports, investments, etc. 

I zeroed out the 1099-K with the same amount as a negative, with the description "Fees/Deposits, Other Income Reversed".

Am I doing the right thing?

[GeorgeM777]

That depends.  If the account that generated the 1099-K functioned more like a checking account, as described in the previous post from @JamesG1, then you can enter the 1099-K as described in the post from @JamesG1.

However, if you sold things for a profit then you will have to pay tax on that income.  For example, if you were selling personal use property, such as things you use everyday (appliances, clothes, furniture, etc.), and you sold such property for a gain, then you would pay tax on that gain.  If personal use property is sold at a loss, then you cannot deduct such loss.  

Any property that you held/purchased for investment purposes is handled differently than personal use property.  Investment property sold for a gain is subject to capital gain tax rates.  Investment property sold at a loss can be deducted as a capital loss.

If any of the above apply to you, you may have to separate such items and report them separately on your return.  

@drewcrawford03

[drewcrawford03]

Hi, yes. Essentially functioned as a checking account. Nothing was sold.

I also noticed I only had 59 transactions and the federal threshold for reporting is 200. I'm guessing this was issued before the IRS postponed the new guidance to tax year 2023?

I'm still going to file the form amd plan on "zeroing out" the large sum as noted.

But did I receive this form technically in error since I didn't even meet the transaction threshold? If so, should I note this in the description? Thanks again!

[GeorgeM777]

No, and there is no need to include in the description that the 1099-K was sent in error.   The reporting requirements for 1099-Ks changed for 2022, and then the implementation of those proposed changes was postponed. However, whatever the reporting requirements are, firms are not prohibited from sending their customers a 1099-K even if they are not required to do so.  If they choose to send one, whether required or not, they will also forward a copy to the IRS.  Thus, it's appropriate to report the 1099-K on a tax return.  

@drewcrawford03

[drewcrawford03]

Thanks for the reply. How was it not in error? If it didn't meet federal threshold guidelines?

I guess I am looking for best way to ward off potential audit triggers and thought "error" would be most beneficial.

If I just zero out and put "Other Income Reversed" you think that will suffice? 

[Howdy8]

If I understand correctly, we are in similar situations. With that said, they send a 1099k for 200+ transactions or an accumulated amount over $20,000. Since you stated yours was for $160k, then I presume you received it because it was over the $20,000.

Hope this helps 🙂