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Fantasy sports: Gambling or just good, clean online fun?
Either way, taxes are due, but deduction options differ

A couple of weeks ago, Rep. Frank Pallone called for a Congressional review of fantasy sports operations.

The ranking Democrat on the House Energy and Commerce Committee is concerned about the relationships of professional sports teams and players with the fake leagues. The New Jersey Representative also is seeking clarification on just how, if at all, playing fantasy sports differs from gambling

Pallone renewed his call for a hearing today in the wake of reports of so-called insider trading of information by employees of fantasy sports providers DraftKings and FanDuel.

Gomes Brothers DraftKings WinnersDave and Rob Gomes, brothers from Boston, Massachusetts, won $1 million last year in the DraftKings Millionaire Maker fantasy football contest.

Fantasy sports scandal reignites inquiries: The still-unfolding scandal, says Pallone in a statement on his Congressional website, is a prime example of why a Capitol Hill hearing is needed to review the legal status of fantasy sports and sports betting.

"Daily fantasy sports is functioning in a Wild West void within the legal structure," says Pallone. "Like professional sports betting, fantasy sports should be legal, but both are currently operating in the shadows. With little legal oversight and deep investments into these sites by the same professional sports leagues that oppose traditional sports wagering, these issues are ripe for Congressional review."

Sports group joins call: Pallone is getting support from the International Centre for Sport Security (ICSS).

"Fantasy sports are, plain and simple, sport betting," says Chris Eaton, executive director of sport integrity for the ICSS, in a statement also issued today in response to the scandal. "Despite the subtle differences in the definition between the two industries, it is important not to disguise the clear relationship between fantasy sport and sport betting – and the need for both to be legalized and supervised by competent, independent and well-resourced regulators."

Eaton argues that self-regulation in this rapidly growing market won't work. If the system continues as is, he says, "there is a very real threat that organized crime and corruption will take hold and fund wider criminal activities."

Since sports betting is legal in most of the world, Eaton also emphasized the need for a globally regulated sport betting economy.

In addition to protecting the integrity of the games, Eaton says a regulated sports betting market will produce additional revenue and tax opportunities.

"The real lesson in this fantasy scandal is to be honest about sport betting, to not disguise it or hide it, and to force the industry into public regulation and social compliance," says Eaton.

Whatever you call it, it's taxable: Regardless of how you characterize the money from sports fantasy leagues, the Internal Revenue Service will still get its portion.

Currently, under an exception in the Internet Gambling Enforcement Act (UIGEA), fantasy sports games are exempted from the online gambling prohibition and the money on the games is considered taxable "other" income at ordinary tax rates.

Typically, playing and making money on fantasy sports is regarded as hobby income.

Gambling winnings also are taxable, again reported as other income and taxed at ordinary tax rates, so there's no difference there to the winner.

There are, however, some distinctions in deductions that can be claimed again these different types of earnings.

Differing deduction options: When other income is classified as coming from a hobby, any avocation-related expenses can be claimed to help reduce the taxable amount. But there are limits.

First, hobby deductions cannot be more than hobby income. That means you can't use the expenses to create a taxable income loss situation.

Plus, you must itemize to claim hobby expenses. And there's an additional limitation here. The losses are included as miscellaneous expenses on Schedule A, and this total must exceed 2 percent of your adjusted gross income before you can deduct anything.

Gambling losses also are claimed as an itemized deduction, but there's no AGI percentage to meet. The losses from bad wagers are counted on a separate Schedule A line entitled Other Miscellaneous Deductions.

However, as with other income losses, you can only claim gambling losses up to the amount of your winning wagers. So you can't use your bad luck to claim losses that could reduce your other income.

Overall, though, it might be easier and more tax-valuable for not-so-good fantasy sports players to take the gambling deduction.

Then the only problem facing these fake football (baseball, soccer, hockey, etc.) team owners would be convincing their moms that what they're doing is still OK.

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