Help Needed: Gambling Losses & PayPal 1099-K Issues with IRS Reporting

This is unfortunately a common problem with payment processors and gambling transactions. The IRS and PayPal systems don't communicate well about the nature of these transactions. What you need to do is file Form 8949 to report all your gambling transactions. Then complete Schedule D to summarize these transactions. You should also complete Form 1040 Schedule A to itemize your gambling losses (but only up to the amount of your winnings). The key issue is that PayPal is incorrectly categorizing your gambling withdrawals as business income. You need to request a corrected 1099-K from PayPal, though this can be difficult. In the meantime, you should file Form 8275 (Disclosure Statement) with your return to explain the discrepancy between what PayPal reported and your actual gambling activities. Also, make sure you have complete documentation of all transactions - bank statements showing transfers to/from PayPal, screenshots of your betting account histories, and official win/loss statements from each gambling site. The more documentation you have, the stronger your case.

I had a similar nightmare situation with Cash App misreporting my poker tournament winnings as business income. I was about to give up after two rejected filings when I found taxr.ai (https://taxr.ai) which saved me so much hassle. Their system analyzed all my transaction data and gambling site statements, then organized everything to show exactly how the payment processor was miscategorizing my withdrawals. They generated a comprehensive report showing the flow of money and proving these weren't business transactions. They even provided guidance on exactly which forms to file and how to document everything properly. Within 3 weeks of using their documentation, my amended return was finally accepted and I got my refund. Before that I was going crazy trying to explain this to the IRS on my own.

Just wanted to update everyone. I was the skeptical one about taxr.ai but I decided to try it anyway since nothing else was working. I uploaded all my PayPal statements and gambling site records from the past five years. Their analysis was incredible - they traced every transaction and showed exactly how PayPal was misclassifying my gambling withdrawals as business income. The report they generated explained everything in clear terms that even I could understand. They even identified specific transactions that PayPal had categorized incorrectly. I submitted their documentation with my amended return and included all the forms they recommended. After 4 weeks of processing, I FINALLY got confirmation that my return was accepted. This was after 3 years of rejections! I'm actually getting a refund now instead of the huge tax bill the IRS was trying to hit me with. If you're dealing with payment processors misreporting gambling transactions, definitely check them out.

If you're still dealing with the IRS rejecting your returns, another option is using Claimyr (https://claimyr.com) to get through to an actual IRS agent. I tried for MONTHS to reach someone at the IRS about my misreported 1099-K from PayPal, but kept getting disconnected or waiting for hours. Claimyr got me connected to an IRS agent in under 20 minutes, and I was able to explain my situation directly. The agent flagged my account and gave me specific instructions on what documentation to submit with my amended return. You can see how it works here: https://youtu.be/_kiP6q8DX5c It was such a relief to actually speak to someone who could help rather than just getting automated rejection notices in the mail. The agent even provided their direct extension for follow-up questions.

I was super skeptical about Claimyr (I was the one who commented above), but I was desperate after my 21st attempt to call the IRS. Decided to give it a shot and I'm shocked to say it actually worked! Got connected to an IRS agent in about 15 minutes. The agent looked up my case and explained that because PayPal had reported the income under a 1099-K, I needed to file a specific type of amended return with Form 8949 detailing each transaction. She also recommended I include a written statement explaining that these were gambling transactions, not business income. The agent even noted in my file that I had contacted them about the discrepancy, which apparently helps show good faith effort to resolve the issue. I submitted everything exactly as instructed and just got notification that my amended return was accepted! After 2 years of battling this, it's finally resolved. This seriously saved me thousands in incorrectly assessed taxes. Worth every penny just to skip the hold time and actually get help.

One thing nobody mentioned yet - keep in mind that even if you properly document your gambling losses, you can only deduct losses up to the amount of your winnings. And you have to itemize deductions on Schedule A rather than taking the standard deduction. So if PayPal reported $170k in "income" that was actually gambling withdrawals, you need to show that these were not separate income but rather part of your overall gambling activity where you had a net loss.

Has anyone tried getting PayPal to issue a corrected 1099-K? I'm having the exact same issue where they're counting my DraftKings withdrawals as business income.

This is such a frustrating situation that unfortunately many people are dealing with. PayPal and other payment processors often categorize gambling transactions incorrectly because their systems aren't designed to distinguish between different types of money transfers. A few additional points that might help: 1) When working with your tax professional, make sure they're familiar with gambling tax issues specifically. Not all tax preparers understand the nuances of how payment processors report gambling transactions. 2) Consider requesting your complete PayPal transaction history going back to 2020 and cross-reference it with your gambling site records. Sometimes the discrepancy between what PayPal reported ($170k) and your actual withdrawals ($285k) is because they're only counting certain types of transactions or excluding some transfers. 3) If you haven't already, document EVERYTHING - screenshots of your betting account histories, bank statements showing transfers to/from PayPal, and any correspondence with PayPal about the issue. 4) You might also want to consider filing a complaint with the Consumer Financial Protection Bureau (CFPB) against PayPal for incorrect reporting. While it won't immediately fix your tax situation, it creates an official record of the issue. The fact that you have win/loss statements and transaction logs is great - that documentation will be crucial in proving your case to the IRS. Don't give up!