Daily Fantasy Sports: Taxes & Legalities

Oct 23, 2015

If you are a football fan, or probably even if you have watched any TV at all in the last couple months, you are probably familiar with phrases such as “immediate cash payouts, no season-long commitments” and “welcome to the big time.” These, of course, are phrases from the overplayed and nearly intolerable commercials for the daily fantasy sports (DFS) sites FanDuel and DraftKings. Per USA Today these companies combined to spend $31 million on 9,000 ads in the first week of the NFL season alone.

These two companies are fighting for control of the huge DFS market. Both companies are valued at over $1 billion and both will be paying out over a billion dollars in prizes to over a million users during the 2015 NFL season. The future appears bright for DFS, but there has been a large amount of controversy in the industry over the past month.

On October 4, 2015, a DraftKings employee won $350,000 on a FanDuel contest. This employee had access to DraftKings player ownership percentages, which would provide inside information which could be used to help win the FanDuel contest. After an independent review from a law firm, the employee was cleared of any wrongdoing.

fantasy sports winnings

Despite being cleared of wrongdoing, this incident has ignited a very large amount of scrutiny on the DFS industry. The FBI, in conjunction with the U.S. Department of Justice, is investigating the legality of DFS based on federal law. This investigation is being led by U.S. Attorney Preet Bharara’s office in the Southern District of New York. This is significant because Mr. Bharara had a key role in shutting down the U.S. online poker industry in 2011.

Additionally, on October 15, 2015, the Nevada Gaming Control Board ruled that “DFS constitutes gambling under Nevada law” and that “a person must possess a license to operate a sports pool (DFS) by the Nevada Gaming Commission”. This is significant because the claim DFS sites make to make the activity legal is that DFS is a skill game and is not considered gambling. However, this ruling from Nevada states DFS is gambling and is not a skill game. There are many other states looking into the legality of DFS, and this ruling could provide support for them to outlaw DFS in the future. Currently, DraftKings and FanDuel can be played in all but six states, with Nevada being the first state to make it illegal (without a license).

Despite all of the controversy and investigations, DFS is a huge industry. In 2015, FanDuel is expected to pay out over $2 billion in prizes, while DraftKings is expected to pay out over $1 billion. With that kind of money being paid out, you can bet the IRS is making sure they get their cut. If you participate in DFS and are “skilled” enough to win over $600 in net profit, that is prizes won minus entry fees plus bonuses, both DraftKings and FanDuel will require you to complete an electronic W-9. This form will provide the companies with the information needed to issue you a 1099-MISC to report your winnings to the IRS. The amount of your winnings that are taxable can be reduced by entry fees, transaction fees, research materials (such as magazines) and losses from other methods of fantasy sports participation where you weren’t quite as lucky. So be sure to keep records of all your expenditures to support the information reported on your 1040.

Once you come to the net of all your winnings less all expenses, this amount will be reported as other income on line 21 of your 1040. Since the amount reported will not match the 1099-MISC you received, you will need to attach a statement to the return reconciling the 1099-MISC to the amount reported. Note that if you participated in a large amount of fantasy sports to the point that overall you lost more money than you won, you will not be able claim a loss on your return and will just report income of $0.

Next year when you file your tax return, avoid controversy and be sure to report all of your fantasy sports activity correctly.

By: Mark Sawyer, CPA

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