Fantasy Sports Leagues and Taxes

With the NBA Finals complete, Major League Baseball returning from its All-Star break, and NFL training camps set to open, the volume of fantasy sports leagues and transactions are about to escalate significantly. Fantasy sports, whether played on a daily or a seasonal basis, allow a player to draft a team, select a lineup, or participate in a contest in which they compete against other participants. There are usually entry fees, a wide array of different formats, and payouts to those who perform the best.

Fantasy Sports Online

If that general concept sounds like gambling, the IRS, via PLR 202042015, would agree. Under this Private Letter Ruling from October 2020, amounts paid to daily fantasy sports participants are considered to have been paid as part of a wagering transaction under IRC 165(d).

Currently, if you play fantasy sports online for money and earn $600 or more, the sponsoring website is reporting the winnings to the IRS on a Form 1099 as Other Income.  Should the IRS continue down the path of classifying these winnings as gambling, the sponsoring website may need to report amounts on a Form W-2G which is specific to gambling winnings.

Proper tax reporting and the treatment of this income is frequently problematic for fantasy players under the common refrain that this is a recreational activity. While that may have been true once, when fantasy sports were played in private leagues among friends and colleagues, the proliferation of daily fantasy sports – via FanDuel and DraftKings among other sites – has created increased gambling opportunities with significant and frequent payouts.

Report Winnings and Losses May be Deductible

As a result, the IRS has deemed the activity to be equivalent to gambling in a casino, where winnings are required to be reported and losses are deductible to the extent of winnings with one caveat: a taxpayer must itemize deductions in order to even claim gambling losses. In other words, if your deductions rise to the level of itemization, you could potentially offset your gambling winnings with equivalent losses, which include entry fees. However, if you utilize the standard deduction, gambling loss deductions are not allowed, rendering the income fully taxable.

WM WISDOM:

We recommend you maintain accurate records of all fantasy sport income and expenses. Even if you do not traditionally itemize deductions you never know when you may have the opportunity to itemize and when you do you will need to have accurate, supportable records to take the gambling loss deductions.

One of the more intriguing aspects of IRS’ ruling is its far-reaching implications for state-wide legality. In many states, daily fantasy sports could be considered illegal under state constitutions. However, many of these sites registered in states under the premise that their product represented a game of skill and not one of chance. By virtue of the IRS allowing a deduction for entry fees to these daily fantasy sports contests, it is signaling that it views the activity as gambling, which would obviously be contrary to the “game of skill” argument. It’s unclear how states will respond to this ruling, but it could result in further state-wide and national regulation of the industry.

Tax Implications

Fantasy sports have steadily risen in popularity over the last few decades to the point that players can now enter contests and choose daily lineups on their phone at the click of their fingers. The activity has become a daily ritual for many who may view it as fun and recreational. However, there are clear tax implications for this industry that existing and new players should consider before deciding to join a league or choose their lineup.

WM WISDOM:

We recommend working with a CPA to navigate the state and federal regulations related to income earned or expenses incurred on fantasy sport sites.

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