Daily Fantasy Sports and Taxes
RotoKevin’s Disclaimer: I am a Certified Public Accountant, licensed in the State of Minnesota. However, any tax advice that may be contained in this article is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.
Daily Fantasy and Tax
If there’s a buck to be made, the tax man will come calling for his share. You can count on that. In an effort to help you prepare tax filing season, let’s take a look at the daily fantasy landscape under the tax microscope.
Site Reporting Criteria
Any honest tax professional will tell you that whether or not you receive a document from a payor, all income must be reported on your personal tax return. Maybe you don’t exactly follow the rules, but one thing is certain, if you receive the appropriate tax form, that income had better show up on your tax return or you can pretty much guarantee you’ll get one of those fancy audit letters. Trust me, you don’t want one of those.
Anyway, how are the top daily fantasy service providers handling the tax reporting issue? I’m glad you asked. Here’s the run down from those with listed reporting processes:
• FanDuel: “For withdrawals over $600 we require a valid mailing address and social security number in order to file the appropriate tax forms at year end.”
• Draftstreet: “Players are required to pay taxes on net earnings (withdrawals less deposits) totaling $600 or more for a calendar year. DraftStreet will issue a form 1099-MISC for qualifying accounts.”
• DailyJoust: “Users who have won $600 or more (net of all entry fees) in a calendar year will need to provide address and social security details.”
•FSL: “For individual prizes of $600 or larger we require the winners Social Security Number prior to disbursement.”
• DraftDay: “For cash outs of $600 or more, we require a valid mailing address and social security number for tax purposes.”
• Profanity, DraftZone, FanSaloon, BuzzDraft and FantasyFactor make no mention of taxes on their sites.
So, what’s with the seemingly-random $600 thing? Well, the IRS has established $600 as the threshold that triggers the issuance of a 1099 from a payor to a payee, typically for services rendered (think independent contractors), but really for anything covered by form 1099-MISC (pdf here). There are no tax rules specifically governing daily fantasy, so keeping to the $600 trigger is perfectly reasonable.
What varies among the sites with clear tax policies is how the $600 is determined. DraftStreet uses a very clear withdrawals less deposits calculation. This excludes profits from the year that remain in your Draftstreet account, but reflects amounts actually paid. DailyJoust takes it a step farther in that all profits for the year would be counted, even those left in the account.
FSL is unique in that they only issue 1099s if the prize for an individual contest is $600 or more. I’m pretty sure no contests run at FSL currently offer prizes that trigger this threshold.
DraftDay and FanDuel have strikingly similar wording with regard to their respective tax reporting policies that aren’t entirely clear. Both seem to trigger 1099s off of total withdrawals, but in this thread, Wiggy clarifies that it will only be triggered in the event that withdrawals and profits exceed $600. Fanduel’s policy appears to follow similar criteria.
Player Reporting
The above is all well and good, but you need to complete your tax forms. Sadly, the tax code is no clearer regarding player tax reporting than it is about how sites should report. As I said in the opening, you are responsible for reporting all of your income, including daily fantasy winnings. You do have a couple of options regarding how you report it, though. Here are some useful resources:
Publication 529
Publication 535
These publications represent “option 1.” Application of these rules allows for the deduction of expenses to reduce your net profit. For example, let’s say that your entire DFS play of the year was conducted on DraftStreet and FanDuel. You profited $1,000 on DraftStreet, but lost $300 on FanDuel. DraftStreet will send you a 1099-MISC which must be reported in your gross income. Pub 529 allows for deductibility of miscellaneous expenses if they are incurred “to produce or collect income that must be included in your gross income.” There’s a pretty decent argument for deducting the $300. You can only deduct losses to the extent of your reported winnings. That is, if you have a net loss, you can’t get a tax benefit from that. Also, you can only deduct losses to offset winnings if you itemize deductions on schedule A. Don’t itemize? You’re out of luck under this section of literature. However, there’s another option, though it’s more aggressive.
For-profit hobbies
Hobby-Loss Rule (IRC 183)
If you can’t itemize deductions, you might want to consider representing your daily fantasy play as a for-profit hobby. Here are some of the general criteria the IRS suggests to support such a claim:
• Does the time and effort put into the activity indicate an intention to make a profit?
• Do you depend on income from the activity?
• If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
• Have you changed methods of operation to improve profitability?
• Do you have the knowledge needed to carry on the activity as a successful business?
• Have you made a profit in similar activities in the past?
• Does the activity make a profit in some years?
• Do you expect to make a profit in the future from the appreciation of assets used in the activity?
Going this route could enable you to deduct losses if you can’t use the first option and may also allow deductions in excess of your winnings in any given year. This is an exceptionally risky stance to take if you want to report a net loss in your first year. If, however, you have shown a year or two of net winnings, bullet 6 becomes your best friend. Generally, this literature guides your DFS play away from “Miscellaneous Income/Expense” toward “Profit/Loss from Business” (Schedule C). This exposes your profits to self-employment tax, so this probably isn’t the more efficient approach for most, but it might be a viable option for some.
Consult your tax professional to determine the most tax-efficient approach to reporting your earnings.