Daily Fantasy Sports Tax Reporting

PJGuin23’s Disclaimer: I am a Certified Public Accountant licensed by the Commonwealth of Pennsylvania. Any information provided is for informational purposes only and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional accountant, CPA, lawyer or other competent financial professional. Presentation of information I provide on RotoGrinders does not constitute an accountant-client relationship. Such relationship can be established by engaging in professional services privately with PJGuin23. RotoGrinders readers are advised not to act upon information I provide without seeking the service of a professional accountant well versed in your particular situation.

For DFS Tax Preparation Services call Patrick Guinan CPA at (866)668-4650 or visit dailyfantasytaxes.com

Daily Fantasy Tax Reporting

If you have winnings of over $600 from any Daily Fantasy Sports site, such as FanDuel or DraftKings, you will likely receive a Form 1099-MISC with the amount shown on Box 3. I will advise you to report net earnings of $1, but anything over $600 is what will be reported to the IRS. The sites have different methodologies in calculating 1099-MISC winnings and there is much debate about which one is correct. It would be best to include the amount placed on the 1099-MISC on your return. The IRS will match the amount on that Form to your tax return.

So what does this mean for you? For most people, your Winnings will be reported on Line 21 of your 1040 Tax Form as Other Income. But what if you have some losses as we talked about above? For the “Casual” player where it’s a hobby, the losses and other expenses, up to the amount on Line 21, will be reported on Schedule A- Miscellaneous Deductions Subject to 2% AGI Floor. How a theoretical example would work:

Income from Wages: $60,000
Winnings from FanDuel: $5,000
Losses from DraftKings: ($3,000)
Deductible Other Expenses (Research, Portion of Internet, DirecTV): ($1,000)

As a “Casual” player, this would mean your AGI is $65,000 and 2% of that is $1,300 so only $2,700 ($4,000-$1,300) would be deducted IF you Itemize Deductions as opposed to taking the Standard Deduction. For some of you starting out in your careers, still in college, not owning a home, or even later in life having a paid off mortgage it is almost always wise to take the Standard Deduction. So your losses and expenses would not benefit you at all. So what is the other Alternative? Filing your Daily Fantasy Sports (DFS) activities on a Schedule C. Using the example, you would file your DFS activities as $5,000 Gross Income and expensing the $4,000 for a Net Profit of $1,000. This along with your wages would have your AGI as $61,000 as opposed to $65,000. Even though your AGI will be lower, you will be paying Self Employment taxes on 92.35% of those $1,000 winnings at a 15.3% rate (that is up to a $117,000 cap of course then it’s 2.9%). Other factors to consider are overall AGI, other business activities, applicable AGI sensitive Credits, and the dreaded Alternative Minimum Tax. So much to consider if you’re doing them yourself!

Business vs. Hobby Loss Rules

Now can you just file on a Schedule C if you want? Well, per IRC 183 you have to run your Daily Fantasy Activities as a business. The IRS uses 9 Factors below to determine if the DFS taxpayer is operating a for-profit business or a hobby:

1) The manner in which the taxpayer carries on the activity. For DFS this could mean:

— Do you complete accurate books?
— Do you have a separate business bank account?
— Were records used to improve performance?

2) The expertise of the taxpayer or his advisers. Did the taxpayer study the activities business practices? Did they consult with experts? For DFS subscribing to RotoGrinders Incentives or DirecTV would be evidence.

3) Does the time and effort put into the activity indicate an intention to make a profit? For DFS does this mean playing a few random lineups here and there or do you “Grind?”

4) Have you made a profit in similar activities in the past?

5) The history of income or losses 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?

6) Does the activity make a profit in some years (three of past five, incl. current year)?

7) The financial status of the taxpayer and does the taxpayer rely on DFS or does the taxpayer have other sources of income? Many DFS participants are wage earners, some fairly high, but that does not preclude Schedule C status.

8) Is there an expectation of asset appreciation for any assets involved in the business activity? This is not applicable to DFS at all.

9) Does the activity lack elements of personal pleasure or recreation? If the activity has large personal elements it is indicative of a hobby. Well, for DFS there’s BOTH! This would be more applicable to the horse racing industry.

The above factors do not fully determine how you should file. Whether to file as a Casual “Hobby” or Professional “Grinder” is not set in stone. For some especially profitable Grinders, the IRS wants may wish to classify the DFS participant as a Business rather than as a Prize Winner. The IRS has the benefit of some juicy Self Employment Taxes if classified as a Business, if profitable, rather than a Prize. Just placing the 1099-MISC income on Line 21 of your 1040 might not work exactly.

Box 3 of the Form 1099-MISC, as opposed to Box 7- Nonemployee Compensation, would suggest that the DFS winnings are a Prize. However, the IRS has contested this not only for DFS, but in the past in other activities. IRS Revenue Ruling 58-112 characterizes a business as one that is “regular, frequent, or continuous.” In one case, under Revenue Ruling 77-356, a Congressman was found to be considered a business for making 10 speeches per year for $1,500 and showed “a degree of recurrence, continuity and availability.”  On the contrary Revenue Ruling 55-431 states that “as a general rule, an individual who accepts an occasional invitation to make a speech is not engaged in a trade or business.” So how does this translate for DFS? Say you play DraftKings for Weeks 12 and 16 only and win $1,000. To me that would look very much like a hobby and would simply be reported on Line 21 of the 1040 as Other Income for $1,000 for no Self Employment Tax. Now if you play every week of the NFL plus playoffs and you grind it out for PGA and MLB. The Revenue Rulings to me look like you would be in a trade or business due to the recurrence and continuity. Yes sir, you now have Self Employment Tax. But if you’re grinding it out, surely you are using Internet access, maybe a DirecTV package, paying for research like RotoGrinders Incentives and other items to ensure your DFS grinding is profitable. Now it is a whole lot easier to expense these items in full or in part! That Self Employment Tax might not look so bad after all and could be wiped out with better expense deductibility. Plus like I said before the lower AGI would surely help you in other areas like Credits, AMT, and Social Security taxability.

Local issues and how you handle your winnings and expenses can have a HUGE impact on your tax liabilities. For example, Pennsylvania and New Jersey do not have Itemized Deductions. Other States have Itemized Deductions largely tying in with Federal. What does this mean for DFS grinders? For those in Pennsylvania and New Jersey, it would behoove DFS taxpayers in those states to file as a business more than other states because losses on another site wouldn’t be counted against income AT ALL. Other states will vary.

There are also Local Tax Considerations for example Philadelphia, New York City and various municipalities throughout Pennsylvania and Ohio. They often have separate returns IN ADDITION to the Federal and State tax returns. Some areas will have Business Receipts Taxes, if DFS activities are placed on a Schedule C. It is important to pay attention to any and all applicable taxes if you are profitable.

Simply putting the number received from your 1099-MISC on your H & R Block or TurboTax program for Daily Fantasy Tax purposes may not be the wisest choice. These programs are very cumbersome on business income and local taxes as well.

You need to know how often you participate, how much you earn and keep good records of your activities. I would recommend downloading the .CSV file of your activities every month or at the most threemonths from your Daily Fantasy site and provide that to your tax professional so they can determine the best course of action for your situation. Having a year’s worth of CSV file activity is best for you and your tax practitioner. As shown with this type of income, the IRS and other taxing authorities can go many different ways in how to interpret your winnings.

About the Author

  • Patrick Guinan (PJGuin23)

  • Patrick Guinan, CPA (or PJGuin23 on RG) is from Philadelphia, PA, lives in suburban Montgomery County, PA and is an avid Eagles, Flyers, Phillies, Sixers and Temple Owls fan. He is a graduate of Temple University’s Fox School of Business majoring in Accounting and is a licensed CPA in the Commonwealth of Pennsylvania. He is currently the owner of PHL Tax Services and website Daily Fantasy Taxes, where you can have your DFS taxes handled with ease. Patrick has a wealth of experience working at the IRS in the Collections and Examinations Departments and a various Tax and CPA firms. One of those firms specialize in Equine (horse) tax issues which have some similarities to the realm of Daily Fantasy Sports, especially Hobby-Business issues. He has also played in season long NFL and NHL leagues for years prior to DFS ever existing. He got into DFS after a losing NFL season and has not looked back since! From these experiences, Patrick took an interest in Tax issues related to Daily Fantasy Sports seeing the potential of DFS Taxes as a rapidly growing need.

Comments

  • cogs7

    awesome! thank you for this information.

  • KillaChap

    They always have to take their cut, don’t they?

  • jbank727

    Interesting. Most casual players have won very little money. I started playing football in September. I quickly learned that daily fantasy was a different animal than season long play. Needless, to say, my first month or so could best be described as a steep learning curve. My initial investment of $100.00 was gone pretty quick and I almost quit playing. It wasn’t until after a couple months in, I started getting a few small wins. Anyway, my point is that my history shows $737 in winnings. This does not factor the fact that my total deposits were $400.00 which means my profit is only $337.00. How does this work?

  • bosmeg

    What line item on a Schedule C do you put the loss of 3,000(according to your hypothetical above) from Draft Kings?

  • PJGuin23

    DFS Tax Guru

    @bosmeg said...

    What line item on a Schedule C do you put the loss of 3,000(according to your hypothetical above) from Draft Kings?

    Other deductions. I like ‘Entrance Fees’.

  • BOATSANDHOES

    Hey! Thanks for the write up! I live in Canada and profited just over 30k in 2015 on draft kings. They didn’t deduct any money when I cashed out and asked me to fill out a w8ben with my Canadian social insurance number and asked for drivers license. I have checked in Canada and it is not to be reported at all cause it is a hobby not a business for me. I think I’m good just filling out that form that I sent back to Draft Kings correct? Or do I need to do anything else in the States? Thanks so much!!

  • thehumanraindelay

    What if you have not received a 1099 Misc but won money and withdrew it from the site?

  • PJGuin23

    DFS Tax Guru

    @BOATSANDHOES said...

    Hey! Thanks for the write up! I live in Canada and profited just over 30k in 2015 on draft kings. They didn’t deduct any money when I cashed out and asked me to fill out a w8ben with my Canadian social insurance number and asked for drivers license. I have checked in Canada and it is not to be reported at all cause it is a hobby not a business for me. I think I’m good just filling out that form that I sent back to Draft Kings correct? Or do I need to do anything else in the States? Thanks so much!!

    Just worry about the W-8Ben for the States. I can not comment on Canada but my understanding is a hobby is non taxable

  • PJGuin23

    DFS Tax Guru

    @thehumanraindelay said...

    What if you have not received a 1099 Misc but won money and withdrew it from the site?

    It’s taxable. Whether you get a 1099 is a whole other story.

  • thehumanraindelay

    I understand it is taxable, but how do i know what to report. I played various dfs sports all of 2015.

  • PJGuin23

    DFS Tax Guru

    @thehumanraindelay said...

    I understand it is taxable, but how do i know what to report. I played various dfs sports all of 2015.

    For the most part, it’s Winnings -Entry Fees + Bonuses

  • BOATSANDHOES

    Thanks Brother!!

  • dossou

    I am new here. I know not where, how to play the game! I need direction!

  • bluesjack

    I’ve downloaded my CSV from Draftkings but I can’t make heads nor tails out of it. What should I be looking for?
    Many thanks in advance

  • discofunk

    Hey pj, I cashed out $29,000 in june, since then I deposited about 4,500 back and lost it before the end of year, I haven’t received my tax forms from draftkings, will it say I won 29000 or 24500

  • PJGuin23

    DFS Tax Guru

    @bluesjack said...

    I’ve downloaded my CSV from Draftkings but I can’t make heads nor tails out of it. What should I be looking for?
    Many thanks in advance

    The 1099 form. If you have losses I can take a look for you but namely the Entry Fees and Winnings.

  • PJGuin23

    DFS Tax Guru

    @discofunk said...

    Hey pj, I cashed out $29,000 in june, since then I deposited about 4,500 back and lost it before the end of year, I haven’t received my tax forms from draftkings, will it say I won 29000 or 24500

    It’s not what you “cashed out” rather what’s “earned” that counts. A that would either require a 1099 issued or a CSV/Excel analysis.

  • mhoward2131

    When are they going to send my 1099 MISC form? I want to file!

  • bluesjack

    The 1099 form. If you have losses I can take a look for you but namely the Entry Fees and Winnings.

    Thanks, they don’t make that easy to find. The CSV is in so many different columns that don’t seem to correspond to the column below. You would think it could be a little easier to read.

    Got in touch with DraftKings support on 2/15 and they said they have an extension with the IRS and that 1099’s won’t be sent out for another 2-4 weeks.

  • PJGuin23

    DFS Tax Guru

    @bluesjack said...

    The 1099 form. If you have losses I can take a look for you but namely the Entry Fees and Winnings.

    Thanks, they don’t make that easy to find. The CSV is in so many different columns that don’t seem to correspond to the column below. You would think it could be a little easier to read.

    Got in touch with DraftKings support on 2/15 and they said they have an extension with the IRS and that 1099’s won’t be sent out for another 2-4 weeks.

    Sounds like a recycled line. They better be out before the end of the month.

  • aylsg

    Great article. Just to be clear, if you go the Schedule C route, can you essentially file a loss? For gambling, you can claim losses only up to the amount of your winnings, but with a Schedule C and self employment, you’re allowed to claim a business loss. So if my entry fees were more than my winnings, leaving me with negative earnings, is that permitted?

  • PJGuin23

    DFS Tax Guru

    @aylsg said...

    Great article. Just to be clear, if you go the Schedule C route, can you essentially file a loss? For gambling, you can claim losses only up to the amount of your winnings, but with a Schedule C and self employment, you’re allowed to claim a business loss. So if my entry fees were more than my winnings, leaving me with negative earnings, is that permitted?

    It’s risky, but I’d take a look at what expenses cause a loss. Having a loss against other active income is hard to prove especially for DFS. I’d have to understand your specific fact pattern.

  • aylsg

    @PJGuin23 said...

    It’s risky, but I’d take a look at what expenses cause a loss. Having a loss against other active income is hard to prove especially for DFS. I’d have to understand your specific fact pattern.

    Just referencing your advice to the earlier comment where you said entrance fees can be claimed in the other deductions area. Or am I misinterpreting that? Do you mean every single entry fee paid on for contests or the lump sum money you “buy-in” with when you add funds to your DFS account(s)? Or neither?

  • PJGuin23

    DFS Tax Guru

    @aylsg said...

    Just referencing your advice to the earlier comment where you said entrance fees can be claimed in the other deductions area. Or am I misinterpreting that? Do you mean every single entry fee paid on for contests or the lump sum money you “buy-in” with when you add funds to your DFS account(s)? Or neither?

    Entry fees paid in. Doesn’t matter how much you deposit. Example, you deposit $200 and put in $20 worth of contests. It would be the $20 that is relevant for tax purposes.

  • jlewi24

    “Yeah I cashed out $29,000 in June.. it’s nothing..” Haha, I’d be lucky to some day cash out $29. Just keep putting in $10 and losing it. Shit I grind too.. I just suck.

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