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
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 DirectTV 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 startup phase of the business?
6. Does the activity make a profit in some years (3 of past 5 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 are not fully determinative on 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 3 months 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.
What If You Just Flat Out Lose? (new for 2017)
Even those amongst us who spend a lot of time on DFS as an activity can have a losing calendar year. That being said quite a few have asked me if they can write off their DFS losses and related expenses against their Wages, Business and Other Income. The answer is yes and no. Again, look at the Hobby Loss factors from above in particular 3 of 5 years being profitable. If you’re calling me asking whether you can take $10,000 in DFS Losses against $70,000 in Wages on your Adjusted Gross Income and have never been profitable in the past, my short answer is I’m not going to feel comfortable taking the loss if you come to me pretty much without a PLAN. This means, if you’re not running DFS activities in a business-like manner nor do you have a business plan per se, I will likely treat your loss as a Hobby and call it what it is.
2017 Tax Law Changes and Beyond (new)
No significant tax changes from last year that are Daily Fantasy related. However, there are numerous proposed changes with the upcoming Trump Administration and GOP Congress that could have an impact in 2018 and beyond. In particular there could be major shifts in the tax brackets and deductions allowed which could have implications on whether Hobby or Business is more advantageous. But at this point (January 2017), nothing passed Congress and signed by the President…. yet.
Check out my website, Daily Fantasy Taxes, for more information!