Daily Fantasy Sports Tax Reporting
Hello RotoGrinders Community,
We hope 2018 treated you well. For those who had winnings from DFS, you will have to pay special attention to your tax this year. The Tax Cuts and Jobs Act of 2018 (TCJA) was an unprecedented over haul of the tax system. Keep in mind these tax changes will take into effect this year and beyond. It is important to be proactive with your taxes and to properly plan and understand your tax situation. A couple of hundred dollars in tax planning costs could save you thousands in taxes.
If after this article you believe your tax situation is more complicated than you thought, please feel free to reach out to us for a free consultation.
At the onset of Daily Fantasy Sports, there was much debate as to what type of “activity” individuals are engaging in. The IRS determined that playing DFS was a game of skill and technical ability. Players had to develop a strategy, research athletes, and build a team that will gain the most points possible in order to win a “set prize.” Compared to gambling activities, where the IRS views those activities as a game of “luck,” winning an undeterminable amount (the professional gamblers in the community would disagree). This distinction caused DraftKings and Fan Duel to mail out Form 1099-Misc to their participants. This opens up DFS income into a grey area of taxation. Is your playing style a hobby or full time job/business? We will discuss further.
Note: You cannot write off gambling losses against your DFS income. They are two different activities with different tax rules. Sorry!
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. It is advised that you to report all earnings on your income tax return and not just earnings reported to you on a 1099-MISC or other tax forms.
Your winnings will be reported on Line 21 of your 1040 tax form as Other Income. This type of reporting commonly defaults to as hobby income. Before 2018, DFS players classifying their income as hobby income could reduce their income/winning for expenses incurred or losses. The signing of TCJA effectively repealed hobby losses and expenses. This change in tax law is detrimental to the casual DFS player as they can no longer offset winnings with losses from other sites.
Individuals who spend more time than the casual DFS player or who play professionally for a living typically report their DFS activities on Schedule C – Profit or Loss from a Business. This type of reporting allows the DFS player/business owner to reduce the income earned by expenses incurred or losses from one daily fantasy site while another daily fantasy site had winning/income.
So, how do you know which reporting is best/right for you? The IRS has several criteria under the Internal Revenue Code that helps distinguish the casual player/hobby from the professional player/business owner. We have developed a Tax Determination Questionnaire that will assist you in making this decision. Selecting the correct tax position is critical. Miss-steps could result in IRS tax notices and significant interest and penalties.
We believe that determining the proper tax position (casual vs. professional) is important but not as important as proactively tax planning throughout the year. Proper tax planning will lessen your tax burden and reduce your stress come tax time.
Whether you are a casual DFS player or a professional, keeping support for your expenses and amounts reported on your tax return is vital