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The Skill Of Handling Tax Issues With Daily Fantasy Sports

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Daily Fantasy Sports (DFS) continues its mammoth growth, with payouts exceeding previous industry highs year-after-year as evidenced by record guaranteed payouts by DraftKings and FanDuel this year, as well as Yahoo, CBS, and Amaya jumping into the space.  With record payouts escalating, more and more winning players emerge. States could get into the fold with their own forms of taxation, but for the meantime players should be aware of the tax implications that may come along with participating in DFS.

Profitable players receiving at least $600 from DFS sites should be receiving a 1099-Misc tax form.  The Internal Revenue Service (IRS) also receives a copy.  As stated in an article on FantastyFootballers.org concerning the tax considerations of fantasy sports players, the income reported on the 1099-Misc form for the year is calculated by DFS sites by basically using the following formula:

Income = (Winnings – Total Entry Fees) + any Bonuses/Rewards.

A simpler method to calculate income uses this formula:

(Total Withdrawals + Year End Account Balance) – (Total Deposits – Beginning Year Account Balance)

Profitable DFS players should become familiar with this formula in order to properly plan for the completion of 1099s. Furthermore, another type of 1099 form may come into play as well -- the 1099-K.  This type of 1099 gets issued from payment settlement entities (i.e. PayPal) if payments to a payee exceed $20,000 and the payee has more than 200 transactions in a year.  Both criteria must be met for the 1099-K to trigger.

Perhaps neither 1099 form is the most prudent for the daily fantasy sports player.  Mitchell S. Halpern, Tax Principal at KLR believes that players who win $600 or more will receive a W-2G, not a 1099-Misc.  W-2G is used to report gambling winnings.  Players may receive multiple W-2Gs from the same payer throughout the year.

It has commonly been argued that the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) federal law has legalized the play of daily fantasy sports operations that comply with various required elements (including but not limited to all winning outcomes reflecting the relative knowledge and skill of the participants), but the UIGEA law is separate from federal income tax laws which are governed by the Internal Revenue Code (IRC), and the states that have their own specific income tax laws, if any (i.e. Florida has no personal state income tax).

How a fantasy player reports DFS income can vary depending on personal circumstance.  Deducting losses up to the amount of winnings is permissible if they are itemized (1040 Schedule A) on a federal tax return.   The IRS website provides more information about miscellaneous deductions on its website.  However, if a DFS player takes the standard deduction instead of the itemized deduction, then losses cannot be deducted.

Another option a DFS player may consider is reporting the DFS activity as a for-profit business (1040 Schedule C).  A DFS player taking this route could possibly deduct losses up to and in excess of income.  With this option, it would not matter if a DFS player uses the itemized or standard deduction.

Additional relevant business expenses could also be deducted under this method, which may include anything a DFS player requires to conduct the player’s industry specific business.  Such expenses may include items like TV sport packages, site subscriptions, internet/mobile data, travel for industry conventions/seminars, etc.  Going this route may bring with it potentially substantial federal tax implications.

“The only way a DFS player could report the DFS activity as a for-profit business (1040 Schedule C) is if that player is in the trade or business of being a DFS player (i.e. a professional gambler),” explains Halpern.  “The player would generally need to establish that he/she were pursuing DFS on more or less full-time basis and that DFS was not a hobby.”

With all of this in play, there is much for the profitable DFS player to plan for, which should include a discussion with an accountant before something occurs that cannot be undone.  At a minimum, players should document losses, which is important in the event that the IRS questions a deduction.

Darren Heitner is a lawyer and the Founder of South Florida-based HEITNER LEGAL, P.L.L.C., which has a focus on Sports Law and Entertainment Law.