In the past few years, you may have seen an increase in advertisements for daily fantasy sports (DFS) during sporting events from sites like DraftKings or FanDuel. This follows several legal rulings declaring DFS is a legal game of skill, which now allows these sites to operate in 43 of 50 states. The style of gaming has spread into pretty much every sport imaginable – including golf, tennis, and even e-sports.
Like many other fantasy sports, you compete against other contestants for prizes by entering contests and building teams under a salary cap. If you’re skilled, lucky, or a little of both – you can win back your entry fee plus more. But as those amounts add up, it’s important to be aware of the tax ramifications.
Daily Fantasy Sport Tax Rules
The IRS has consistently maintained that Fantasy sport competitions that involve money are a form of gambling and must be treated accordingly. Here are a few of the rules for reporting your winnings:
You must report your winnings if your net profit is greater than $600 on a single platform throughout the year. Net profit is calculated as prizes won minus entry fees plus bonuses. At the beginning of a new year, both you and the IRS you will receive a 1099-MISC from the platform that paid the money stating how much money you won in the previous year so you can report it on your tax return.
One of the acceptable ways to reduce tax liability on winnings is to itemize your deductions. If you itemize your deductions (meaning you do not take the standard deduction), you may deduct your gambling losses. However, the amount of losses you are eligible to deduct cannot be more than the amount of reported gambling income.
Another way to legally reduce the tax liability on your winnings is to set up a business. If you get very serious about using Fantasy sport gambling to create income, and your activity rises to the level of a business, you can establish yourself as a self-employed individual. The key part of that sentence was rises to the level of a business which means you must be able to show you intended to turn a profit and did not treat Fantasy sports as a hobby.
As with all major income changes, it’s best to talk to your accounting BEFORE you make any major changes. There are expensive consequences to not following the rules set by the IRS. Your accountant knows your income history and can lay out the options that work for your situation.
Chris is a Strategic Analyst who maintains expertise in litigation support, international taxation, and complex entity and fiduciary taxation services.