It has been estimated that over 33 million people per year play some form of fantasy sports, whether it be football, hockey, baseball, or basketball. Over the past year or so, there has been a rapid increase in popularity in “Daily Fantasy Leagues”, such as draftkings.com or fanduel.com, where players select players for a short time period rather than a full season commitment.
US Law does not consider fantasy sports to be a form of gambling, but rather a game of skill. This carve out is important to the legality of fantasy sports as a whole and is presented in the 2006 bill, the Unlawful Internet Gambling Enforcement Act. This distinction will also have tax implications as well.
Fantasy sports players can expected to be taxed on their “net earnings”, regardless if these have been withdrawn from the website. The reasoning behind this relates to the concept of “constructive receipt”, meaning that because the player has access to the assets they therefore have earned them and should pay tax on them. The fact that the player may not have withdrawn them and placed them in their bank account does not affect this idea; the mere fact these profits can be re-wagered will satisfy constructive receipt.
Generally speaking, if your winnings are over $600 for the year, most sites will be reporting these net earnings to players by January 31, 2015 via Form 1099 in Box 3. However, even if the site does not report these earnings or does not do so in an accurate manner, it is still the player’s responsibility to accurately figure their net earnings for the year and to report them accurately.
If the player is considered an “amateur”, which the majority of players will be, the net earnings are reported on Line 21 – Other Income. However, despite how counter-intuitive this may seem, Line 21 cannot be reported as a net number from all websites and contests. Despite not being considered gambling, the IRS has taken the position that each individual site and therefore contest is an independent event and the overall results cannot be netted together, which is similar to how gambling income is to be reported. Any fantasy sport losses will have to be taken as a miscellaneous itemized deduction, which is subject to the 2% itemized deduction floor, as well as standard deduction limitations.
Site 1 has net earnings of $5,000
Site 2 has net earnings of $1,000
Site 3 has a loss of $3,000
Other offsite losses total $1,000
In this scenario, the total to be reported on Line 21 would be $6,000, with the $4,000 of losses to be taken as itemized deductions. These will be reduced by 2% of AGI and furthermore if the taxpayer does not itemize, he will gain no benefit. These rules, while unfair, are the current standard. Even though the taxpayer only has $2,000 of realized gains, because of the way the tax code is written the taxable income is $6,000. Players can also take itemized deductions of expenses related to the hobby, such as subscription fees and sports journals, but only up to the extent of their income.
The other option available for serious fantasy sports players would be to file as a professional using Schedule C opposed to Line 21. In this case, the taxpayer is making the claim that they are in the business of fantasy sports. There are substantial documentation requirements, such as business plans, profitability studies, if the taxpayer undertakes this as his primary business, which will not apply to most players. In the event the taxpayer does qualify as a professional, they will be able to net their wins and losses on their Schedule C as well as take any related expenses, without regard to itemized deductions.
Edward McWilliams, CPA
Ed is a Partner in the firm’s tax and business advisory practice focusing on providing services to middle market private companies across different industries as well as to early stage startups. Ed has over a decade of experience providing tax and business consulting services to these companies of different sizes and across different industries, bringing a broad and diverse knowledge base and strategic solutions to the many complex issues that businesses face.