Fantasy sports is sweeping the nation. It can range from casual leagues just for fun to
heavy betting for high stakes.
Strategy: Learn the tax consequences. If you don’t, you could land in hot water with the IRS.
Although the tax law is still evolving, fantasy sports is generally treated as a form of gambling where payoffs are concerned.
Here’s the whole story: To play fantasy sports, you might sign up with an online forum like FanDuel or DraftKings offering winnings based on daily, weekly or season-long performance; or enter into a league of friends or family hosted by websites such as Yahoo and ESPN. Virtually all athletic pursuits are represented.
If you play fantasy sports for money and win, however, the IRS is going to want to get its share. Fantasy sports websites are legally obligated to report annual winnings of $600 or more on Form 1099-MISC. You get a copy of the form, and so does the IRS. So the IRS knows how much you won. If you’re paid through a third-party source (e.g., PayPal), you’ll likely receive a 1009-K instead.
Don’t think that this is being shoved under the rug. IRS computers may flag discrepancies if you don’t report 1099 income on your return. Typically, a fantasy sports entity will calculate your “net profit” as being equal to the amount of your winnings minus entry fee plus any bonuses. For instance, if you hit the jackpot this year with a $25,000 payout and a $5,000 bonus and it cost you a $1,000 entry fee, your net profit is $29,000.
This income should be reported on your 1040 along with other random income like jury duty pay and trustee fees. At least there’s a silver tax lining: Income from gambling activities can be offset by gambling losses, but only up to the amount of your winnings. Thus, if you have losses elsewhere, you might break even taxwise.
In this brief analysis, we’ve presented a general tax outline for casual players. If you’re in the “business” of playing fantasy sports, you’re treated like a professional gambler who can deduct losses on Schedule C. To support your position, you may have to prove that the activity isn’t a hobby, based on nine factors listed in IRS regulations. Notably, you must show that you legitimately intended to turn a profit and generally acted in a business-like manner.
Tip: State laws will govern income taxation on the state level.
Small Business Tax Strategies Vol. 12 No. 7 July 2017