Daily Fantasy Sports operators examining their operation regarding how to challenge the IRS regarding a recent IRS ruling that, for tax purposes, welcome bonus casino DFS is gambling. The issue was first raised 4 months ago when the IRS ruled that DFS players may deduct their entry fees against any winnings BUT that online casino DFS operators must calculate the fees as a “wagering transaction” and pay tax on those fees.
American Tax Law and Gambling Winnings
The IRS taxes welcome bonus casino gambling income at 24% for winnings above and beyond $600 if the amount is at least 300x the bet (wins of $1200 from a bingo game or a slot machine, $1500 from keno or $5000 from a poker tournament are taxed). The IRS considers gambling income as winnings from casinos, horse races, lotteries and raffles and also includes the fair market value of any prize that you might win (cars, trips, etc).
Winnings that you achieve online are also taxable. Even if the tax wasn’t withheld, you must report the wins using form W-2G which is filed along with your 1040 form. Gambling losses are deductible though an itemized list must be submitted of the losses.
Professional gamblers list their wins and losses and file taxes as though their wins are income.
Daily Fantasy Sports
The question about whether Daily Fantasy Sports involves gambling or a game of skill has dogged the pastime almost since its inception. Fantasy sports originated in the ‘70s but in recent years, playing fantasy sports has become increasingly popular, especially the Daily Fantasy Sports that allows people to bet on their decisions.
Players appreciate the opportunity to get interactively involved in “playing football” by using their understanding of the game, the real-life players and other elements to build teams and then watch to see how the teams that they built “perform.”
DFS is also being capitalized on in the sports world. Twelve NFL teams have partnered with one of the biggest DFS operators, DraftKings, while the FanDuel DFS operator has closed deals with 16 NFL teams. ESPN, the biggest sports network, signed an exclusive marketing deal with DraftKings and now incorporates DFS coverage and tips in their daily sports reports.
The question of how DFS plays out legally has reached the courts on multiple occasions. Questions include how DFS maneuvers through the murky waters of online gaming, of sports betting in states which have not yet legalized sports betting and now, regarding the way that the IRS views DFS fees.
DraftKings summarizes how it views DFS activities on its website DraftKings.com. “The legality of daily fantasy sports is the same as that of season long fantasy sports. Federal Law and 45 of the 50 U.S. States allow skill based gaming. Daily fantasy sports is a skill game and is not considered gambling.” That comes from an exception to the 2006 Unlawful Internet Gambling Enforcement Act which allows “participation in any fantasy or simulation sports game…”
That view isn’t held by all. In Nevada, the Gaming Control Board considers DFS gambling and therefore it is illegal without a license. Nevada is one of six states – along with Louisiana, Montana, Arizona, Iowa and Washington -- where DFS is illegal but in other states, it is flourishing.
Is DFS Gambling?
The debate over whether DFS is or is not gambling comes down to the question of whether DFS is a game of luck or of skill. Those who say that it’s luck point out that a DFS player has no control over the performance of the real life players upon which their teams are built and their bets are made. Thus, they say, winning is a matter of chance. That’s the opinion of the Nevada Gaming Control Board.
Others aren’t so sure. A recent Bloomberg Businessweek article quoted statistics that support the stance that daily fantasy sports is a game of skill. According to Businesweek, a 3-month review showed that 1.3 percent of the players – only those players who were skilled in DFS – made a profit. FanDuel CEO Nigel Eccles said that this is known to the DFS operators. “We don’t make any apologies that it’s a game of skill, and you might go up against the best in the industry,” he said. “Some of the people are really good.”
New York is the epicenter of the legal battle. In New York, gambling is basically illegal though there are some exemptions – a few native casinos located upstate and the state lottery. DFS never asked for an exemption from the anti-gambling laws in New York. They relied on the opinion that DFS is not gambling. Attorney General Eric Schneiderman didn’t agree and in 2015 he issued FanDuel and DraftKings a cease-and-desist order.
DraftKings and FanDuel filed lawsuits. They argued that their games were not “contest of chance” but are, instead, games of skill. New York defines gambling as risking or staking something of value on the outcome of a contest of chance -- a contest of chance being a game where the outcome depends on an element of chance to a “material degree”.
In their suit, DraftKings and FanDuel claimed that a player’s success depends on the player’s skill in investigating, researching and analyzing the various elements that go into building their teams.
The court didn’t agree with the DFS operators because, they said, ultimately, players rely on someone else’s skill which determines the outcome. An initial injunction was granted to forbid the operators from taking bets from New York residents but a year later, the state senate approved legislation to legalize DFS. The legislation didn’t go up for a referendum and another suit was filed, this time by anti-gambling activists, who claimed that the legislature violated the state constitution. In 2018 the court agreed though, as the DFS operators appeal the ruling, they can still legally take entry fees in New York.
Now the IRS is having its say. The IRS has ruled that DFS entry fees are gambling expenses. Not only does this cause the operators to consider how they will pay taxes on those fees but it affects DFS operations in states where DFS has been accepted as a game of skill, as opposed to gambling.
The subject has been the focus of much debate over the years. Some states have enacted legislation that states that DFS is not gambling while others allow DFS based on the premise that it’s a game of skill. A number of states simply term DFS to be illegal gambling under state law and there are some states that have, until now, ignored the issue entirely.
But in a far-reaching move that will have national implications above and beyond individual state laws, the IRS has concluded that DFS are contest of chance and that DFS entry fees represent wagers
If the IRS’s decision stands, DFS entry fees will be subject to an excise tax from 0.25% to 2% per wager. Sportsbooks already pay those taxes but by applying the tax to DFS fees, the IRS is sending a message that the fees are, in fact, wagers, and must be treated as such.
The IRS’s ruling could cost the DFS operators tens of millions of dollars annually. This could put many smaller operators out of business and adversely affect the operations of the bigger operators. Court cases are sure to follow.