Assess Tax Risks for Fantasy Sports

If you’re like many sports enthusiasts, you’re preparing for your fantasy football leagues upcoming draft.

Don’t forget about the tax consequences. If you’re not careful, you could be tackled hard by the IRS.

Although the tax law in this area is evolving, fantasy sports is generally treated as a form of gambling for federal income tax purposes. The IRS essentially confirmed this position in a recent private ruling. (PLR 202042015, 10/16/20)

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 you might 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 its share. Fantasy sports websites are legally obligated to report annual winnings of at least $600 to you on Form 1099-MISC. If you’re unpaid through a third-party source (e.g., PayPal or Venmo), you’ll likely receive a 1099-K instead.

Don’t think that this is being shoved under a rug. The 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 the entry fee plus any bonuses. Example: If you hit the jackpot this year with a $25,000 payout and a $5,000 bonus and it costs you a $1,000 entry fee, your net profit is $29,000.

This income must be reported on your Forum 1040 like other random types of income including jury duty pay and trustee fees. The silver tax lining is income from gambling activities can be offset by gambling losses up to the amount of your winnings. Thus, if you have losses elsewhere, you might break even tax-wise.

In the new private letter ruling, the IRS said that a fantasy sports entry fee constitutes a wager for the tax purposes. This is indicative of how the IRS would rule on this issue.

Special rules: If you’re in the “business” of playing fantasy ports, 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 the nine factors listed in the regulations. Notably, you must show that you legitimately intended to turn a profit and generally acted in a business-like manner.

Small Business Tax Strategies
August 2021