Tax Rules for Fantasy Sports Betting

Fantasy sports is big business in America. The industry continues to mushroom as online entities like FanDuel and DraftKings offer payouts based on daily, weekly or season-long performances, while friends and families are often consumed by leagues organized by websites such as Yahoo and ESPN.

The leagues range from traditional team sports of football and baseball to solo competitions of golf and auto racing. If you’re not at least a casual player in Fantasy sports, it’s likely that you know someone who is.

What are the tax consequences? The lines can often get blurry. With the laws in this area continuing to evolve, both taxpayers and practitioners must be careful to avoid any missteps.

This much is clear: If you hit the jackpot playing Fantasy sports, the IRS expects to rake in its fair share of the spoils. Websites have a legal obligation to report annual winnings of at least $600 on Form 1099-MISC. If you’re paid through a third party source like PayPal, you’ll likely receive a 1009-K.

IRS computers may turn up discrepancies in you don’t report 1099 income from these websites in full. And, even if you don’t receive any 1099s, you are still legally obligated to report your profits from Fantasy sports on your federal and state income tax returns.

A Fantasy sports organizer generally calculates your net profit under a formula that can be represented as follows: The amount won minus entry fee plus any bonuses equals profit. For instance, if you hit it big during the year with $20,000 in winnings and a $5,000 bonus while paying $1,000 in entry fees, your net profit is $24,000.

Typically, the winnings must be reported as “other income” on your Form 1040, Line 21, along with other random items like trustee fees and jury duty pay. To offset some of the tax liability, you can claim gambling losses up to the amount of winnings on Schedule A. Thus, the best you can hope to do tax-wise is to break even.

The rules described above apply to casual players. However, if you’re a die-hard who relies in Fantasy sports activities for your daily bread, you may report the income from the business on Schedule C. Thus, you can offset the income with losses, regardless of the amount, and use any net loss to offset other business income you might have during the year.

Of course, in most cases the IRS won’t be easily convinced that playing Fantasy sports is a legitimate business and often contests such matters in the courts. To support your position, you may have to prove that the activity isn’t a hobby, based on factors cited in the prevailing regulations. Notably, you must show that you legitimately intended to turn a profit and generally operated in a business-like fashion. There’s a general presumption that an activity is a business, not a hobby, if you had a profit in three out of the last five years.

But that’s hardly the end of the tax story. Most Fantasy sports activities have been able to flourish around the country because they don’t technically meet the definition of “gambling” under state laws. But tax revenue-hungry state officials have been carefully examining the rules with the intention of tapping into this lucrative market. It is expected that we will soon see a wave of proposed legislation concerning taxation of Fantasy sports. Stay tuned.