In February 2014, I wrote a post titled, “Taxes and Daily Fantasy Sports: The Duck Test.” I concluded:
So daily fantasy sports have at least some element of luck. Then from a tax standpoint they sure look to be a form of wagering activity. There’s a prize, chance, and consideration. The Duck Test again: If it looks like a duck, walks like a duck and quacks like a duck, it might just be a duck.
On Friday, the IRS released a second Chief Counsel Memorandum dealing with Daily Fantasy Sports. An IRS attorney asked the question, “Does the amount paid by a daily fantasy sports player to participate in a daily fantasy sports contest constitute an amount paid for a wagering transaction under §165(d) of the Internal Revenue Code?” The Chief Counsel’s Office conclusion was:
The amount paid by a daily fantasy sports player to participate in a daily fantasy sports contest constitutes an amount paid for a wagering transaction under §165(d).
The Chief Counsel’s office opinion is basically what I wrote over six years ago:
DFS transactions meet the definition of wager as interpreted by the Tax Court and State courts because there is an uncertain event (such as the live performance of individual players), winnings if the event resolves in participant’s favor, and consideration is lost if the event does not resolve in participant’s favor. Each DFS transaction is a pay to play competition with predetermined winnings for a certain number of participants. The outcome of the competition turns on the overall statistical performance of live professional players assembled into the fantasy team. The winning participant receives a return of his or her initial bet along with wagering gains, while the losing participant walks away empty handed. This is consistent with the courts’ interpretation of the term “wager.”
The IRS Chief Counsel memorandum also correctly notes that the fact that DFS is skillful wagering is a blind alley. “DFS transactions are similar to poker and other wagers in which a player’s skill is a component of the game but it does not dictate the outcome. As such, the argument that DFS transactions are excluded from wagering as a game of skill are unpersuasive.”
There are some obvious conclusions from this. First, DFS sites have been issuing Form 1099-MISC’s, not W-2G’s, to participants. We can expect the IRS to pressure the sites to switch (and expect the sites to fight this). Second, expect the sites to come under pressure to register as gambling sites in “grey market” states or to leave such states.
Both DraftKings and FanDuel, the two leading DFS sites, have expanded into sports betting (which is clearly gambling) and have registered appropriately in states where they act as sports books. In those states, DFS being considered wagering/gambling won’t matter. However, just like Nevada did years ago some other state or states are going to also consider DFS to be gambling.
For DFS players, there is both good and bad in this memorandum. The good is that you can deduct losses (to the extent of winnings). If DFS were a skill contest, you couldn’t; however, if DFS is a wagering activity losses are explicitly allowed up to the amount of winnings. That’s good. The bad is that for professional DFS players, you might not be able to take business expenses in a year that you lose money. The Tax Cuts and Jobs Act (passed at the end of 2017) specifically disallows a professional gambler from taking business losses.
For the DFS sites, this is a continuation of the bad news coming from the IRS. Like the first Chief Counsel memorandum, I expect the DFS sites to bury their head in the sand and fight this. Unfortunately, while DFS clearly involves substantial skill to be a consistent winner, that is completely irrelevant as far as whether or not it is a wagering (gambling) activity. The only way around this for the DFS companies is for Congress to change the law.
Tags: DFS