Legal sports wagers are subject to an excise tax of 0.25% on the amount wagered and an annual occupational tax of $50 for each person accepting wagers. Illegal wagers are subject to an excise tax. Dec 01, 2015 The IRS expects its share. Fantasy-sports winnings of any size are considered taxable income, and if you have a net profit of more than $600 for the year, DraftKings and FanDuel—and other. Tennessee’s fledgling sports betting industry which is exclusively online saw $312.3 million in gross wagers in its first two months of operation (November and December of 2020). This brought in $5.4 million in privilege taxes and both January and February will likely see similar tax revenues thanks to Super Bowl LV.
[toc]This is the first in a four-part series about paying taxes on daily fantasy sports.
Did you receive a tax form as a result of your daily fantasy sports play in 2015? It may look like this, or this. Even if you played and won and did not receive any tax forms, there still may be an obligation to report and pay taxes on winnings.
Reporting taxes from DFS play in 2015 is not straightforward for players. The legal battles and legislative developments surrounding DFS in the United States leave us with unresolved questions that could affect how players sort through their tax situations.
Today begins a series of posts on DFS and taxes in the United States. This post will cover the impact of tax forms that players may receive as a result of DFS play.
In general, the sites do not consider DFS play as gambling, and issue tax forms based upon that assumption. To date, the Internal Revenue Service has not commented on whether it considers DFS play, or fantasy sports games in general, as gambling.
Gambling or not, all winnings on DFS sites are taxable under the Internal Revenue Code.
Some players mistakenly believe that DFS winnings are taxable only if the site issues them a tax form. What are the forms, and what do they mean?
Form 1099-MISC, Miscellaneous Income
A common practice for a DFS site is to issue a Form 1099-MISC to a player if the player won $600 or more on the site during the year. The amount of winnings should appear in Box 3, “Other income.” A copy of the form is also sent to the IRS.
Fanduel Sportsbook Taxes Against
How does a DFS site determine whether a player reached the $600 threshold?
FanDuel, for example, claims it computes a player’s “net profit” using the following formula for the calendar year:
Net profit = Prize Winnings – Entry Fees + Bonuses + FDP Entries
FDP stands for FanDuel Points, which are earned by players when they enter into a money game. As the points accumulate, the player may use the points to enter into paid contests.
It appears that if FanDuel issues a Form 1099-MISC, the amount reported captures all of the player’s activity for the year on the site. If FanDuel does not issue the form, the player could apply the same formula above to determine taxable winnings for the year from playing on the site.
Despite how the DFS sites calculate winnings, the IRS may nonetheless take the position that the formula above should include entry fees paid only from winning contests and exclude those from losing contests.
There is at least one indication of this position in a Private Letter Ruling issued by the IRS in 2005. In the PLR, the IRS advised an online gaming site on the appropriate Form 1099-MISC formula for computing player winnings from various games such as checkers, golf, 9-ball pool and mah-jongg.
Though a PLR binds only the IRS and the requesting taxpayer and cannot be cited as precedent by other taxpayers, this PLR may indicate how the IRS may rule on similar fact patterns in the future, as applied to DFS.
A lesson here is not to assume that all DFS sites apply the same formula as FanDuel. A player should know what is and is not included in each site’s Form 1099-MISC formula in order to be able to also report the items not included, if applicable. More on this in the next post.
Form 1099-K, Payment Card and Third Party Network Transactions
There is another tax form at play in the DFS world, the Form 1099-K. This form is not issued by DFS sites themselves. Instead it is issued by credit card or third-party merchants, such as PayPal.
In short, a payment merchant is required to issue Form 1099-K if a taxpayer receives more than 200 incoming payments that in the aggregate exceed $20,000.
A potential unfortunate outcome here is the double reporting of income.
Suppose my FanDuel net winnings for 2015 were $25,000, and I make more than 200 withdrawal requests (however unlikely) from PayPal that total $25,000. I will receive a Form 1099-MISC from FanDuel and a Form 1099-K from PayPal. My income from DFS play is $25,000. The IRS gets a copy of both forms and based on these forms alone, the IRS may think that my income was actually $50,000, rather than $25,000.
A more likely scenario is a DFS player who also runs an online business and receives payments through PayPal and other merchants. A 1099-K does not specify the activities generating the receipt of funds, so the amount reported on a 1099-K could represent a blend of DFS income and other income.
A lesson here is recognizing the 1099-K triggering thresholds and the added complications that could arise when tax forms are issued from two different companies on the same activity. It is important to remember that if the taxpayer receives fewer than 200 incoming payments from the merchant, the 1099-K will not be issued. Limiting the number of incoming payments may help avoid having to provide an explanation to the IRS later on.
Key takeaways on 1099s
- Winnings from DFS play is taxable income whether or not a tax form is issued.
- Winnings from DFS play is taxable income whether or not the activity is considered gambling.
How the income and expenses are reported to the IRS depend on whether DFS play is considered gambling. We will get into that next time.
Disclaimer: Nothing contained in this article is specific tax advice, as each person’s situation is different. Consult a tax professional to discuss particular facts and circumstances.
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While sports bettors around Colorado can place wagers using one of many mobile betting apps, the state's only in-person sportsbooks are located in casinos in Black Hawk, Central City and Cripple Creek. But working with FanDuel, one of the sports-betting heavyweights, some entrepreneurs are now offering a hybrid option.
'It's the closest thing to a sportsbook,' says Noel Hickey, owner of the Celtic on Market, the Irish pub at 1400 Market Street. The Celtic is also a licensed off-track-betting facility, where gamblers can watch horse and dog races 'off-track' and legally bet on them; at sportsbooks, gamblers can bet on all sports.
But the Celtic is betting on gamblers willing to put up with certain limitations in order to stay in Denver, enjoy the ambience of a bar...and maybe win some money. In December, the Celtic unveiled 'Cash at Counter,' a partnership with FanDuel. Using the FanDuel app, bettors can deposit cash in person at the Celtic and make bets while watching sports.
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The Celtic doesn't actually take bets; gamblers must place wagers on their phones. But Hickey believes the amenities of his place and the tactile aspects of exchanging cash will bring people in. 'It's nice to win, but it's much nicer to get the cash,' says Hickey, acting out flipping through $500 in bills while he takes a break from bartending for the half-dozen people drinking at the first-floor bar. That area is filled with TVs showing horse and dog races, as well as more traditional sporting events.
The Celtic's off-track-betting venue is in the building's large basement. Before the pandemic, it would typically fill up for popular sports events like the Kentucky Derby. During the pandemic, following social distancing rules, the space can fit about fifty people.
According to Hickey, most of the 500 or so people who have made use of the sports-betting counter since it opened last month have been men in their twenties. While some have been avid horse- and dog-race gamblers who placed their winnings in a FanDuel account, many came in to bet on other sports and then became interested in betting on races. 'A lot of them have never even experienced horses or dogs,' says Hickey, who takes time to sits down with new customers and explain the basics of betting on races.
The Celtic gets no commission from the FanDuel deposits, but benefits from new customers generated from the arrangement. And sports gamblers get bonuses for making in-person deposits at the Celtic.
Other off-track betting facilities in the metro area whose licenses are owned by Twin River Worldwide Holdings — a casino company that owned Arapahoe Park racetrack and established a larger footprint in Colorado before sports betting went live — have similar arrangements with FanDuel. Besides the Celtic, there are FanDuel 'Cash at Counter' sites at Havana Park in Aurora, Elevated Stakes in Colorado Springs, and Odds On in Arvada.
'We're doing what we can do legally,' explains Bruce Seymore, executive director of the Colorado horse-racing operations for Twin River. 'It helps our business. Someone comes in and cashes and may want to stick around. The bar might make some money.'
The Colorado Division of Gaming has signed off on the off-track facilities opening cash counters in partnership with FanDuel.
'These cash counters are just an option to fund accounts and make withdrawals, similar to how PayPal or Apple Pay used to fund sports-betting accounts, but the counters are for people funding accounts with cash. They have no betting functionality, so they're allowed per rule. All the options to fund accounts are approved by the Division of Gaming director after the division reviews for internal control procedures and AML (Anti-Money Laundering) practices,' says Suzi Karrer, a division spokesperson. FanDuel did not return a request for comment.
While officially sanctioned by state regulators, the cash counters are a bit of a workaround to the spirit of sports betting in Colorado.
When Colorado lawmakers were working on the language of Proposition DD, which would legalize sports betting in Colorado, one of their selling points was that the 'brick-and-mortar' aspects of the state's sports-betting market would be limited to Black Hawk, Central City and Cripple Creek, where gambling has been legal for close to three decades.
'There was a fear that this would be like marijuana, where there were physical ticket windows on every corner, that in a way can lead to more falling into the negative impacts of gaming,' Alec Garnett, the Democratic state lawmaker (and now House speaker) who championed sports-betting legalization, told Westword in June 2019. 'Somebody who gets paid in cash on a Friday and just wants to go up to a ticket window and wants to risk it all is much more likely to happen with brick-and-mortar all over the state than it is with creating an online account linked to a bank account.'
In their final proposal, Garnett and other lawmakers ended up excluding off-track betting facilities from being allowed to open retail sportsbooks, instead creating the two sports-betting prongs of casinos and mobile apps. A slim majority of Colorado voters ended up approving sports betting in November 2019; under the language of Proposition DD, the majority of tax revenue generated by the wagers goes to the Colorado Water Plan. The legal market went live in May 2020.
FanDuel contributed $1.35 million to efforts to pass the measure; that amount represented 35 percent of the $3.86 million put into the campaign. Twin River, which also has a partnership with DraftKings in Colorado, contributed $350,000.
Between then and the end of December, bettors in Colorado wagered $1.185 billion on sports, which resulted in the state collecting $3.4 million in taxes. Only a small percentage of the bets were made in person at casinos. The vast majority of the money wagered went through mobile betting apps, including DraftKings and FanDuel; some of those were made in person at Cash at Counter locations, which might look like sportsbooks...but aren't.
Fanduel Illinois Sportsbook
'The Speaker is confident that the Division of Gaming has worked hard to listen to and balance the interests of the many stakeholders involved in sports betting, and that they are making fair decisions while creating the sports-betting regulations that are best for Colorado and its people,' says Jerónimo Anaya-Ortiz, a spokesperson for the Colorado House Democrats.
'Obviously, I wish we could be doing the full thing,' says Seymore.
But for now, the Celtic on Market and other Cash at Counter off-track-betting facilities are settling on the next best thing to a sportsbook allowed by the state.
Hickey is betting on the return of sports fans to Coors Field, Ball Arena and Empower Field at Mile High. By then, he plans to install a 20-by-20-foot screen in the pub.
'It'll feel like a sportsbook without calling ourselves a sportsbook,' Hickey says.
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