Maybe you are a fantasy sports junkie or maybe you saw too much advertising from Fanduel and DraftKings and you decided to enter the world of Daily Fantasy Sports (DFS). You enter a tournament and lo and behold, you win! After the excitement of winning fades, you start to wonder if your winnings are taxable. Good news, you don’t need to call your accountant you can just continue reading this article. Bad news, those winnings are taxable. If you are a professional fantasy sports player this article does not pertain to you.
Daily Fantasy Sports are currently labeled a game of skill and therefore are classified as ordinary income and not gambling income. The winnings for a non-professional fantasy sports player will be treated as other income not subject to self-employment tax. However, this classification is currently being challenged by the State of Nevada. If the courts rule in the favor of Nevada, DFS winnings will be classified as gambling income (New York Times – Nevada Challenging DFS). Whether it is gambling income or other income, it is reported on line 21 of your Federal 1040 tax return. Another way to further clarify if you are receiving gambling income or other income is to check the document that reports it. For gambling income you will receive a W-2G Form and for other income you will receive a form 1099-MISC. Since DFS is currently other income, you will receive a 1099-MISC form if you earn over $600 in winnings from Fanduel or DraftKings.
Another important consideration is to determine if you have any offsetting losses to help reduce the amount of taxable income to be reported. Losses would be defined as entries into a DFS game in which you do not win. These losses can be deducted on line 21. If DFS income becomes classified as gambling the way losses are treated will change. You will then be able to lump together all other gambling losses, (i.e., casino or horse racing losses). These losses will be deducted on Schedule A, other miscellaneous deduction not subject to 2%. Keep in mind, you can only offset gambling losses up to the extent of the winnings and only if you have itemized deductions. After deducting your loses if you still have income then you may be required to pay estimated taxes. Please consult your accountant to see if estimated taxes are required.
With the tax laws changing the issues behind Daily Fantasy Sports can become complicated. If you have any questions, please feel free to contact anyone in our sports and entertainment group.
Update: As of the posting of this article, Arizona, Iowa, Louisiana, Montana, Nevada, Washington and New York have all currently banned Daily Fantasy Sports. These bans are currently being challenged. Stay tuned for further updates.