Draftkings Sportsbook Taxes
The Internal Revenue Service has decided that DraftKings DKNG, -2.36% and other daily fantasy sports companies should pay a federal excise tax on daily fantasy sports (DFS) contests. 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 fantasy-sports sites.
Tax Day is right around the corner, and sports wagering winnings should be part of a bettor’s annual filing.
Nathan Rigley, a lead tax research analyst at H&R Block, spoke with TheLines.com to offer advice for bettors making preparations for 2018 and beyond.
The first thing to realize is that any winnings are taxable and bettors should include it on a tax return.
“Just because a taxpayer doesn’t receive a tax form, (it) does not make the winnings tax-free,” he said. “Taxpayers still have a responsibility to report their prize on their tax return as ‘other income.’”
Don’t neglect to report it
Don’t be caught unaware. No matter the amount, gambling winnings are taxable. Those winning a substantial amount are likely to receive a tax form, and the IRS will also receive that form.
Those winnings will usually be reported via form W-2G or 1099-Misc. The IRS will then compare the information to the taxpayer’s return. Not reporting can be costly, triggering penalties and interest.
“Failing to report the prize as income is the surest way to get audited,” Rigley said.
That could certainly be uncomfortable and cause the type of scrutiny most bettors would like to avoid.
Record keeping 101
Serious bettors must not only be savvy with betting lines, but also with record keeping. The IRS advises gamblers to keep an accurate diary or record to substantiate wins and losses on a tax return.
Plan to keep track. A little extra work can pay big dividends in the long run. Rigley recommends bettors include the following in their records:
- The date and type of each wager.
- The name and location of the bet.
- The names of other people with the bettor at the betting establishment.
- The amount won or lost.
Bettors should also keep verifiable documentation of losses, which include:
- Wagering tickets
- Canceled checks
- Credit card records
Mobile wagering makes keeping track of wagers much easier. Players should have easy access to bets made throughout the year. That helps in reporting overall wagering income.
Track those wins and losses
Bettors should keep track of their winnings, but also their losses. If they won big and show a profit for the year, they can offset winnings with losses to help lower a tax burden.
Only winners can deduct losses, and the full amount of winnings and losses must be reported when filing. However, Rigley notes that gamblers may deduct losses, but only by as much as they report in winnings.
For example, suppose a taxpayer entered two betting pools: One at the office and one among friends. Both had a $10 entry fee, and the player won $100 from the office pool. The bettor should report $90 in winnings, deducting the $10 fee.
For itemizing, the entry fee from the losing pool and other gambling losses could be taken as an itemized deduction. That would be capped, however, at a maximum of the amount won being reported, in this case, $90.
Do the new tax laws have any impact?
Taxpayers will notice some changes when filing this year. The Tax Cuts and Jobs Act changed many aspects regarding itemized deductions. That includes the elimination of some deductions that were subject to a 2% floor of adjusted gross income.
“This has been impactful for many taxpayers,” Rigley said. “Luckily, the deduction for gambling losses, though a miscellaneous deduction, was not subject to this floor.”
This is advantageous to gamblers. They can continue to claim gambling losses as an itemized deduction to the extent of their gambling income.
Sports betting as a full-time job
The majority of bettors may fall into the recreational or hobby group. But those who bet professionally as their sole means of earning a living have different benefits and requirements.
These bettors would need to file as a business with a Schedule C form.
Filing as a business allows deducting expenses, but also subjects them to self-employment tax and possibly quarterly estimated payments. It’s as if that bettor runs his or her business and files accordingly.
The new tax laws have had some changes on this aspect, however. Bettors can no longer deduct non-wagering business expenses in excess of net wagering income. Thus, reporting a loss as a gambler isn’t possible.
Planning for next year
The new sports betting landscape has brought many more into the wagering ecosystem. Players new to betting may want to start planning for filing their 2019 taxes.
Rigley strongly advises maintaining detailed gambling records.
“The foundation of any tax return is one’s records,” he said. “In order to ensure the best outcome on the tax return, you have to make sure you can back up anything reported on your return, including the reporting of inherently personal activities like gambling.”
And if you do make a nice score, Rigley suggests making that first check to the tax man.
Set aside an estimated payment on taxes you’ll owe on those winnings.
“This is essentially a deposit toward your tax liability,” he said. “The reason we suggest this is that it helps to avoid any underpayment penalties for failing to deposit enough taxes throughout the year. And, psychologically, it seems easier to write that check when the income is new rather than be hit with the balance due down the road when the return is filed.”
Here’s hoping that big win comes, though bettors should plan on paying Uncle Sam.
New guidance from the Internal Revenue Service says that the federal excise tax on sports betting also applies to daily fantasy sports.
The excise tax, sports betting and DFS
The excise tax is applied as a tax of .25% of all sports wagers; as applied to DFS this would be each entry fee for a contest. Estimating the DFS industry handles roughly $4 billion annually, this would equate to $10 million of federal tax annually. It’s also possible this tax could be applied retroactively, or at an even higher tax rate, depending on how the IRS uses this guidance.
That tax has long been known to apply to sports wagering, as Nevada sportsbooks have been responsible for paying it for years. Sportsbooks in states with legal sports betting that has cropped up since 2018 are also subject to the tax.
But it was unknown if it applied to the DFS industry — which is dominated by DraftKings and FanDuel — or if any DFS company was paying it. (DFS companies likely were not, as they have long held that anything applied to gambling does not apply to DFS.)
An interesting part of the equation is that DFS is being treated like gambling in this instance at the federal level. While the memo clearly does not mean that the federal government writ large considers DFS to be a form of gambling, the IRS is attempting to treat DFS entries as “wagers.” The DFS industry was created, grew and still exists based on the Unlawful Internet Gambling Enforcement Act and on DFS-specific laws or existing laws pertaining to gambling and games of skill at the state level.
It’s not clear why this issue is just coming out now, as daily fantasy sports has been around for more than a decade. The IRS memo was written in July and was recently made public in August. The impetus for the memo appears to be an internal question about the application of the excise tax. The memo is internal guidance and does not carry the force of law.
Draftkings Sportsbook Taxes Against
You can see the IRS memo here.
Legal Sports Report has reached out to both DraftKings and FanDuel on the matter. Both said they are aware of the IRS memo but had no comment on the record. DraftKings CEO Jason Robinstalked with Yahoo Finance about it after Friday’s earnings call.
What’s in the IRS memo on DFS
The memo is 10 pages of why the author — Holly Porter, associate chief counsel for the IRS — says the excise applies to DFS.
Here are the top-level conclusions of the memo:
1. A DFS operator is liable for the excise tax on wagers under IRC § 4401.
Here is the applicable part of US code about taxes on sports wagering:
(1) State authorized wagers
There shall be imposed on any wager authorized under the law of the State in which accepted an excise tax equal to 0.25 percent of the amount of such wager.
(2) Unauthorized wagers
There shall be imposed on any wager not described in paragraph (1) an excise tax equal to 2 percent of the amount of such wager.
The memo goes on to outline why DFS is subject to these taxes. The IRS says the amount of skill involved in DFS is immaterial to whether the tax is owed. From the memo (emphasis added):
A DFS operator may try to differentiate taxable wagers from non-taxable entry fees into skill-based contests. In state courts and state legislature discussions of DFS, the issue of DFS’s legality within each state typically turns on whether DFS is a game of skill or a game of chance (that is, gambling) under the state’s laws.
While these state rules are helpful context, the statutory language in IRC §§ 4401 and 4421 does not differentiate whether an activity involves skill, chance, or some combination of the two. Most importantly, whether DFS is a game of skill for state gambling statute purposes is not relevant for determining whether DFS is wagering for federal excise tax purposes.
Could DFS face an even higher tax rate or retroactive application of the law?
The IRS guidance leaves some questions without clear answers, at least from reading the memo.
Could DFS handle be taxed at a rate of 2%?
Here’s another conclusion from the memo:
The rate of tax IRC §4401(a) imposes on wagers accepted by a DFS operator depends on whether the wager is accepted in a state in which the wager is authorized.
The excise tax on sports betting is generally known to be .25%, but as § 4401 and the memo point out, “unauthorized” wagers are taxed at a higher rate of two percent.
From the memo:
Because we have determined that DFS entry fees are taxable wagers under IRC §§ 4401 and 4421, we must evaluate whether the authorized or unauthorized rate of tax applies. IRC § 4401(a)(1) imposes an excise tax of 0.25 percent of the amount of the wager on any wager authorized under the law of the state in which accepted. IRC § 4401(a)(2) imposes an excise tax of 2 percent of the amount of any other wager (any unauthorized wager).
Generally, the person who is engaged in the business of accepting wagers is liable for the tax. We conclude that any DFS operator that accepts wagers is subject to the authorized rate under IRC § 4401(a)(1) for each wager that is accepted in a state in which DFS is authorized under state law. If DFS is not authorized under state law and a DFS operator accepts a wager in such a state, such wager is subject to the unauthorized rate under IRC § 4401(a)(2).
This seemingly leaves a lot of room for what “authorized” entails. DraftKings and FanDuel obviously maintain that they operate legally in all but a handful of US states, and could say that game of skill and gambling laws “authorize” them to take entry fees in those states.
But does that amount to “authorization” according to the IRS? Likely not, but there does seem to be some wiggle room in arguing the interpretation.
Could DFS handle be retroactively taxed?
This is another big question out of the guidance. The IRS seemingly asserts that the DFS industry should have always been subject to the excise tax. DraftKings and FanDuel have handled tens of billions of entry fees over the years.
Could the IRS go to any DFS company and demand back taxes be paid? Such an effort would almost certainly land in court.
DFS is gambling to the IRS, but not elsewhere
The IRS memo certainly does not hold the force of law to say that the federal government considers DFS to be a form of gambling.
The 2006 Unlawful Internet Gambling Enforcement Act — which the DFS industry used as the backbone of its legality — specifically carves paid-entry fantasy sports as a game of skill and not gambling. The federal Wire Act applies to conducting sports betting on an interstate basis but has never been applied to DFS. No law other than the UIGEA at the federal level deals with fantasy sports in particular.
In recent years, nearly two dozen states have passed laws dealing with the legality and/or regulation of fantasy sports.
Draftkings And Taxes
Still, it’s fair to wonder how this guidance would have been received several years ago, when DraftKings and FanDuel found themselves at the center of controversies around the US concerning their legality. Circa 2015 and 2016, the DFS industry found itself with a number of attorneys general saying that the companies were violating state law.
What does all this mean?
Right now, the memo is just that. It’s not entirely clear how and if this is being applied to DraftKings, FanDuel and other companies in the DFS space. LSR has no insight into any actions the IRS is taking or plans in regards to this memo.
Should the IRS demand payment of the taxes — either for the future, retroactively or both — it seems likely that the companies would challenge that assertion, perhaps in court.
Draftkings Sportsbook Taxes
There is a new piece of legislation that looks to repeal the federal excise tax, although that faces uncertain prospects as well.
Uno On Facebook
The guidance might give pause to smaller DFS operators that occupy the space. And if DraftKings and FanDuel collectively find themselves on the hook for tens of millions of dollars in back taxes, the guidance starts to matter a bit more.