DFS Taxes: Are Fantasy Sports Winnings Taxed?

Daily fantasy sports is an entertaining endeavor that can also result in a great payday. The bad news is this payday will be like almost every other payday you have ever had: the government will want its share.

Editors note: We are not tax professionals, and this is not tax advice. If you have DFS winnings, you should speak with a qualified CPA for advice. Today’s post is more of a nuts-and-bolts explanation of how I personally calculated my net winnings and filled out the various tax forms associated with online gaming winnings.

In most states, daily fantasy winnings of any amount are considered taxable income. If you win $600 or more in a year, your DFS site should send you a 1099-Misc tax form.

Calculating DFS Profit

Each site can have a different way of calculating what they see as your overall profit, but almost every website will have the same formula. You need to take your prize winnings and then subtract the overall entry prices for all of your contests. After finding that total, add the amount of rewards and other miscellaneous things that a DFS site may provide you.

When I say “other miscellaneous things,” this is usually something like rewards given to you by a site or a deposit bonus of some sort. An example of this is that if you play DFS at DraftKings you will earn crowns for every dollar you play. If you make 55,000 crowns this year, that is an extra $100 you have earned.

The equation for this would simply be:

Total Winnings – Total Entry Fees + Any Bonus Earned = Overall Profit

For example, let’s say I won $10,285 in total winnings while entering $3,948 and then earning $400 in bonuses. I would have an overall profit of $6,737, and that is the money that I would be required to pay daily fantasy sports taxes on.

How Can I Find My DFS Earnings?

There are a few ways to actually determine these numbers. You can go to most DFS sites and download your contest history. Once you download your contest history into a CSV, you can find multiple websites that will allow you to analyze your overall DFS success.

These programs are a great way to determine how you play at your best in DFS, but they are also good at providing you the raw numbers that you have won over a given time period.

The other simple way to find this is by determining these four numbers: Total $’s Withdrawn, Account Balance at Year End, Total $’s Deposited, and Beginning of Year Account Balance.

If you can determine these four numbers, you just need to plug them into this equation:

Withdrawn + Balance at Year End – Deposited – Beginning of Year Balance = Overall Profit.

For example, if I started with $1,000, deposited $2,000, withdrew $9,000 and ended with $2,000. I would have an overall profit of $8,000.

Other DFS Tax Forms

The only other things you should be presented with are a W9 and a 1099-K form.

A W-9 form is what you would fill out for any DFS company that you may have to pay taxes from. What I mean is that, for example, FanDuel DFS may need you to fill out a W-9 form with some basic information so they can potentially send you a 1099-Misc form later on in the process if need be.

This is a very simple form and should be rather self-explanatory while filling it out. Filling out one of these forms does not mean that you will HAVE to pay DFS taxes, but it does help get the ball rolling for you and the company in the case that your profits do exceed $600.

A 1099-K form is not something that you will likely have to deal with as it is for using a service like PayPal an excessive amount. The qualifications you need to meet to fill out this form are as follows: you must make over 200 transactions through the platform to the same vendor, and you must transfer over $20,000.

If you do meet these criteria, you will just be required to fill out the 1099-K form and submit it to the IRS.

How To Report DFS Winnings On Taxes

There are two main ways I would consider when trying to figure out how to report your DFS results on your taxes.

The most common way to attack this is to report the income you have earned as “other income” on your form 1040. The other way is to report your DFS results as business income on a Schedule C.

Other Income Approach

If you decide to list your DFS profits on your form 1040 under “other income,” you can do this in two different ways. You can deduct your losses all the way up until your winnings by itemizing your deductions using a Schedule A. The other option is to use the standard deduction, which does not allow you to deduct losses.

Business Income Approach

The best part about this approach is that it would actually allow you to claim DFS losses and possibly lessen your overall daily fantasy sports taxes due. If you claim DFS losses in this scenario, it will decrease from your other jobs or businesses that do make money that you are paying taxes on.

This sounds nice if you have a losing year, but you will be required to convince the IRS that DFS is actually a business venture to you. The things that they want to see are that you treat DFS like a venture that you are trying to turn profitable AND that you play very regularly.

If you can prove these two things, the IRS is willing to consider activities that turn a profit twice every five years a business. You will then be allowed to treat your DFS losses as a bad business investment for the season, potentially allowing you to lessen your tax burden.

Reminder: The information I have presented today is based solely on my own personal experience with daily fantasy sites and my own tax professional. If you win any money at daily fantasy, talk to a tax professional. Everyone’s situation is unique and a tax professional will help you wade the murky waters of US tax law.

IRS To Tax DFS As Wagering And Implement 0.25% Tax

10/27/2020: Update from the editor

The IRS is pushing forward with plans to treat DFS entries as wagers and implement a federal 0.25% excise tax on all entry fees, similar to how it treats sports betting. If implemented, the change will not directly affect users, but it will impact fantasy operators who are likely to pass the cost on to consumers.

A September 2020 memo issued by the IRS in response to a query from an attorney concludes:

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).

Although many states treat daily fantasy sports as contests of skill, the IRS intends to treat them as wagering. The IRS further explains its rationale:

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 has not implemented a federal excise tax as of this update, but it seems intent on doing so. We will update this post as we learn more.