Your winnings from DFS are subject to both federal and state taxes in Alabama. Gambling winnings are fully taxable at a rate of 25% for federal taxes, and state taxes consider gambling winnings to be classed as income and are taxed accordingly to residents’ tax classes. DFS has faced criticism over its semblance to sports betting; multiple U.S. States ruled that DFS contests constituted gambling and sports betting (which, at the time, was effectively illegal in most states under the Professional and Amateur Sports Protection Act of 1992), arguing that their elements of chance were predominant over those or skill, or how much control the player has over the outcome of the game. Daily Fantasy Sports for Beginners Daily Fantasy Sports has been a game changer for the world of fantasy sports, not to mention the sports viewing experience itself. Viewers and players can now play along in real-time in exciting contests which offer up the opportunity to win some life-changing prizes.
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.
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There is a debate raging in the gaming world when it comes to daily fantasy sports over whether DFS is gambling. The technical answer to this question depends on what state you’re in, as some states consider DFS contests gambling, while other states’ laws seem to designate DFS contests as a skill-based game and therefore not gambling.
However, on a visceral level, the vast majority of people would quickly place DFS in the gambling column without a second thought. As MGM Resorts CEO Jim Murren stated in an interview with News3LV, “But who in the world thinks that FanDuel or DraftKings — who’s going to tell me that’s not gambling? Of course it’s gambling.”
Is Dfs Gambling
This opinion extends far beyond Murren and casino executives.
Dfs Gambling
Look no further than the reaction to a recent ESPNW column where the author details his weekly practice of playing real-money DFS with his nine-year-old son. If social media is any guide, even hardcore gamblers and poker players seem to be questioning this decision.
The general reaction to that article is also telling, as it appears to be a clear indication that many people feel DFS is indeed gambling. Had the author said he was playing $1 online chess or backgammon games with his son, I doubt it would raise too many eyebrows.
I don’t want to cast aspersions on the author’s decision to play DFS with his son (that’s an activity other people can engage in), considering I’ve taught my boys the rudimentary rules of draw poker, although we play for chips, not money.
That being said, I do have some serious misgivings about the article.
The big problem the article creates
So, let’s ignore the moral and ethical objections people have to children and gambling.
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Let’s also forget the fact the author is breaking the terms and conditions of whatever DFS site he is using, as all DFS sites require a person to be at least 18 years of age, and in some places older. If DFS were regulated, such as online poker is in New Jersey, this father could be brought up on charges for allowing his son to participate in these contests.
The real problem many DFS players and legal gambling advocates like myself have with the column is that the anti-online gambling crowd could leverage this story and use it to further their agenda. It has turned the possible (underage children will be able to gamble online) into a reality, and at the same time the article probably caused some consternation for executives at DFS sites FanDuel and DraftKings.
Is DFS gambling?
Gambling Log Sheet
For instance, lines such as, “But when he got his first taste of daily fantasy sports this spring during the NBA playoffs, he was hooked…” seem to be taken right out of a Gamblers Anonymous speech. (In fact, GA may add fantasy sports to its book.)
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In addition to setting the legalization discussion back, this is the kind of image DFS companies don’t want people to conjure in their minds when they think of daily fantasy sports. Yet here is ESPNW, essentially promoting the idea of a father and a son wagering money on DFS contests together, and looking at it as the new “playing catch.”
The image of a child “hooked” on fantasy sports, anxiously watching football on a Sunday and fretting over his fantasy lineup should be troubling to anyone, whether or not they are pro- or anti-gambling. This article is quite literally the outlier scenario that Newsweek created in their anti-online gaming piece last year, complete with the image of a nine-year-old boy gambling online, only instead of poker, it’s DFS. And to top it all off, we have a parent encouraging this behavior.
Furthermore, the author’s justification for teaching his son how to play DFS has nothing to do with the “DFS isn’t really gambling” debate. At one point in the column, the author describes how he internally weighed the perceived positive aspects of playing DFS with his son and the potential negative aspects of teaching his child how to wager money on sports, as he wondered: “What if I am planting the seed for a future gambling problem as an adult?”
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When someone willing to teach their nine-year-old the ins and outs of selecting a DFS lineup can’t avoid drawing parallels between DFS and traditional gambling, it’s time to reevaluate how we categorize DFS.
Dfs Gambling
The creation of such a vivid image, a child playing daily fantasy sports for money, could do a whole lot of harm to DFS’ efforts to avoid the gambling designation. It could also have far-reaching effects on online gambling in general, particularly if the anti-online gambling crowd starts lumping DFS in with other forms of online gambling.
