The IRS released a four page memo October 16 that concluded the money paid by a daily fantasy sports player to participate in a game represents the “amount paid for a wagering transaction.”
A related memo earlier this year indicated that daily fantasy sports companies must pay a federal gambling excise tax, according to Legal Sports Report.
The latest response opens a window into how the IRS thinks of daily fantasy sports in comparison to other betting on sporting contests.
The tax code permits taxpayers to deduct losses from wagers but only to the extent of wins via betting.
“Each DFS transaction is a pay to play competition with predetermined winnings for a certain number of participants,” the IRS stated. “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 new memo equates DFS with poker and other bets in which skill is a component. “As such, the argument that DFS transactions are excluded from wagering as a game of skill is unpersuasive.”
Sports events include mainstream sports, plus obscure activities such as billiards, cards, checkers, croquet, and tug of war.
“A contest is any competition involving speed, skill, endurance, popularity, politics, strength, or appearance, such as elections, the outcome of nominating conventions, dance marathons, log-rolling contests, wood-chopping contests, weightlifting contests, beauty contests, and spelling bees.”
In fantasy sports, the IRS said, players pay an entry fee to participate, with such fees generating the funds to pay off winners. Examples of activities not subject to excise tax include pari-mutuel wagering, slot machines, pinball machines, or video games.
The author of the latest IRS memo, attorney Amy S. Wei, makes clear that the advice in the memo “may not be used or cited as precedent.” Likewise, there are no publicly-announced tax prosecutions involving players or operators in the fantasy sports space. But it seems the IRS is making tax implications of daily fantasy sports a priority.
