The IRS recently issued two memos that that declared daily fantasy sports games to be a form of gambling that should be taxed just like a “wagering transaction.”
The first IRS memo was issued July 23. This was followed by a second memo on October 16.
A few months ago DraftKings CEO Jason Robins blustered that the first communication, “has no force of law and is non-binding.” He has so far not commented on the second memo.
No one expects enforcement to begin this year or even the next, but eventually DFS players and operators will need to deal with the new reality.
CPA and DFS player and analyst Justin Van Zuiden told US Bets: “Sports betting operators have to pay this 0.25% excise tax to the government on each wagering transaction — or in this case, for DFS operators, it would be each entry fee. That obviously adds up.” Most of those familiar with the game expect that DFS will pass those onto payers by increasing the rake.
Van Zuiden said, “It’s not really noticeable if it’s a tenth of a percent or two tenths of a percent, or if it’s only on certain contests like the DraftKings Millionaire Maker or something like that.” He continued, “But 0.25% of all their entry fees is not small potatoes. So I think you’ll see them do something, whether it’s cutting back on certain costs or trying to bump the rake up a little bit.”
Van Zuiden believes that it will be hard for losing players to deduct net losses. “From a tax perspective, if it’s treated as a gambling activity, you’re only allowed to deduct expenses up to the extent of your earnings — so basically, you’re going to be capped at a zero if you have a loss,” he said.
He believes that winning players will probably need to file as a business using a Schedule C. It will be more complicated for players who have a second source of income.
These complications arise from the contention of the IRS that DFS should not be considered a “game of skill” even though skill is obviously involved. It concedes that, like poker, “a player’s skill is a component of the game” without dictating the outcome. So for the government’s purposes, DFS is a game of chance.
Van Zuiden concluded, “I don’t think there’s enough hardline evidence to get it reversed. I think there is skill involved, but it’s a high hurdle to try to challenge the IRS on it.”
