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General daily fantasy tax reports
You may have had a great year in 2014 as you made a handsome profit on FanDuel, DraftKings, or any of the popular Daily Fantasy Sports sites. You may be licking your wounds with losses in some locations. But in late January or early February, you’ll receive a 1099-MISC form from one of these sites if you strike and receive more than $600 in net earnings and it will appear in Box 3. You may also be sent a W-9 form asking for Your social security number and your home address. I advise complying because the fines are $50 plus a 28% reserve withholding. As a CPA, I will advise you to report net earnings of $1, but anything over $600 is what will be reported to the IRS. Now how is the “net earnings” calculated on most of those sites for 2014? Simply take your withdrawals during the year and then add the closing balance as of 12/31/2014 then subtract the deposits during the year and subtract the starting balance as of 1/1/2014. This is a fair and accurate way to report your earnings to the IRS. Now doesn’t the site calculate that for you? Usually, they do and should. But the amounts are not always correct and you as the subscriber and the US taxpayer need to check if they are incorrect.
So what does this mean for you? For most people, your net earnings will be reported on line 21 of your 1040 tax form as other income. But what if you suffer some losses as we talked about above? For the “casual” player where it is a hobby, losses and other expenses, up to the amount on line 21, will be reported on Schedule A – Miscellaneous deductions subject to the 2% AI minimum. How does the theoretical example work:
Income from wages: $60,000
Earnings from FanDuel: $5,000
Losses from DraftKings: ($3,000)
Other deductible expenses (research, part of the Internet, DirecTV): ($1,000)
As a “casual” player, that means your AI is $65,000 and 2% of that is $1,300, so only $2,700 ($4,000 – $1,300) would be deducted if you itemize deductions instead of taking the standard deduction. For some of you who are starting their careers, still in college, don’t own a home, or even later in life after having a paid off mortgage, it’s always wiser to take the standard deduction. So your losses and expenses will not benefit you at all. So what is the other alternative? Place daily fantasy sports (DFS) activities on a schedule c. Using this example, you could present your DFS activities as a total income of $5,000 and an expenditure of $4,000 for a net profit of $1,000. This in addition to your salary would have your AGI of $61,000 instead of $65,000. Although your GPA will be lower, you will pay self-employment taxes. Other factors to consider are AI, other businesses, AI sensitive credits applied, and the dreaded alternative minimum tax. There’s a lot to consider if you’re doing it yourself!
Business Rules vs Hobby Loss
Can you now file on table C if you want to? Well, according to IRC 183, you must run your daily fantasy activities as a business. The IRS uses 9 factors below to determine whether a DFS taxpayer operates a for-profit or hobby business:
1. The manner in which the taxpayer carries out the activity. Do you complete accurate books? Do you have a separate business bank account? Are logs used to improve performance?
2. The expertise of the financier or his advisors. Has the taxpayer studied business practices? Have they consulted with experts? As for DFS signing up for Rotogrinders incentives or DirecTV would be a clue.
3. Does the time and effort spent on the activity indicate an intent to make a profit? For DFS, does this mean running some random formation or are you “grinding?”
4. Have you made a profit in similar activities in the past?
5. History of income or losses from the activity. If there are losses, are they due to circumstances beyond your control or did they occur at the start-up stage?
6. Has the activity been profitable in some years (3 of the past 5 including the current year)?
7. The financial position of the taxpayer and does the taxpayer depend on DFS or does the taxpayer have other sources of income? Many DFS participants are wage earners, some of them fairly high, but that doesn’t preclude Schedule C status.
8. Is there an expectation of an increase in the value of the assets of any assets involved in the business activity? This does not apply to DFS at all.
9. Does the activity lack elements of personal enjoyment or recreation? If the activity contains significant personal elements, this indicates a hobby. Well, for DFS, there are both! This would be more applicable to the horse racing industry.
The above factors are not entirely decisive on how you apply. Whether offering a casual “hobby” or a professional “mill” isn’t static. And Daily Fantasy is a new industry. One industry that I have worked extensively in in the past is horse racing. Usually very few are the profits of the taxpayer, and the IRS often attempts to reclassify equine activities as a “hobby” rather than a “business,” sometimes eliminating huge losses against other income. Daily Fantasy, as I’ve seen on some forums, quite the opposite can happen for profitable Grinders especially with the IRS wanting to classify a DFS participant as a corporation and not as a prize winner. The IRS benefits from some interesting self-employment taxation if it is classified as a corporation, if profitable, rather than an award. Just putting the 1099-MISC entry on line 21 of the 1040 might not quite work.
To SE or not to SE, that is the question?
Box 3 of Form 1099-MISC, vs. Box 7 – Non-Employee Compensation, indicates that DFS gains are an award. However, the IRS has contested this not only for DFS, but in the past in other activities. IRS Revenue Ruling 58-112 characterizes a business as “regular, recurring, or continuing.” In one case, under Revenue Code 77-356, a congressman was deemed to have made 10 speeches a year for $1,500 and demonstrated “a degree of frequency, continuity, and availability.” Conversely, Revenue Code 55-431 states, “As a general rule, an individual who accepts an occasional invitation to give a speech is not engaged in a trade or business.” So how does this translate to DFS? It depends on the frequency of your activities and only a tax professional can guide you if necessary. It’s not all bad you have to offer as a company. If you’re grinding it, be sure to use internet access, maybe a DirecTV package, and pay for research such as Rotogrinders incentives and other items to ensure your DFS grinding is profitable. Now it is much easier as a business to spend these items in whole or in part! The self-employment tax might not seem so bad after all and could be eliminated with a better expense deduction. Plus, as I said before, the lower AGI will definitely help you in other areas like credits, AMT, and Social Security tax. You have many options here, but as always, seek out a professional to ensure you’re doing the right thing.
State and local tax issues
I have to be honest here, I am most familiar with the Mid-Atlantic region. But local issues and how you handle your earnings regardless of where you live and expenses can have a significant impact on your tax liability. Did you know that taxpayers in Pennsylvania and New Jersey may be better off filing as a corporation over neighboring states like New York, Maryland, and Delaware because of DFS withholding issues?
Philadelphia, New York City, and various municipalities throughout Pennsylvania and Ohio have local considerations to contend with, too. As a Philadelphia resident, you may be subject to SIT (School Income Tax) or BIRT (Business Franchise) and NPT tax returns. Some exceptions apply. This could hurt the very lucrative mills in the City of Brotherly Love. New York City imposes a local tax linked to state income tax. However, DFS taxpayers filing as a corporation need to file an Unincorporated Business Tax (UBT) and possibly an MCTMT form if you live in New York City and surrounding areas in New York State.
The most popular do-it-yourself tax software does not have the ability to provide the local returns you would need to be fully tax compliant. It is especially recommended to seek out a tax professional in these cases and what I have written so far is only scratching the surface.
Where do I go from here
Simply putting the number received from the 1099-MISC on the H&R Block or TurboTax for everyday fantasy tax purposes may not be the wisest choice. These programs are quite onerous with business income and local taxes as well. You need to know how often you participate, how much you earn and keep good records of your activities. I recommend downloading a CSV file of your activities each month or at most 3 months from your Daily Fantasy website and providing that to your tax professional so they can determine the best course of action for your situation. If you are not sure how to report your daily imaginary winnings, please find a tax professional who is either a registered agent or a chartered accountant. As seen with this type of income, the IRS and other tax authorities can go many different ways in how they interpret your earnings.
