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2017 Federal Taxation of DFS Winnings

Dbarlow87’s disclaimer- I am a Certified Public Accountant, licensed in the State of New Jersey.  This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors.

Fantasy sports taxes may be the least exciting thing you would expect to find a guide about on a DFS website. However, much like rake, sports betting taxes are an important component to consider in becoming a successful player. With the recent big wins by DFS Army members, there has been some inquiry in how to plan for tax time, and that is definitely the smart way to go about it, the IRS wants its money no matter what.  This article will cover how the IRS taxes your winnings, each state is different and this guide does not cover state taxes1.

The most common misconception that I’ve run in to is that people think they only pay taxes on the money they withdraw.  The second most common misconception is that you pay tax on any money you win.  The way you are taxed is based on your profit so the first step is to determine your profit for the year.  There are two main ways that I’ve seen this done- as outlined below:

  • Take your total winnings for the year and subtract out your total buy-ins.
  • Take your ending account balance, add in any withdrawals, subtract any buy-ins, and subtract your beginning of the year account balance.

Both of these methods should come out with the exact same number for your profit for the year, so use whichever is easiest for you to figure out.  The IRS has issued no formal guidelines on what method the DFS websites should use to report your yearly income, but I’ve heard that Fanduel uses method 1.  If your total for the year exceeds $600, they will issue you a form 1099-Misc, with your profit in line 3 other income:

Some of you astute DFS army members may be wondering why you are going to be issued a 1099-Misc rather than a W-2G.  The reasoning behind this is that a W2-G implies gambling winnings and DFS is classified a game that is predominantly skill based.

Ok, now that we’ve covered how to find out your total profit for the year, we need to know how much tax the IRS is going to be looking for:

To determine your sports betting taxes, you need to find which bracket your regular income falls into, along with your filing status to determine what your next dollar of income will be taxed at. As an example, let’s imagine a single taxpayer earning $40,000 a year who happened to profit $15,000 in 2017 from DFS.  The entirety of the $15,000 was fall into the 25% bracket, so the taxpayer could easily plan to hold 25% of that winning back as tax.  If we take the same taxpayer and have them profit $100,000 from DFS in 2017, the first $51,900 of DFS winnings would fall into the 25% bracket and the remainder would be taxed in the 28% bracket.

A common question that is asked is, “How do I deduct my other expenses related to my DFS income?”  The answer to that is very complex and you should consult your tax professional for any specific advice, but there are two main ways to report your income and potentially deduct your expenses, as outlined below.

  • Treating DFS as a profession. If you are in the business of DFS playing, you report your income on Schedule C and can deduct all expenses related to your income.  This also makes your DFS winnings subject to self-employment tax.  There are specific guidelines to how you have to act to consider this a business rather than a hobby.
  • If you report your DFS winnings on line 21- Other income, there may be a way you can deduct your expenses. If you itemize your deductions, you can deduct “the ordinary and necessary expenses that you pay: to produce or collect income that must be included in your gross income” as a miscellaneous itemized deduction.

Consult with your tax professional on whether either of these scenarios is one that applies to you.  For more individual advice, or tax consulting, please feel free to contact me at [email protected]

David Barlow, CPA
The Koenig Group
1093 Raritan Road, 2nd Floor
Clark, NJ 07066
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