Draftkings vs. IRS - Daily Fantasy Sports Tax
Draftkings announced the IRS is still conducting an audit surrounding its status as a Daily Fantasy Sports (DFS) operator. The IRS believes DFS is a gambling activity and all revenue derived from operators should be subject to federal excise tax.
DFS is currently not classified as a gambling activity (from a legal standpoint). However, from a tax perspective, it appears to be pretty evident that it meets the definition. Per the tax code, gambling income is derived from an event where there is:
Money earned
From placing a wager
On a game of chance
DFS checks all these boxes and passes the “smell test”, so it is hard to understand why it wouldn’t be classified as a gambling activity for tax purposes. Many taxpayers already report DFS winnings as gambling income on their returns, so why wouldn’t the operators be subject to gambling-related excise tax?
If the IRS is successful in its audit, DFS operators would need to comply with standard gambling industry compliance requirements, such as issuing W-2Gs (instead of 1099-MISCs).
The good news? Even if the IRS is successful in its challenge, it does not appear that it would have a retroactive impact on taxpayers. Draftkings may be subject to excise tax for previous years, but it is unlikely the IRS would require Draftkings to file W-2Gs for all players meeting the threshold in prior years.
If DFS becomes subject to W-2G requirements, it should follow sports betting and apply to wins of more than $600 and 300x the wager. Many players would not have to worry about this threshold, but those with larger wins would receive W-2Gs reporting their gross winnings. This would be a considerable shift from the yearly "net" amount currently reported by operators.
If you have been reporting your DFS winnings/losses correctly (per the session method and not just what is reported on the 1099-MISC issued by the operator), you have nothing to worry about. Even if W-2Gs are retroactively issued, you have already reported all income via the session method and will not need to amend your return.
If you have not been reporting this way, then 1) you should start, regardless of the ruling and 2) you may need to amend prior returns for any W-2Gs issued. This might require a bit of additional work, as you will need to go through your records from the year in question.
This has been an ongoing issue for quite some time, so it is hard to say if there will be an outcome in the near future, but with the increasing legalization of online sports betting, it is my guess the IRS wants to set a precedent for DFS and collect their share of excise tax.