As Fantasy Football Starts Back Up, Track Your Losses

Chad Silver

Chad Silver

Managing Partner of Silver Tax Group, author of the book "Stop the IRS". Practicing a variety of tax issues, regulations, laws and rights. Specializing exclusively on tax matters involving IRS audits, negotiation, settlements & compromises.

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On behalf of Silver Tax Group posted in Back Taxes on Friday, August 19, 2016.

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From the small Yahoo league to a FanDuel and DraftKings league with a significant payout, it is almost fantasy football draft day. It’s probably not your first thought, but you could owe a big tax bill next year if you win big.

Last year, FanDuel and DraftKings spent a reported $500 million on advertising. The ads make it appear that winning is almost certain. The ads caught the attention of the attorney generals in several states who started to investigate whether the outfits needed permission from gambling authorities to operate. These investigations caused the companies to stop offering services to New York and Nevada residents.

How to report winnings?

If you win $100 in a local pool with buddies from high school or $30,000 on the FanDuel website this is income. You need to report it to the IRS or you could open yourself to an audit.

In March, we wrote a guide with some practical answers about reporting winnings and what to do if the IRS starts asking questions.

The more interesting part is whether you can offset your losses through a deduction.

Can you offset losses as business expenses?

To claim a business deduction, you need to play fantasy sports basically as your profession. A casual participant would not likely be able to use this deduction to offset losses.

Gambling or not? 

Could you offset the amount you paid as gambling losses? This one is not as easy to answer. The state Attorney Generals have investigated just this question looking at whether fantasy sports require skill or are games of chance (i.e. gambling). This supports an argument that these games are in fact gambling.

If it cost you $10,000 to win $30,000, it is worthwhile to look into whether you could offset what you spent as gambling losses. Then you would only need to pay tax on $20,000.

But gambling losses are highly audited. You need to have evidence to support your deduction, so keep track of what you paid in. If the IRS disallows your deduction, it could send a notice claiming you owe more taxes along with an assessment of interest and penalties. In this case, speak with a skilled tax attorney to resolve the matter as quickly as possible.

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