The Internal Revenue Service (IRS) has issued another memo at the intersection of daily fantasy sports and the federal tax code.
Dated September 14, 2020 but not publicly released until October 16, the IRS’s recent four-page memo concludes that
“[t]he amount paid by a daily fantasy sports player to participate in a daily fantasy sports contest constitutes an amount paid for a wagering transaction.”
The new memo comes on the heels of another DFS-focused IRS memo earlier this year that determined DFS companies are subject to the federal gambling excise tax.
The latest IRS memo also shines a light on how the IRS views fantasy sports vis-à-vis other wagering involving sports events and contests, including some off-the-beaten-path activities.
New memo completes the DFS circle
While the IRS memo issued earlier this summer focused on DFS operators, the new memo released earlier this month looks at the other side of the transaction: players.
A specific part of the tax code – Section 165(d) – allows taxpayers to deduct losses from wagering transactions, but only to the extent of wagering gains.
The latest IRS memo notes that there is no formal definition of the phrase “wagering transactions,” but undertakes a detailed analysis of prior cases to conclude that “DFS transactions meet the definition of [a] wager.” According to the IRS:
“Each DFS transaction is a pay to play competition with predetermined winnings for a certain number of participants. The outcome of the competition turns on the overall statistical performance of live professional players assembled into the fantasy team. The winning participant receives a return of his or her initial bet along with wagering gains, while the losing participant walks away empty handed. This is consistent with the courts’ interpretation of the term ‘wager.’”
The new IRS memo also invokes poker to make its point on the skill-chance sub-issue: “DFS transactions are similar to poker and other wagers in which a player’s skill is a component of the game but it does not dictate the outcome. As such, the argument that DFS transactions are excluded from wagering as a game of skill are unpersuasive.”
Form 730: From spelling bees to beauty contests
For decades, the IRS has published a form that provides additional insight into how the federal government views wagering involving sports. The IRS advises that Form 730 must be filed if you “[a]re in the business of accepting wagers [or] conduct a wagering pool or lottery.”
The IRS provides examples that are taxable for four different categories:
- Sports events
- Wagering pools
According to the IRS, “sports events” include mainstream sports, plus obscure activities such as billiards, cards, checkers, croquet, and tug of war.
More IRS definition clarity
The IRS’s definition of “contest” includes a number of unique entries too:
“A contest is any competition involving speed, skill, endurance, popularity, politics, strength, or appearance, such as elections, the outcome of nominating conventions, dance marathons, log-rolling contests, wood-chopping contests, weightlifting contests, beauty contests, and spelling bees.
The IRS’s position on taxing wagering pools also adopts a definition similar to the one a leading DFS operator used in a New York court filing four years ago. According to FanDuel in 2016:
“In fantasy sports as well, participants pay an entry fee to participate in a contest, and the entry fees generate the fund from which the successful contestants win prizes.”
Certain activities are not subject to the wagering excise tax per Form 730. Examples include pari-mutuel wagering and “[c]oin-opertated devices, such as slot machines, pinball machines, or video games.”
Form 730 does not mention fantasy sports by name.
Impact of IRS memo
The author of the latest IRS memo, attorney Amy S. Wei, makes clear that the advice in the memo “may not be used or cited as precedent.” Likewise, there are no publicly-announced tax prosecutions involving players or operators in the fantasy sports space.
But with two policy statements being issued in less than four months, the IRS seems keen on making the tax implications stemming from DFS a priority.
Indeed, both memos were written in response to a specific “request for assistance,” suggesting that at least one high-ranking IRS official views the issue to be important.