Tax considerations for fantasy sports fans

Tailgating: Hands With Football Items
Tailgating: Hands With Football Items

Fantasy sports winnings of at least $600 are reported to the IRS

If it turns out to be your lucky day and you take home a net profit of $600 or more for the year playing on websites such as DraftKings and FanDuel, the organizers have a legal obligation to send both you and the IRS a Form 1099-MISC. If you receive your winnings through PayPal, the reporting form may be a 1099-K.

The 1099 tax forms report your winnings to the taxing authorities and also gives you notice of the amount you must report on your taxes. Even if you don't receive a 1099 form, you must still report the net profits on your federal and state income tax returns.

Organizers calculate players' net profits using a formula

Fantasy sports organizers must figure out players' net profits in order to determine who gets 1099 forms. They use a formula to determine when a player hits the $600 level: Prizes won minus entry fees plus bonuses = net profit.

Another way to calculate this is:

  • (Withdrawals + Year End Account Balance) - (Deposits – Beginning Year Account Balance) = net profits.

Reporting income or loss from fantasy sports on Form 1040

You must report all income earned from fantasy sports either as "other income" on line 21 of your Form 1040, or as business income on Schedule C. If you use the first approach, your fantasy sports is considered a hobby and you can't deduct any of your expenses or losses.

Reporting income or losses from fantasy sports as business income

If you can establish that you play fantasy sports as a business, you can report your net profit as business income on Schedule C. The great advantage to this tax choice is that you can then report all losses as well. If you have a net loss for the year, you can use that loss to reduce taxable income from jobs you hold or other businesses you run.

The IRS allows you to claim fantasy sports as a business if you can convince them it is not a hobby and that:

  • You engage in fantasy sports regularly, and

  • Treat it as a business activity with the intention of earning a profit

The IRS may consider an activity to be a business if it earns a profit at least two years out of every five.

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