How do I pay taxes on daily fantasy winnings?

Question

Like many others, I've been playing daily fantasy football. I've had a good bit of luck and have made a substantial portion of my income this year from these sites.

Now, I live in Massachusetts, which does not yet have a law or regulation that declares daily fantasy to be gambling. Given that daily fantasy isn't legally considered gambling (yet), how do I report income from daily fantasy winnings?

Do I report it as if it were gambling winnings or simply miscellaneous income? The few articles I've read on this are all from before the recent trend of states prohibiting daily fantasy sports as illegal gambling and suggest using 1099-MISC for miscellaneous income. I'm not sure, however, if the current climate changes that advice.

How should I report daily fantasy winnings as income?

Answer 1

The fact that the action may be illegal doesn't mean you pay no taxes on the gains. Ask Al Capone, he learned that the hard way.

I suggest you report it is gambling winnings, and enter in the same way as you would enter W2-G amounts. Usually it ends up being on line 21 (misc. income) of your tax return.

If you actually get the 1099-MISC or W2-G for the amounts - use the instructions for how to enter the amounts as reported on these forms. If you receive 1099-MISC - make sure to attach a statement to your tax return to explain why this is not self-employment income, since otherwise you'd be liable for additional taxes.

Answer 2

I don't think the choice of how you report it is going to be up to you. If you won more than $600 from a DFS site then you will be receiving a form from them in January, and that form will dictate how you report it. The form will likely be a 1099-MISC which means you will report it as such. The good news is that with a 1099-MISC they should automatically deduct your entry fees, so for example if you paid $1000 to play throughout the year, and won $5000 that year, your 1099-MISC should be for $4000.

If you were to receive a W-2G form (Gambling winnings), typically this would be for only your winnings, so from the previous example it would be for $5000 rather than $4000, and you would have to deduct your $1000 yourself. The caveat though is you can only deduct your gambling losses if you itemize (as opposed to taking the standard deduction). If you do itemize, a W-2G is probably preferred because not only can you deduct your losses from DFS, but you would also be able to deduct any other losses you had such as lottery tickets, casino play, etc.

Lastly, if certain conditions are met, (for example if you use PayPal to get your money and you have more than 200 transactions in a year and you had more than 20K in winnings), you could receive a 1099-K form. If you receive this form I'd recommend discussing with an accountant to help you maximize your deductions as it's very likely they'll save you much more than their fee.

Answer 3

I've had a good bit of luck and have made a substantial portion of my income this year from these sites.

That statement means that you may have an issue to deal with. If no money was withheld by the daily fantasy site, and you have not been filing estimated taxes this year, you could have a major tax issue.

US tax law expects that you will periodically pay estimated taxes throughout the year. When an employer withholds federal and state taxes from each paycheck and sends them to the IRS and the state government, most employees are considered in compliance. Self employed individuals have to do this withholding and submitting on their own. Those who have both paycheck income, and other income need to see if they also need to send in estimated taxes to meet the requirements in the tax laws.

Without knowing the size and ratio of the outside income, or knowing your tax situation from the year before, it is impossible for us to give you a number. You should take some time in the last week of the year to see if you have a potential problem. The estimated tax payment for the 4th quarter is due January 15th.