The Internal Revenue Service (IRS) issued another memo at the intersection of daily fantasy sports and the federal tax code.
Dated September 14, 2020 but only published publicly October, 16thThe latest four-page memo from the IRS concludes
“[t]The amount a daily fantasy athlete pays to participate in a daily fantasy sports competition is an amount paid for a betting transaction. “
The new memo follows another IRS memo with a DFS focus earlier this year determined DFS companies are subject to federal gambling Excise tax.
The latest IRS memo also sheds light on how the IRS views fantasy sports versus other sports event and competition betting, including some off-the-beaten path activities.
A new memo closes the DFS circle
While the IRS memo released earlier this summer focused on DFS operators, the new memo released earlier this month looks at the other side of the deal: the players.
A certain part of the tax code – Section 165 (d) – enables taxpayers to deduct losses from betting transactions, but only in the amount of betting winnings.
The latest IRS memo states that there is no formal definition of the term “betting transactions” but rather takes a detailed analysis of previous cases to conclude that “DFS transactions meet the definition of [a] Bet. “According to the IRS:
“Every DFS transaction is a pay-to-play competition with fixed prizes for a certain number of participants. The outcome of the competition depends on the overall statistical performance of the live professional players gathered in the fantasy team. The winning participant will receive a return of their original bet along with the winnings, while the losing participant leaves empty-handed. This is in line with the courts’ interpretation of the term “wagering”. “
The new IRS memo also invokes Poker to highlight the skill chance sub-problem: “DFS transactions are similar to poker and other bets where a player’s skill is part of the game but does not determine the outcome. Therefore, the argument that DFS transactions are excluded from betting as a game of skill is not convincing. “
Form 730: From spelling bees to beauty pageants
For decades, the IRS has published a form that provides additional insight into the federal government’s perspective on sports betting. The IRS advises you to do so Form 730 must be submitted if you “[a]I’m in the business of taking bets [or] Run a betting pool or lottery. “
The IRS provides examples that are taxable for four different categories:
- Sporting events
- Betting pools
According to the IRS, “sporting events” include mainstream sports as well as obscure activities such as Billiards, cards, checkers, croquet and tug of war.
More clarity on the IRS definition
The IRS definition of “competition” also includes a number of unique entries:
“A contest is a contest that includes speed, skill, perseverance, popularity, politics, strength, or appearance; B. Elections, the result of nomination conventions, dance marathons, wood rolling competitions, wood chopping competitions, weightlifting competitions and beauty pageants and spelling bees.
The IRS’s position on the taxation of betting pools also adopts a similar definition to that of a leading DFS operator in a new York Trial four years ago. According to FanDuel in 2016:
“Even in fantasy sports, participants pay an entry fee to enter a competition, and the entry fees generate the fund from which successful participants win prizes.”
Certain activities are not subject to Form 730 sales tax. Examples include pari-mutuel Betting and “[c]oin-operated devices such as slot machines, pinball machines or video games. “
In form 730, fantasy sports are not mentioned by name.
Effects of the IRS memo
The author of the latest IRS memo, attorney Amy S. Weimakes it clear that in the memo the Council “must not be used or cited as a precedent”. Likewise, there are no publicly announced tax prosecutions involving players or operators in the fantasy sports sector.
However, with two policy statements issued in less than four months, the IRS appears keen to make the tax implications of DFS a priority.
In fact, both memos were written in response to a specific “request for assistance,” suggesting that at least one senior IRS official believes the issue is important.