There are two things I know to be certain of, in life. That as I grow older, gravity will slowly bring my ball closer to the ground and I’m going to have to give the government most of the money I earn. If you’re a DFS player and you’re doing well then you’ve got a large payment to the government coming your way.
First off let me say that, although I did work as an accountant for the last 3 years, talk to your accountant about your taxes. I know most of what I’m doing, but no one’s situation is the same and my favorite part of the US government, the IRS, can basically do whatever they want. So here’s what you need to know.
1099’s Are On Their Way
If you won over $600 at any website during the year then you are required to claim this as income on your tax return. Your net winnings is determined by this simple equation
(Money won – Money played) + Any Bonuses = Income or (Money Deposited – Money Withdrawn -Account balance) = Income
You’re probably thinking “how is the IRS gonna find out”?
Well there’s this wonderful form that pisses off people every year. This form is called a 1099-Misc. This is the form that any DFS site, where you have won a significant amount of money, is going to send to both you and the IRS. Don’t disregard this!
A Form 1099 states the amount of money you must claim as taxable income on your tax return. The IRS gets a copy of this too so make sure to report this income or the IRS might come after you.
In addition to a 1099-Misc, you may be given a 1099-K from PayPal if you have over $20,000 and 200 total transactions. This does not mean that you going to have to claim all this money on your tax return as these don’t count all your losses, so make sure to make the IRS aware that it isn’t an accurate representation of your income.
How to Report Your Winning
You have two different approaches on how you can report your DFS winnings. The first way is by claiming this as ordinary income. If you claim your DFS winnings as ordinary income then you can still deduct your losses against you winnings as an itemized deduction.
There is one problem that you can run into if you take this route. The IRS has what’s called a “Standard Deduction”. This is a $6,300 deduction you can take on your tax return from your total income. It is available to everyone and can significantly lower your taxes.
The standard deduction cannot be taken if you use itemized deductions. If your itemized deductions are not in excess of your standard deduction you cannot use them on your tax return.
One problem many people run into is that their itemized deductions, often times, do not exceed their standard deduction. For example, lets say that you won 6k on Fanduel and lost 6k on Draftkings. If you have no other itemized deductions (such as charitable contributions, medical expenses, etc.) then you cannot deduct this money, meaning you gained no money this year for DFS, but are footing the tax bill for your lack of winnings.
For Profit Endeavor
The second way you can claim your winning is as a “For Profit Endeavor”. In this scenario you report you net winnings and losses from all sites and that is the money you claim on your tax return. You can deduct all your taxable losses and expenses and still get the standard deduction.
In addition, you can claim any excess losses as a deduction, meaning that if you lose money on DFS this year you could count that as an expense. If you are going to try this, you are going to need to be able to justify this as a “For Profit” activity. To figure out if this applies to you, you should ask yourself the below questions.
- Does the time and effort put into the activity indicate an intention to make a profit?
- Does the taxpayer depend on income from the activity?
- If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
- Has the taxpayer changed methods of operation to improve profitability?
- Does the taxpayer or his/her advisers have the knowledge needed to carry on the activity as a successful business?
- Has the taxpayer made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
For more information, you can check out the IRS page here or talk to your accountant. All this may seem like a great idea, but there might be worse tax consequences than taking the first route. If you declare DFS as a “For Profit Endeavor” then you will have to deal with Self Employment Taxes.
Self Employment Taxes
This is the main downfall of having DFS as a “For Profit Endeavor”. You have inevitable seen the words “Social Security Tax” and “Healthcare Tax” on your pay stub taking away that money you were gonna use for a new TV. Both these taxes are self employment taxes.
Normally if you are employed by someone else you aren’t taking the full brunt of these taxes. Your employer will pay half of the 15.3% self employment tax levied on you (12.4% Social Security Tax and 2.9% Medicare Tax), but for your DFS income under a “For Profit Endevor” you’re responsible for that entire amount. This tax does decrease at around $118k of income (meaning any income in excess of that would be at a smaller rate), but if you don’t make that much you’re out of luck here.
Deducting outside expenses
If you make money in DFS there are other ways to wipe out those winnings other than your losses. Per the IRS, “you can usually deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is appropriate for the activity.”
You can never really be certain what the IRS will allow or not allow as a “necessary” or “ordinary” expense, but my guess is that you’re generally pretty safe deducting subscriptions to strategy sites, NFL Sunday Ticket, etc. However, I would be weary about deducting all those lap dances you bought at the spearmint rhino cause the only way that nice lady grinding on you would only tell you who to start at QB this week is if she told you in the champagne room.
All in all, you can deduct anything you want, but you better be ready to explain yourself to Uncle Sam when he comes to your house with belt in hand ready to whoop your ass.
Overall, it’s better to talk to your accountant and make sure you properly document any losses or expenses you put on your return just in case you go under audit.