How to Know if your DFS Winnings are Taxable

While many of you daily fantasy sports fans are 100% focused on the recent arrival NFL football season, there’s another season right around the corner that will be grabbing all of your attention soon enough. That’s right – I’m talking about the dreaded Tax Season. And if you live anywhere in North America – the US or Canada – you’ll want to know what the current DFS tax laws are.

Our good friends at TaxAct wrote up a great piece on the subject, and for many of you out there wondering – “are daily fantasy sports winnings taxable?” – you’ll be glad to know they aren’t. But not for everyone. It actually depends on where you live, and how your jurisdictions defines DFS betting.

The first question you’ll need to answer is this: Is DFS considered gambling in your area?

As of right now – based on current laws – we can separate all North American jurisdictions into three categories. There are those where DFS is Not Considered Gambling, those where DFS is an Illegal Form of Gambling, and those where DFS is Legally Regulated. We’ll work that list backwards, since the number of jurisdictions rises in that order.

DFS Tax Laws where Legally Regulated

At present, there are only two US states in North America that have passed laws to regulate daily fantasy sports. However, while none of them define DFS as ‘gambling’, they still require players to file W-2G tax forms on winnings that exceed $600.

Those states include:

• New York
• Massachusetts

If you live in either of these states, you can participate in DFS all you want, but you will have to follow the rules of the IRS in terms of reporting gambling winnings, and – if they exceed $600 – paying taxes on those winnings. Your DFS operator should mail you a W-2G form to file with the IRS.

According to the tax gurus at H&R Block:

“If your winnings are reported on a Form W-2G, federal taxes are withheld at a flat rate of 25%. If you didn’t give the payer your tax ID number, the withholding rate is 28%.”

DFS Tax Laws where DFS is Illegal

In some US states, DFS has either been specifically defined as gambling, and therefore illegal (as is the case in Texas), or the laws of that state are so stringently scripted that – while they don’t refer to fantasy sports directly – its safe to assume that DFS is gambling, and therefore illegal due to the lack of state regulation. Most DFS sites won’t even accept customers from those locations.

These states include:

• Arizona
• Alabama
• Delaware
• Hawaii
• Idaho
• Iowa
• Louisiana
• Montana
• Nevada
• Texas
• Washington State

If daily fantasy sports is illegal in your state, you’ll probably want to refrain from doing it in the first place. If, however, you choose to play DFS, and you happen to win over $600 in the process, the IRS is still going to want you to fill out a W-2G and report the winnings as gambling proceeds.

Your best bet is to check with your local political office and ask for a definition of the law. It could be that betting on DFS comes with potential legal recourse, or it could be that only DFS operators are under threat of penalty – not the players. Know you local laws before you get involved.

DFS Taxes Everywhere Else in the US

If you live in any US state not previously mentioned, that means that, according to local legislation, DFS is not considered gambling in your area. It is instead considered a game or contest of skill.

That doesn’t necessarily mean you won’t have to pay taxes on DFS winnings, though. You won’t need a W-2G form to do it, since that form relates to ‘gambling’ winnings only, but still, daily fantasy sports winnings are taxable in most cases.

TaxAct clarified the stance of the US Internal Revenue Service, saying that where DFS is not gambling, it’s “typically treated as hobby income,” due to its classification as “a recreation activity,” rather than a business.

“However, you still have to report the winnings on your Federal tax return. And, you are subject to income taxes,” said TaxAct.

Similar to gambling winnings, if a player collects over $600 from daily fantasy sports in a tax year, they will receive a 1099-MISC form in the mail to report that income.

DFS Taxes in Canada

Great news for all you fellow Canadians out there. If you’re just a recreational bettor, our government does not collect taxes on gambling winnings. You are free and clear – rejoice!

However, if you’re what the Canada Revenue Agency (CRA) considers a professional gambler, you could be subject to Taxes on a Gambling Business. Unfortunately, the CRA does not specifically state what constitutes a gambling business, and what does not.

Each case is reviewed individually, and determined on an unexceptional basis. The CRA uses the following set of rules to make their determination:

• the degree of organization that is present in the pursuit of this activity by the taxpayer,
• the existence of special knowledge or inside information that enables the taxpayer to reduce the element of chance,
• the taxpayer’s intention to gamble for pleasure as compared with any intention to gamble for profit as a means of gaining a livelihood, and
• the extent of the taxpayer’s gambling activities, including the number and frequency of bets.

In Layman’s terms, it really depends on how much time you spend playing daily fantasy sports, how many contests you enter, how much you win from it, and how all of that compares to the efficacy of your ‘day job‘.

If you don’t have a day job and rely on income from DFS to make a living, you can bet your bottom dollar your DFS winnings are taxable.