Benjamin Franklin said, “The only things certain in life are death and taxes.” Right again Ben.
Recently I was contacted by an individual who told me he had started to win a lot of money playing fantasy football. He wanted to confirm whether these winnings were taxable, and if so, was there any established method for minimizing the tax bite. Well, turns out this is a very new development and there is between zero and very little guidance out there.
Here is what little we do know. The Unlawful Internet Gambling Enforcement Act of 2006 states that Fantasy Leagues such as Fantasy Football are NOT gambling. So the tax laws that relate to gambling are not availing or necessarily helpful. Are Fantasy Football winnings taxable income? You bet (pun intended). Where do you report such winnings? The consensus appears to be on line 21 of the Form 1040 US Individual Income Tax Return. The Fantasy Football League (FFL) winner can expect to receive a Form 1099-Misc from the FFL if his winnings are $600 or more. So the FFL winner can expect that the IRS will be looking forward to his reporting those winnings on his taxes.
Now often, in a situation such as this, the FFL winner may take the position that his FFL activities are a business so that he can offset his winnings with all manner of business expenses like any other business. Whether FFL’s themselves are businesses is a question that does not appear to have been tested yet. As for the question of whether there is such thing as a professional fantasy sports player, this seems rather unlikely. If you take that position on your taxes and get audited do not be surprised if that position is aggressively challenged by the IRS.
Bottom line, if you are going to assert that you are a professional fantasy sports player, and deduct “ordinary and necessary” business expenses from your fantasy football winnings, you may want to set aside an amount equal to the tax you would pay if such position were audited and disallowed by the IRS for at least as long as the period of time that the IRS can audit your returns, generally three years from the later of the due date for the return or the date the return was filed.
Just a thought. Go team!