IRS Releases New Guidelines on Daily Fantasy Sports and the Excise Taxes on Wagering

Late last month, the Office of Chief Counsel of the IRS released a memorandum with regards to daily fantasy sports providers and the excise tax. It should be noted that the memo is not supposed to be cited or used as precedent. However, DFS players should take note to the memo as it is likely to result in an eventual increase in DFS fees/costs.

The memo addresses multiple issues with regards to DFS. The first issue is whether a DFS operator, such as FanDuel or DraftKings, is liable for the excise tax on wagers under IRC Section 4401. For DFS activities to be considered taxable wagers, the entry fee must fall into the definition of a “wager” under IRC Section 4421(1). The memo concludes that any entry fee for a DFS contest constitutes a taxable wager under IRC Section 4421. Any DFS operator in the business of accepting taxable wagers is liable to pay the wagering excise taxes on entry fees/wagers it receives.

The next issue is whether a DFS operator is liable for the occupational excise tax imposed by IRC Section 4411 and is required to register under IRC Section 4412. IRC Section 4411(a) imposes an occupational excise tax of $500 per year to be paid by each person who is liable for the tax imposed under IRC Section 4401. Because a DFS operator is liable to pay excise taxes on wagers, the IRS concluded that each DFS operator is liable to pay the occupational excise tax imposed under IRC Section 4411 and is required to register under IRC Section 4412 as a person liable for the tax imposed under IRC Section 4401.

The next issue addressed by the IRS is whether a DFS operator is liable for the excise tax on wagers and the occupational excise tax at the authorized or unauthorized rate described in IRC 4401(a) and 4411(a) and (b). The IRS concluded that any DFS operator that accepts only authorized wagers under IRC Section 4401(a)(1) is an authorized person subject to the occupational tax at the rate described in IRC Section 4411(b) ($50). Any other DFS operator accepting taxable wagers is subject to the occupational tax at the rate described in IRC § 4411(a) ($500).

DFS players are reminded that only net profits greater than $600 are reported to the IRS. While unlikely, it is possible for players to notice larger fees due to the recent memo released by the IRS. The professionals at The Center for Financial, Legal, and Tax Planning are more than knowledgeable with regards to unusual forms of income such as gambling winnings. Please contact us at (618) 997-3436 with any questions.