Fantasy Sports is a $7 billion industry, with 59.3 million people in the
United States and Canada playing. The Tax Cuts and Jobs Act (TCJA)
offers some tax opportunities and difficulties that players should
understand. The Fantasy Sports Trade Association (FSTA) strongly argues
that fantasy sports are games of skill rather than luck, and the TCJA
does not have a clear definition of gambling. Which leaves uncertainty
of how fantasy income and expenses should be reported. If fantasy sports
are not considered as gambling, the hobby loss rules apply (as long as
the play does not meet the requirements to be a professional player).
Prior to 2018 hobby losses were deductible. Under the TCJA, income from
hobbies are included as income, but losses are no longer deductible.
Many have argued that fantasy sports are wagering transactions, and are
consistent with the Internal Revenue Code section 165(d), fantasy sports
losses should be deductible to the extent of the player’s winnings.
There are other sections in the IRC which indicate that any expenses
that are “ordinary and necessary†in carrying on any trade or business
are deductible. The IRS has not answered whether fantasy sports winnings
are gambling or hobby income, and fantasy players are going to want to
be more aware of where they stand.
For casual players, the only related deductions allowed are classified
as “other itemized deductions†of wagering losses and related
deductions. Casual players may want to combine other itemized deductions
such as real estate taxes, or charitable contributions in that year in
order to utilize fantasy-related losses. In the case for serious
players, treating games as a trade or business may be appropriate.
Income and expenses are recorded differently which can bypass the need
to itemize, and take advantage of tax-related deductions. To be
considered a professional player, a fantasy player must meet nine
factors, and each individual taxpayer’s circumstances are unique.
Regardless if the player is casual or professional, documentation is
important. The IRC is places the burden of documentation on the
taxpayer. For professionals its important to document and demonstrate
the intent to make a profit. Fantasy players need to be aware of the
changes with TCJA and how it can positively or negatively effect income
and deductions.
