Fantasy football used to be limited to leagues set up through Yahoo. Some leagues required players to pay a buy in and then awarded the winner the pot of money at the end of the season.
In the past several years, fantasy betting has grown through apps such as FanDuel and DraftKings. Players pay entry fees. Success then depends on how their lineup performs in real games.
California is home to the largest population of fantasy sports players. Some of these players earn large sums of money, but most players lose money. An investigation by the New York Attorney General Eric Schneiderman found that as many as 89 percent of players lose money. He is reviewing advantages that computer scripts and other tactics give professionals over casual players.
If you won a substantial amount on fantasy sports last year, you need to report it or you could open yourself to a serious tax audit. Here is what you need to know.
Gambling winnings and loses
Gambling is a contest of chance. The online fantasy sports sites argue that they are skills-based entertainment. They analogize their games to entering an online chess tournament or playing the stock market. What category they fall into is uncertain as Attorney Generals in California and New York launch investigations.
Earnings from these skill-based competitions are income subject to tax. If these games are considered gambling, tax rules still require you to report your winnings on the other income line of a 1040. With gambling, however, you can deduct your losses against your earnings as long as you itemize.
Gambling losses are highly audited. When you use losses to offset your gambling income, it is crucial to have proof to back up your numbers.
Underreporting income can result in back taxes, stiff penalties and interest. If you the IRS sends you an audit letter related to income you never reported, speak with a tax attorney right away.
Source: Frontline, “Eric Schneiderman: Why Daily Fantasy Sports is Gambling,” Jason Breslow, Feb. 9, 2016