IRS Could Target Daily Fantasy Sports Winners Under American Rescue Plan

Posted on: January 31, 2023, 12:52h. 

Last updated on: January 31, 2023, 02:37h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

The American Rescue Plan Act (ARPA) was approved by congressional Democrats and signed by President Biden to provide financial assistance to Americans during the earlier days of the coronavirus pandemic. But it could be a drag on some daily fantasy sports (DFS) winners.

IRS
The IRS building in Washington, DC, seen above. Under new tax laws, DFS players could be targeted by the agency. (Image: AP News)

Among the more controversial provisions found in ARPA is a significant alteration to how the IRS handles taxpayers’ received payments from third-party settlement organizations (TPSOs), such as Cash App and PayPal. Under ARPA, the IRS can collect taxes on any payment of $600 or more. Previously, the threshold was $20K and a minimum of 200 transactions.

That means anyone who earned more than $600 from DFS play or from selling items on internet retail sites, such as eBay and Etsy, and received those payments through the likes of Cash App, PayPal, Venmo, and other comparable platforms, is liable for taxes. In 2020, the IRS ruled DFS falls under the same guidelines as sports betting.

The amount paid by a daily fantasy sports player to participate in a daily fantasy sports contest constitutes an amount paid for a wagering transaction under Section 165 (d),” according to the IRS.

Previously, DFS operators, such as DraftKings and FanDuel, argued that DFS is a game of skill, not betting. The IRS didn’t agree, noting the game of skill argument carries some merit. But DFS is akin to poker in that skill matters but doesn’t dictate results.

ARPA is ‘Flat Lie’ in Tax Terms

The White House and congressional Democrats consistently said that the new tax provisions featured in ARPA would not impact anyone making less than $400K per year. But some tax experts contend that’s no more than political talk.

The reality of it is they said nobody making under $400,000 a year was going to have an increased chance of audit or pay more on taxes. That’s a flat lie. That’s not accurate. They’re lying to you,” CPA and tax lawyer Bruce Willey told Fox News Digital.

BakerHostetler Nationwide Tax Chair Jeff Paravano told the media outlet that DFS players need to be diligent record keepers because they can deduct losses against their winnings. But participants “can only deduct the losses to the extent of your winnings.”

So burdensome are the new taxes set forth by ARPA that they could extend to activities such as fantasy sports leagues and office pools in which money is exchanged. In fact, if the league commissioner took payments via TPSO, he or she could be liable for taxes on that money even though that cash doesn’t constitute a placed wager.

‘Stealth Tax Increase’ Beyond DFS

Willey told Fox News Digital the plan is a “stealth tax increase” and that it’s ridiculous to assume the IRS increasing monitoring of TPSO payments won’t lead to more audits and taxes paid.

Some experts argue that the number of 1099 tax forms issued will double as ARPA’s tax revisions ramp- up. Additionally, the $600 threshold could force the issuance of 1099s for activities as mundane as parents sending money to kids, which they’re allowed to deduct up to $17K annually.

In the Senate, there’s bipartisan support to lift the threshold to $5,000. As for raising revenue, the Joint Committee on Taxation recently forecast the new $600 TPSO plan will raise a mere $8.1 billion for government coffers over a decade.

That is for a country that’s roughly $30 trillion in debt.