The Wagering Excise Tax and DFS

I’m focusing on the tax aspects of daily fantasy sports (DFS) this week. It’s beneficial for DFS participants for the activity to be considered gambling. For political reasons (“gambling is a sin”) and regulatory reasons (gambling is regulated, skill contests are not), the DFS sites want to be considered skill games sites. There’s another reason that DFS sites don’t want to be considered gambling: the wagering excise tax.

The wagering excise tax is either a 0.25% or 2% tax on bets made on certain activities. It falls on wagers on sports events or contests, wagers placed in a wagering pool that involves a sports event or contest (if the pool is conducted for profit), and lotteries conducted for a profit. The tax is on the gross amount of wagers received, not the amount someone might win. Would this tax apply to DFS if DFS is considered gambling?

We can look at the Tax Code and the regulations promulgated under the Code to determine this. A wagering pool conducted for profit includes any method or scheme for the distribution of prizes to one or more winning bettors based on the outcome of a sports event, a contest, or a combination or series of such events or contests, if the wagering pool is managed and conducted for the purpose of making a profit. (Regulations 44.4421-1(c)(1) and 44.4421-1(c)(2)) DFS clearly meets the definition of a wagering pool.

So what’s a contest? Regulation 44.4421-1(c)(3) states that includes any type of competition involving speed, skill, endurance, popularity, politics, strength, appearance, etc., such as a general or primary election, the outcome of a nomination convention, a dance marathon, a log rolling, wood-chopping, weight-lifting, corn-husking, beauty contest, etc. Clearly, a weekend of NFL games (or anything else that DFS contests/bets are based on) would qualify.

You may have noticed there are two different tax rates (0.25% and 2%). The 0.25% tax rate applies on any wager authorized under the law of the state in which accepted (IRC § 4401(a)(1)), otherwise the tax rate is 2% (IRC § 4401(a)(2)).

It’s pretty clear to objective observers that DFS is a form of wagering (aka gambling). If that conclusion is accurate, the DFS sites will owe the wagering excise tax.


One Response to “The Wagering Excise Tax and DFS”

  1. […] Russ Fox, The Wagering Excise Tax and DFS: […]