The IRS is now considering placing a federal excise tax on DFS operators similar to the tax they place on sports betting operators.

  • The IRS is looking to place an excise tax of 0.25% on the Daily Fantasy Sports (DFS) industry which could equate to millions of dollars paid to them each year in taxes.
  • DFS has never been considered a form of gambling which is where an excise tax is enforced but the IRS now says that contest entry fees should be considered wagers.

WASHINGTON – The IRS is in discussions to enforce a federal excise tax of 0.25% on all Daily Fantasy Sports (DFS) activities. Sports betting is subject to this tax and the IRS now believes that this should extend to DFS contests as well.

While wagering on sporting events and DFS differ in how they’re done, the government is arguing that at the end of the day, they’re both their own forms of gambling and should be taxed as such.

For the Daily Fantasy Sports sector, each contest entry would need to have the 0.25% tax placed upon it.

What The IRS Says About DFS And The Excise Tax

The timing is questionable as the nation is hemorrhaging with funding because of the Coronavirus pandemic and this tax would help with the problem.

At a government level, even within the current argument, lawmakers have never defined DFS activities as gambling or a “sports wager” making them their own entity. The excise tax is specific to gambling and sports wagering which would make this a non-argument already, yet it remains an open discussion.

Currently, the IRS has chosen to group sports betting and DFS contests to be within the same vein as forms of gambling and therefore should be treated the same when it comes to being taxed.

Daily Fantasy Sports is a highly profitable business in the nation with an estimated annual handle of $4 billion. If the excise tax becomes a permanent rule, that would mean the IRS could see upwards of $10 million in taxes paid yearly by the industry.

The memo that was released by the IRS on July 23 defines wagering as any money accepted by a business for contests or sports match ups.

However, DFS is more a contest entry style of gaming rather than gambling despite the similarities of the sports aspect. DraftKings CEO Jason Robins agrees that the argument within the memo is very much a flawed attempt at best.

“Our position continues to be, which we believe has been reaffirmed through state legislatures and courts throughout the country, that DFS is not wagering,” said Robins.  “We believe that the arguments at the federal level are incredibly strong.”

What’s To Come

DFS contests allow fans the chance at monetary prizes for the cost of an entry fee. The IRS is now calling these entry fees a form of “wagering.”

This argument will be something that companies like DraftKings and FanDuel, the top two DFS operators nationwide, will fight if it is decided that their businesses will need to begin paying an excise tax.

On top of this, there is presently a bill within Congress that would do away with the excise tax altogether for all gambling markets. This bill would help the gaming industry to get back on their feet after the crippling blows they’ve taken from the COVID-19 outbreak and its mandatory shutdowns.

If that bill goes through, the excise tax, like PASPA will no longer be an issue for gaming but more specifically the sports betting industry or DFS. On one end, the bill in Congress is in favor of supporting the gaming industry by easing their financial burdens.

On the other end, the IRS is trying to cover itself by taking money from the DFS market to help ease the current U.S. budget crisis.

If the IRS is successful, it could ultimately close some smaller Daily Fantasy Sports businesses in the country because they won’t be able to afford such a tax in a post-COVID-19 economy. But one thing is certain, the final result of this argument will not go down without a fight between both sides.

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