Fantasy sports players can't forget about Uncle Sam

Players of the hugely popular daily fantasy sports sites FanDuel and DraftKings study reams of statistics before choosing their ideal lineup. They also can't afford to overlook the IRS.

FanDuel and DraftKings, which constitute 95 percent of the fantasy sports market, are legally required to report all player winnings above $600 to the government. Players who win less than that are required to disclose it to the IRS themselves.

The IRS can easily see if someone doesn't report income they are supposed to by matching it against the data they have on a taxpayer, said Steven Packer, a senior manager in the tax accounting group at Duane Morris in Philadelphia, who has fantasy players as clients. "If it's not on your tax return. You're busted."

Fantasy sports' winnings differ from those garnered from conventional gaming such as casinos and lotteries. For tax purposes, most fantasy players are considered hobbyists, although some reportedly gross six figures.

Players can deduct entrance fees and other related costs so long as they are itemized. The deductions are limited to 2 percent of a player's adjusted gross income. Experts, however, warn players against taking shortcuts like trying to pass off hobby expenses as a business activity because it may trigger an audit.

Debate over whether FanDuel and DraftKings are gambling sites have heated up in a wake of a New York Times investigation into their business practices.

Federal and state officials are investigating the industry, and the games are illegal in at least five states, including Arizona, Iowa, Washington, Montana and Louisiana.

Packer, a certified public accountant, urges players to report their winnings even if they aren't sure if it's legal in their state because federal law requires that all income be reported regardless of the source.

Fantasy sports are exempt from the Unlawful Internet Gambling Enforcement Act of 2006, which forbids financial firms from processing payments for online gambling. The fantasy sports industry argues that it is a game of skill, not chance, and therefore shouldn't be subject to regulation, an argument critics reject. Gambler's Anonymous, a self-help group, views the games as a form of gambling.

Editor's Note: CBS has an investment in FanDuel of less than 1 percent of that company's value.

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    Jonathan Berr is an award-winning journalist and podcaster based in New Jersey whose main focus is on business and economic issues.