I lost $25 this week on fantasy sports.
For the record, it wasn’t gambling. I know this because the site that I used, FanDuel.com, said so. Over and over. According to the site:
Fantasy Sports is considered a game of skill and received a specific exemption from the 2006 Unlawful Internet Gambling Enforcement Act (UIGEA)… Thanks to fantasy sports being specifically excluded from laws affecting online sports betting, FanDuel is not illegal in any way.
DraftKings has a similar statement on its website:
We are a US-based skill games company, and all of our contests are operated 100% legally under United States and Canadian law. The US Government and 45 of the 50 states consider fantasy sports a game of skill.
(In case you’re wondering, Arizona, Iowa, Louisiana, Montana and Washington are the outliers).
So rest easy, Mom. I’m not a gambler. I just clearly lack skills.
I’m one of about 56.8 million users in the United States and Canada who logged in this year to try a hand at fantasy sports, a 450% boost in participation over the past ten years (FanDuel alone boasts 1+ million active users). About 60% of those pay to pay, creating what the Fantasy Sports Trade Association (FSTA) calls a $4 billion industry (other reports suggest the number is much higher).
The typical fantasy sports player is a college educated male, age 37, who works full time in a household which reports at least $75,000 in income. Football is the fantasy sport of choice and average annual spending per fantasy player is estimated to be $465. Those are some pretty desirable demographics which might explain why you can’t get through an NFL game day without seeing a ton of fantasy sports commercials.
I might not match those demographics to a tee but I do match up with most other fantasy sports players in another significant way: I’m bound to lose. At least when it comes to fantasy sports. And chances are, so are you: last week, the top two sites, FanDuel and DraftKings both took in more in entry fees than they paid out in prizes.
A basic grasp of math would indicate that if the company is paying out less than it takes in, there are a lot of folks like me who end up losing. However, that doesn’t mean that there aren’t big prizes to be had. A spokesperson from FanDuel confirmed that they have a Sunday Millions competition which pays out $1 million to the winner; last year at FanDuel’s World Fantasy Football Championship (yes, there is such a thing) the winner took home $2 million. How much is up for grabs in any given year? We’ll never know. I asked but was advised that the company does not, as a privacy matter, disclose an individual’s annual winnings.
If I had won any money, what would that mean for me? Remember, it’s not gambling. So for tax purposes, I wouldn’t have received a form W-2G to declare my winnings. I would have, however, received a form 1099-MISC.
FanDuel notes on its site that it is “required to issue a 1099 tax form to all players who have a net profit in excess of $600 for the calendar year.” The company clarifies on its site that the “$600 threshold is not based on withdrawals, but on net profit.” Similarly, DraftKings advises that “[y]ou do have to pay taxes on your Cumulative Net Profit from fantasy sports. DraftKings is required to issue 1099 tax form(s) to any player who has a cumulative net profit in excess of $600 for the calendar year. This is calculated by the approximate value as ((prizes won – entry fees)+bonuses).” So, in theory, a player could “win” $10,000 but if losses from entry fees are at least $9,400, there might not be a form 1099-MISC.
Assuming a form 1099-MISC is warranted, how does it end up in your mailbox? By statute, a form 1099-MISC is issued following the calendar year. But unlike some web sites, like Amazon, that require you to provide tax information in advance, the requirements on fantasy sites appear to be pretty lean. When I signed up, I only had to provide my name, email address, and country. I signed up using real data but I imagine that’s not always the case.
At the start, I only deposited $25 but I think, all totaled, I was entered to win contests which could yield close to half a million dollars. What if, I wondered, I had actually won something? It could have happened: I didn’t do too shabby for a first go. Despite the Eagles’ best efforts this season to change my mind, I like football and together with my son, we put together a couple of decent fantasy teams (it’s worth noting for the record that 4th graders have zero respect for the salary cap). I finished in the top third in both NFL contests but ultimately walked away with nothing: in contrast, the big winner in the “$2 Million Sun NFL Rush ($150K to 1st)” contest grossed $150,000. According to the scoreboard, the winner has played in FanDuel since December 2014 and has won 13 times, including this one. Not surprisingly, the scoreboard doesn’t report the player’s losses.
If I had won the $150,000, could I have taken the money and run? I hadn’t provided any tax or other personal information. I asked FanDuel about this, noting that under their terms and conditions, the company requires that users update information in January. Since it’s October and there are just a few more weeks left in the calendar year, I asked if it would be possible for me to just withdraw any money now. According to a FanDuel spokesperson, “If you go to withdraw from your account and you have a net profit of $100, it won’t let you withdraw. Basically, you won’t be able to get money out if you’re profitable.” That’s a little bit different from what the site claims: “If your team racks up more than your rivals on that day or weekend you’ll instantly take home the winnings. No waiting for the season to end.” (emphasis added)
In the support section, the site notes that “You can withdraw your money at any time using one of two methods, PayPal or Check.” (emphasis added) However, if you keep scrolling down, the company later advises, “You may be requested to provide your mailing address and SSN before the withdrawal is processed – this helps in the event that your annual net winnings may exceed $600 and FanDuel is required to file a 1099-MISC tax form.” It had initially been unclear to me what would happen if I refused to provide the information or provided bogus information. A spokesperson from FanDuel subsequently clarified that users are prompted to enter their tax details when they are profitable by $100+ via a PayPal withdrawal. If a user requests a check, any withdrawal of more than $250 will be on hold until the user enters their tax details. Further, according to the spokesperson, if the user did not provide tax details by January and did not respond to email requests asking for that information, the user would have their account(s) put on hold.
I sent a similar query to DraftKings since under the terms and conditions, it does not appear that users are required to update information at a specific date or event for purposes of issuing tax forms (not even in January, as FanDuel notes). I asked the company how it ensures that a user updates his or her information but DraftKings did not respond to my request for an interview.
Assuming that things happen as they should, the form 1099-MISC will reflect your net profits. That gets reported on line 21 of your form 1040. But what about those losses – like mine? Like the thousands of other users who took home nothing this week, that’s simply money out of pocket. I can’t claim those entry fees as losses. I could have netted them against winnings, assuming the company didn’t already do that (as noted, however, FanDuel and DraftKings both net their winnings before issuing tax forms).
What if, instead of playing the field, I was playing the slots? If I were gambling online, I’d receive a form W-2G, not a form 1099-MISC. My winnings would still get reported on line 21 of my form 1040 but any losses are only deductible as an itemized deduction on a Schedule A. For casual gamblers, reported losses can’t exceed reported winnings: the rules are different if you’re a pro.
That, however, makes me wonder. If the general premise of fantasy sports is that it’s not gambling because it correlates to a skill, how do you distinguish between a professional gambler, who arguably uses skill, and someone who would frequent a fantasy sports site on a regular basis? Proponents of fantasy sports sites claim that even for professional gamblers, the odds are always very close to 50/50 while in fantasy sports, the level of skill directly correlates to winnings. According to a FanDuel spokesperson, “You can also increase your skill as you play more. You can never increase your ability to throw dice.”
Not everyone agrees, however, that fantasy sports are so very different than gambling. Remember that 2006 Unlawful Internet Gambling Enforcement Act (UIGEA) that fantasy leagues like to cite? The one that exempted them from the gambling requirements? The man who sponsored the original bill, former Rep. Jim Leach (R-IA) now says that he had no idea that fantasy sports would “morph into today’s cauldron of daily betting.” The purpose of the bill was supposed to regulate gambling on the internet, not provide exceptions to encourage the behavior. Leach went on to clarify, “There is no credible way fantasy sports betting can be described as not gambling. Only a sophist can make such a claim.” Sophists, apparently, like FanDuel and DraftKings.
Fantasy sports aren’t just drawing heat for their “are they or are they not gambling?” conundrum. Just last week, the industry received more unwelcome attention for its alleged lack of regulations when a DraftKings employee, Ethan Haskell, won a significant cash prize playing fantasy hockey on FanDuel. An initial investigation suggested that employees like Haskell are able to use information not available to fantasy sports sites customers to make better wagers – kind of like insider trading. New York Attorney General Eric Schneiderman immediately ordered an investigation: both FanDuel and DraftKings have until Thursday, October 15, to respond to requests for information.
Both sites have subsequently announced a ban on allowing employees to participate on daily fantasy sites. That may not be enough, however, to stifle the criticism. Just last week, U.S. Rep. Frank Pallone (D-NJ) re-upped calls for a Congressional inquiry into such sites, saying:
The allegation of ‘insider trading’ by employees of daily fantasy sports operators is a prime example of why we need a Congressional hearing to review the legal status of fantasy sports and sports betting. Daily fantasy sports is functioning in a Wild West void within the legal structure. Like professional sports betting, fantasy sports should be legal, but both are currently operating in the shadows. With little legal oversight and deep investments into these sites by the same professional sports leagues that oppose traditional sports wagering, these issues are ripe for Congressional review.
Last month, Rep. Pallone had requested that the House Energy and Commerce Committee hold hearings to find out more about the fantasy sports industry, their legal status and their relationship with professional sports leagues like Major League Baseball and the National Football League. Together with Sen. Bob Menendez (D-NJ), Pallone has also called on the Federal Trade Commission (FTC) to start an investigation into fantasy sports websites. Perhaps not surprising after those requests, FanDuel subsequently engaged the services of a D.C. lobbyist.
Chances are that FanDuel and DraftKings are also lawyering up. A class action lawsuit was filed in Manhattan last week alleging that the games are “misrepresented as fair.” The lawsuit alleges that employees (like Haskell) may have used information gleaned from their employment to secure unfair advantages over other players. The suit maintains that, “In addition to years of data on optimal strategies, which gives Defendants’ employees a huge advantage over even the most ‘skilled’ (daily fantasy sports) players, Defendants’ employees also have real-time access to data on current lineups of every player in every contest, and the overall ownership percentages of every player.”
What these lawsuits and calls for investigation show is that it’s clear that the rapid growth of the industry is going to cause some growing pains. And while allegations of cheating may cause some sponsors and sports leagues to take a step back, it doesn’t seem to have put a dent in the industry’s popularity. This past weekend marks the busiest weekend ever for fantasy sports sites – not everyone is discouraged. While discussing our losses this morning, the 9-year-old merely shrugged. “We could have done better.”
(Author’s note: After this article was posted, FanDuel reached out to me to clarify their position on user provided tax information. That information has been updated above. DraftKings did not respond to my initial request for information and did not offer a response to the article.)