IRC section 183, commonly referred to as the “hobby loss rule”, governs the criteria of whether an activity is engaged to make a profit (e.g.: any business venture) or if it is a hobby.
It is possible to categorize your daily fantasy sports play into a job or business, and utilize the tax benefits of such a distinction.
For-profit activities and businesses report their transactions on the 1040 Schedule C, which is different if you report your DFS play as a hobby, in which case you can deduct losses up to income if you itemize your tax returns.
In the case of a for-profit activity, losses can be deducted to offset income, even if those losses exceed that activities income. The benefit here is this leftover loss can also be used to offset other income.
What this means is that if all your expenses and losses are more than your winnings, that loss can be deducted from other sources of income, such as the income from another full-time or part-time job.
Ordinary and necessary expenses of the DFS business can also be deducted on Schedule C – such as NFL, NBA, and other sport packages for television, subscriptions to online services, computer equipment, and much more. Be that the case however, Schedule C losses will raise an audit flag.
In determining whether an activity is a hobby or a for-profit activity, numerous factors are involved. Below are some of the factors the IRS considers in making this determination:
– Is the time and actions put into this activity commensurate with a motive to make a profit?
– How dependent are you on this activity’s income?
– If losses exist, are they due to circumstances beyond your control or are they common in the start-up phase of your business?
– What changes have you made in order to improve profitability?
– Do you have the knowledge required to carry on this activity as a successful business?
– Have you previously made a profit in similar activities?
– Is this activity profitable in some years?
– Are there profit expectations from appreciation of assets from this activity in the future?
As if that weren’t enough, there is also the presumption of profit test which the IRS presumes an activity is a for-profit business if it was profitable in three of the last five years. So you need to show that you can turn a profit at DFS at some point in time.
These factors as a whole are taken into consideration in making a determination, so each incident is really a unique case-by-case scenario.
Two relevant IRS publications that may help you is Publication 334 Tax Guide for Small Business and Publication 535 Business Expenses.
Always consult your tax professional for advice on your specific situation. This article only provides general information and is not intended to provide tax advice.
Check out this article on Forbes.com covering this same topic – Tax Issues with Daily Fantasy Sports
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