The Internal Revenue Service (IRS) last week doubled down on its position that daily fantasy sports (DFS) entry fees are akin to sports wagers, signaling that it is a matter of when, and at what percentage, the IRS will levy federal taxes on those sums. This will not come as a surprise to DraftKings or FanDuel, which will likely become taxation victims of their own success after morphing into national sportsbook juggernauts generating large sums of revenue separate from DFS.
In late August, the IRS released a Technical Advice Memorandum concluding, “We have determined that DFS entry fees are taxable wagers under IRC §§ 4401 and 4421.” That refers to the code’s longstanding federal excise tax of 0.25% on all legal sports wagers. However, the tax could be as high as 2% off the top depending on whether entries are submitted in a state where DFS is “authorized” or a state where DFS is not expressly legal. Then in another memo released on Oct. 16, concerning a separate section of the code, the IRS reiterated this position, stating that DFS entry fees “constitute an amount paid for a wagering transaction.”