Fantasy Football – Is it a Hobby or Gambling?

With the growth of fantasy football and other fantasy sports, questions have been raised on how or if winnings should be taxable. Some feel that fantasy sports are a form of gambling. For example, New York Attorney General Eric Schneiderman was one of the first public officials to order fantasy sites to stop operating in his state, saying daily fantasy sports violated New York’s gambling laws.

According to the IRS, "Gambling winnings are fully taxable and you must report them on your tax return." Gambling expenses are not deductible unless the taxpayer is a professional gambler. If a casual gambler takes a trip and wins, the trip expenses, such as travel and hotel costs, cannot be applied against the winnings. Click here for more on the treatment of tax winnings.

Taxation of Hobbies

For most taxpayers, gambling expenses are not tax deductible, but what about expenses related to a hobby? Well, if your hobby produces income they may be. For example, if a hobby produces $1,000 in income, you may be able to deduct expenses against the amount of income that it produced (in this example, up to $1,000).

In general, taxpayers may deduct ordinary and necessary expenses associated with the hobby. The IRS does limit the available deduction on losses. If a taxpayer incurred losses from a hobby, he or she can only deduct those losses against the income earned which it earned. In simpler terms, a taxpayer may deduct ordinary and necessary expenses incurred to carry out such hobby, but only up to the amount of income incurred.

Any deduction must be itemized and the claimed expenses should have a direct association to the hobby itself and the income it generates. Finally, if does not produce any income, your costs are not deductible.

For these reasons, from a taxpayers perspective, it is favorable if fantasy sports are considered a hobby rather than gambling.

The Argument

Those who don’t believe fantasy sports are gambling generally cite the Unlawful Internet Gambling Enforcement Act of 2006. This bill exempts fantasy sports games because their outcome “...reflects the relative knowledge of the participants...”. In other words it is a game based on skill and not chance.

Fantasy sports are considered games of skill by some because the feeling is that you can become good at them by studying player statistics and using this knowledge of sports and intangibles, such as the weather in a given city, to win. Therefore, the argument for those that consider fantasy sports a hobby is that, winners are not random and subject to chance but rather, win based on their skill.

No matter where future determination is made by the IRS, it is important to maintain good records of your expenses if you plan to claim them against fantasy sports winnings.