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Daily Fantasy Sports Fees Are Amounts Paid for Wagering Transactions

(Parker Tax Publishing October 2020)

The Office of Chief Counsel advised that the amount paid by a daily fantasy sports (DFS) player to participate in a DFS contest constitutes an amount paid for a wagering transaction under Code Sec. 165(d). The Chief Counsel's Office found that, while skill is a component of DFS transactions, any argument that a DFS transaction is not wagering because it is based on skill must fail because elements of chance beyond the participant's control ultimately determine the outcome of the transaction. CCA 202042015.


Daily fantasy sports (DFS) are a type of fantasy sports game that evolved over the last decade into a multi-million-dollar industry. A traditional fantasy sports league is comprised of participants that select players from professional sports teams to create a "fantasy" team. The selection of professional players occurs during a "draft" held at the beginning of the season. Each professional player can only be selected once during the draft, but participants may drop, add, or trade players as they become available throughout the season. A schedule is created and each week fantasy teams compete head to head. The winner of the match up depends on the statistical performance of each professional player in their respective real-life sports games that week.

DFS modified the traditional fantasy sports model to offer more flexible and fast-paced competitions. Under the DFS model, participants are given a salary cap with which to select their fantasy team. Multiple participants can select the same professional players so long as they do not exceed the salary cap. Instead of drafting professional players for an entire season, the fantasy team exists for a single day or a single week. Once participants have created their teams, they may select from a variety of competitions including head-to-head competitions, cash games, guaranteed prize pools, and 50/50 competitions. Head-to-head competitions allow two players to challenge each other with the winner receiving the entire pool. Cash games include transactions within a league that identifies winners based on the best performing teams. Guaranteed prize pools are games that have a set entry fee to compete in a fixed prize pool, regardless of the number of entrants. 50/50 competitions involve a transaction in which the top 50 percent of performers nearly double their returns on investment while the other half receive nothing.

Each of these contests are structured as pay to play, with the participant submitting an entry fee for each contest, and the host website taking a commission from fees collected. Participants receive points based on the live performance of their selected players. The points for each player on the fantasy team are compiled for a final fantasy score that determines the winners of the match up.

In CCA 202042015, the Office of Chief Counsel was asked whether the amount paid by a DFS player to participate in a DFS contest constitutes an amount paid for a wagering transaction under Code Sec. 165(d). Under Code Sec. 165(d) and Reg. Sec. 1.165-10, taxpayers may deduct losses from wagering transactions during a tax year, but only to the extent of wagering gains.


The Office of Chief Counsel advised that the amount paid by a DFS player to participate in a DFS contest constitutes an amount paid for a wagering transaction under Code Sec. 165(d). The Chief Counsel's Office noted that there is no statutory or regulatory definition for "wagering transactions" in Code Sec. 165(d). In Tschetschot v. Comm'r, T.C. Memo. 2007-38, the Tax Court held that, in the absence of a statutory or regulatory definition, the plain meaning of wagering when used in the Code is synonymous with gambling. The Chief Counsel's Office observed that the definition of "wager" used by state courts requires two or more parties, having mutual rights in respect to the money wagered, having a chance to win or lose upon the outcome of an uncertain event. In this way, a wager is distinguishable from a prize, according to the Chief Counsel's Office, because unlike a wager, state courts have found that a prize or reward is compensation for an act done.

The Chief Counsel's Office determined that DFS transactions meet the definition of "wager" as interpreted by the Tax Court and state courts because there is an uncertain event (such as the live performance of individual players), there are winnings if the event resolves in a participant's favor, and consideration is lost if the event does not resolve in participant's favor. The Chief Counsel's Office said that each DFS transaction is a pay to play competition with predetermined winnings for a certain number of participants. The outcome of the competition turns on the overall statistical performance of live professional players assembled into the fantasy team. The winning participant receives a return of his or her initial bet along with wagering gains, while the losing participant walks away empty handed. The Chief Counsel's Office stated that this is consistent with the courts' interpretation of the term "wager."

While the Chief Counsel's Office noted that it could be argued that DFS is not considered "wagering" because it is a contest of skill, it found that, as a general rule, a contest in which a prize is offered based on the mental or physical skill of the contestant is not considered gaming. In Rev. Rul. 57-521, the IRS ruled that an entrance fee does not make a payment a bet or gaming transaction unless the entrance fee alone consists of the winnings to be won by the successful contestant. In Rev. Rul. 57-521, the IRS examined a puzzle contest in which contestants submitted solutions with a fee per submission to play and concluded that the puzzle game was not a wagering pool or lottery because the outcome relied entirely on the contestant's skill in completing the puzzle. In Tschetschot, the IRS later distinguished this type of contest as a game of skill from poker tournaments which are considered wagering. The Chief Counsel's Office found that DFS transactions are similar to poker and other wagers in which a player's skill is a component of the game but it does not dictate the outcome. As such, the Chief Counsel's Office said that the argument that DFS transactions are excluded from wagering as a game of skill are unpersuasive.

The Chief Counsel's Office observed that it could also be argued that the DFS pay-to-play transactions are entrance fees for their team, comprised of players selected by the taxpayer based on knowledge and skill, to compete. However, the Chief Counsel's Office explained that the test is not whether there is an element of chance or skill, but which element is the dominating element that determines the result of the game. According to the Chief Counsel's Office, while skill may be involved in drafting the players of a team, the taxpayer's skill has no impact on the players' live performances. The Chief Counsel's Office reasoned that DFS is not unlike pari-mutuel betting, long considered wagering, in which an individual uses knowledge and skill to choose which players or horses to select. Skill may be an element of the transaction, according to the Chief Counsel Office, but chance dominates the outcome of the transaction. The Chief Counsel's Office concluded that any argument that a DFS transaction is not wagering because it is based on skill must fail because elements of chance beyond the participant's control ultimately determine the outcome of the transaction.

For a discussion of the deduction for gambling losses up to the amount of gambling winnings, see Parker Tax ¶85,120.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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