By: Declan Andersen

In two memos released on August 7th and October 16th 2020, the Internal Revenue Service (“IRS”) addressed the question of whether payments made by Daily Fantasy Sports (“DFS”) players constitute “wagers” under §§ 165(d) and 4401 of the Internal Revenue Code (“IRC”).[1] In its August memo, the IRS determined that DFS payments do constitute a wager and would be subject to a federal excise tax under §4401 of the IRC.[2] In its October memo, the IRS doubled down on this determination by finding that DFS payments also constituted a wager under §165(d) of the IRC.[3] It is important to note that both IRS memos included a notice stating that the memos “may not be used or cited as precedent.”[4]

DFS differ from traditional fantasy sports games, popular on sites such as ESPN, as DFS only require a daily commitment.[5] In 2019, FanDuel, a DFS site, was acquired for a reported $465 million, a testament to the popularity of DFS.[6] It is clear that those involved in the DFS industry are against the “wager” classification, as it stands to cost the operators of the service millions in extra taxes.[7] The IRS’s classification of payments as “wagers” would result in a 0.25% tax on each payment made by a DFS participant.[8] This tax would raise the cost associated with playing DFS, which would reduce the profitability of DFS companies.

In its October memo, the IRS relied upon the Random House College Dictionary which defined “wager” as “something risked or staked on an uncertain event” or something close to poker.[9] The IRS then likens payments made by DFS players to “buy-ins” in a game of poker, as opposed to an entrance fee in a puzzle contest.[10] The legal issue then is to determine whether DFS games are games of chance or skill; in supporting its determination the IRS cites People ex. rel. Ellison v. Lavin.[11] The test from Ellison held that it is the  “dominating element that determines the result of the game;” the IRS interpretation, then, is that DFS games are predominately games of chance.[12]

In both memos the IRS relied on an improper and limited definition for the term wager to arrive at its conclusion that DFS payments constitute a “wager.”[13] While DFS may be considered to be more games of chance, that still does not determine whether payments made constitute a wager, as would be the case if an individual placed a bet with a sportsbook.[14] Daniel Wallach, in a series of tweets criticizing the reasoning in the IRS memos, stated that the “sine qua non” of a “wager” is the “risk of loss on both sides of the transaction.”[15] DFS companies, such as FanDuel, make money from collecting a percentage of DFS players entrance fees.[16] This is contrasted with traditional sportsbooks, which risk actually losing money depending on the outcomes of the games.[17] In sum, DFS companies assume zero risk in the individual DFS games, making it illogical to say that the participate in wagering.


[1] I.R.S. Tech. Adv. Mem. 20-20-4-009 (Aug. 7, 2020); I.R.S. Tech. Adv. Mem. 20-20-42015 (Oct. 16, 2020) ; see also Sam McQuillan, IRS Doubles Down on Taxing FanDuel, DraftKings as Gambling, Bloomberg Law (Oct. 23, 2020, 5:44 PM), https://www.bloomberglaw.com/product/tax/document/X6FTK8FC000000?bna_news_filter=daily-tax-report-state&jcsearch=BNA%25200000017556f4dd4aa3f756fc65690001#jcite.

[2] I.R.S. Tech. Adv. Mem. 20-20-4-009 (Aug. 7, 2020); see also Sam McQuillan, IRS Doubles Down on Taxing FanDuel, DraftKings as Gambling, Bloomberg Law (Oct. 23, 2020, 5:44 PM), https://www.bloomberglaw.com/product/tax/document/X6FTK8FC000000?bna_news_filter=daily-tax-report-state&jcsearch=BNA%25200000017556f4dd4aa3f756fc65690001#jcite.

[3] I.R.S. Tech. Adv. Mem.  20-20-42015 (Oct. 16, 2020).

[4] I.R.S. Tech. Adv. Mem.  20-20-4-009 (Aug. 7, 2020); I.R.S. Tech. Adv. Mem.  20-20-42015 (Oct. 16, 2020).

[5] See Drew Harwell, The Rise of Daily Fantasy Sports, Online Betting’s Newest Empire, Wash. Post (July 28, 2015, 11:24 AM), https://www.washingtonpost.com/news/wonk/wp/2015/07/28/how-daily-fantasy-sites-became-pro-sports-newest-addiction-machine/ (stating the appeal of daily fantasy sports).

[6] See Zoë Bernard, The Cruel Truth About How Much Money Two Founders Will Likely Get After Selling Their Startup for $465 Million Reveals the Catch-22 of Raising Too Much Money, Bus. Insider (July 9, 2018, 4:43 PM), https://www.businessinsider.com/fanduel-founders-likely-to-lose-out-from-paddy-power-acquisition-2018-7 (detailing the financial background of FanDuel). 

[7] Sam McQuillan, IRS Doubles Down on Taxing FanDuel, DraftKings as Gambling, Bloomberg Law (Oct. 23, 2020, 5:44 PM), https://www.bloomberglaw.com/product/tax/document/X6FTK8FC000000?bna_news_filter=daily-tax-report-state&jcsearch=BNA%25200000017556f4dd4aa3f756fc65690001#jcite.

[8] Id.

[9] I.R.S. Tech. Adv. Mem.  20-20-42015 (Oct. 16, 2020).

[10] Id.

[11] 71 N.E. 753 (N.Y. App. 1904); I.R.S. Tech. Adv. Mem.  20-20-42015 (Oct. 16, 2020).

[12] 71 N.E. 753 at 755.

[13] See John Brennan, Is Daily Sports Gambling? IRS Now Says ‘Yes’, USBets (Aug. 20, 2020), https://www.usbets.com/irs-says-daily-fantasy-sports-gambling/ (citing Daniel Wallach, a gaming law attorney, for the proposition that the IRS memo relied on an improper definition for the word “wager”).

[14] See Daniel Wallach (@WALLACHLEGAL), Twitter (Aug. 18, 2020, 7:49 PM), https://twitter.com/WALLACHLEGAL/status/1295870543925739520 (stating that payments made to a traditional “house-banked” sportsbook would be defined as a wager).

[15] Daniel Wallach (@WALLACHLEGAL), Twitter (Aug. 18, 2020, 6:33 PM), https://twitter.com/WALLACHLEGAL/status/1295851282129924096.

[16] Trevir Nath, The Economics of FanDuel, Investopedia (Aug. 19, 2015), https://www.investopedia.com/articles/investing/081915/economics-fanduel.asp.

[17] John Brennan, Is Daily Sports Gambling? IRS Now Says ‘Yes’, USBets (Aug. 20, 2020), https://www.usbets.com/irs-says-daily-fantasy-sports-gambling/.

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