Tax Implications of Fantasy Sports Winnings: A Guide from a Toronto Tax Lawyer
Published: December 16, 2022
Last updated: October 10, 2023
Fantasy Sport and Tax Law - An Overview
Fantasy sport refers to a type of competition with participants selecting and assembling their corresponding virtual teams composed of real players of a professional sport such as the English Premier League of Soccer, MLB, NBA, NFL, and NHL. Based on the performance of the real players chosen for each team, these virtual teams compete against one another. Fantasy sports have evolved from casual games played amongst friends offline to a global market valued at over $20.4 billion USD in 2020 owing to the development of the internet and sports analytics, cryptocurrency and NFT based fantasy leagues.
Numerous legal issues relating to fantasy sports have arisen as a result of this development. Whether fantasy sports winnings are taxable under the Income Tax Act and whether there are any additional cryptocurrency tax laws in Canada for taking part in fantasy sports leagues with real money or crypto or NFTs on the line are two of the most crucial legal questions for Canadian taxpayers.
The CRA has not released any policy statements or legislation regarding the tax implications of fantasy sports, and neither has the Canadian Parliament. However, an experienced Canadian tax lawyer can analyse the tax implications of fantasy sports income using the principles of Canadian income tax law as well as current tax case law on gambling in general and sports gambling in particular.
What the Income Tax Act Tells About Gambling Taxation?
The Income Tax Act neither defines gambling nor gambling income, despite the fact that these terms are legally defined under a number of Canadian laws, including Ontario's Gaming Control Act. What the Income Tax Act clearly provided for are the four taxable income sources, which are:
Gifts, windfalls, and lottery winnings are examples of income from "Other sources" that are not taxable and fall outside the aforementioned four categories. Therefore, the taxation of income from gambling is determinable based on any of the four taxable sources where the gambling income can be traced from which only then would consider it taxable, or if it came from “other sources which render it not taxable.
Income Taxation from Gambling - A Hobby or Business?
Under the Income Tax Act, the question of gambling income has to be considered on a case-by-case basis. Case law is almost completely relied upon to determine whether certain activities qualify as a business or not. For more information, please refer to our article on the taxation of gambling income, which can be found at https://taxpage.com/articles-and-tips/gambling-poker-winnings.
One important takeaway from the case law on gambling income is the general evolution of tax law on the definition of "business activities." In both Luprypa v the Queen and Cohen v the Queen, the court mentioned the presence or absence of "reasonable expectation of profit" as a factor in determining whether business activities were being carried out.
However, the Supreme Court of Canada in Steward v Canada rejected the reasonable expectation of profit in determining whether business activities exist. The Supreme Court held that the test of reasonable expectation of profit “is problematic owing to its vagueness and uncertainty of application; this results in the unfair and arbitrary treatment of taxpayers”. This interpretation resulted in the non-acceptance of “reasonable expectation of profit” as the test of whether the taxpayer’s activities qualify as a source of income.
After Stewart, whether a given activity was carried out by the taxpayer for profit or out of personal interest will determine whether it qualifies as a business under the Income Tax Act. The court must then decide whether the activity is being conducted in a sufficiently commercial manner to qualify as a source of income if it may be categorized as a personal pursuit. In order to conclude that the taxpayer didn't pursue profits, the court shouldn't closely examine the taxpayer's business judgments and decisions.
As a result, when interpreting the decisions in Luprypa and Cohen, we must consider the rejection of the reasonable expectation of profit test.
Factors to Consider for Fantasy Sports Winnings
Although there is no case law on the tax ramifications of fantasy sports winnings, there are a number of factors that may be important when determining whether playing fantasy sports could be considered a business for purposes of the Income Tax Act.
Aside from the general factors listed below, there are numerous fantasy sports platforms where players can profit in addition to winning their league.
For instance, some fantasy sports platforms, like Yahoo Sports, charge a fixed entry fee to each participant, after which there is no additional cost for the remainder of the season. Due to the recent expansion of daily fantasy sports (DFS) websites like DraftKings and FanDuel, a participant's potential season-long entry fee on DFS platforms could be significantly higher than on traditional fantasy sports platforms, which might have an impact on how much tax is owed by that participant.
Players can place bids on the right to choose the best players for their virtual teams on other fantasy sports websites like Trading Players or PlayerSX.
In these leagues, fantasy sports participants can auction or trade their athletes to other participants for real money, much like the actual European soccer transfer market. Real cash value gains from these transactions and auctions may result in further tax complications, such as whether they should be classified as income, capital gains, or non-taxable other sources.
Additionally, a few new fantasy sports platforms are collaborating with cryptocurrency exchanges to take payments and distribute rewards completely in cryptocurrency or NFTs. In addition to fantasy sports winning, using these platforms would bring up additional cryptocurrency-related difficulties. To know more about how the Canada Revenue Agency (CRA) taxes cryptocurrency, please see our article here [https://taxpage.com/articles-and-tips/recent-cra-guideline-regarding-cryptocurrencies/].
The tax consequences for fantasy sports income can vary significantly depending on these platform variances. To understand more about how their particular circumstance fits into the tax rules, Canadian taxpayers can consider contacting our knowledgeable Canadian crypto tax law firm. Keep in mind that the tax determination will be made on a case-by-case basis when it comes to these business vs. hobby questions. Based on our understanding of Stewart and teach, we have created a preliminary list of factual factors that may be taken into account when calculating a taxpayer's tax liability for gains and losses from fantasy sports:
Whether fantasy sports are the taxpayer's primary source of income - the court is more likely to deem the taxpayer to be conducting business with his or her fantasy sports operation if the taxpayer depends on his or her fantasy sports winnings and gains to cover such taxpayer's living expenses;
Regardless of whether the taxpayer used a system of risk management techniques - participating in many fantasy sports leagues with a variety of participants could help to reduce the risk associated with the inherently unpredictable nature of sports gambling. Such a technique or approach may suggest the taxpayer is operating his or her firm in the pursuit of profit;
Whether the taxpayer is more skilled than the average participant in a fantasy sports league at foretelling individual and team outcomes in a particular sport - if the taxpayer possesses specialized knowledge in sports analytics, this may provide him or her a distinct advantage over participants when projecting future performances from professional athletes. Having such a clearly defined advantage is another sign that the taxpayer is operating a business in order to make money; and,
Perhaps most importantly, whether the taxpayer's conduct in running his or her fantasy sports league is sufficiently comparable to other situations where participants were able to convert winnings from those leagues into their main source of income by conducting their activity in a sufficiently businesslike manner - this is relatively self-explanatory; acting like other business people in your industry is the best gauge of conducting business in an adequately commercial manner. The behaviors and techniques of top fantasy sports winners have not yet been widely published, in contrast to professional sports gambling where the typical strategies of "sharks” are fairly well known in the popular media. However, this might change very soon.
Keep in mind the Stewart decision, which said that the court need not find that the taxpayer is engaging in commercial activity with his or her participation in a fantasy sports league in order to find that the taxpayer is carrying out the activity. Each case needs to be examined holistically, taking into account all the pertinent information in the context of the most important tax case law about what constitutes a business under the Income Tax Act.
Tax Pro Tips - When Reporting Fantasy Sports Winnings And Losses, All Pertinent Information Must Be Taken Into Consideration.
It is crucial to remember that, on average, most Canadians who merely join a fantasy sports league with their friends to increase their enjoyment of their preferred sport would be seen as carrying out a hobby under the Income Tax Act. Fantasy sports, on the other hand, can sometimes involve intricate tactics and the research of actual sports statistics, which could give one player a clear advantage over others and move the activity closer to business.
Contact one of our knowledgeable Canadian tax experts for advice if you have any concerns about whether the profit or loss from your fantasy sports league will satisfy the criteria for being conducted in a sufficiently commercial manner to constitute a source of income. Consider using the voluntary disclosure program to safeguard yourself against potential CRA crypto audits and tax evasion charges if you are worried that your prior winnings may satisfy the criteria for business income and you have not reported these winnings in your tax return. Consult one of our leading Canadian tax lawyers to learn more about cryptocurrencies and the VDP. Your communication with us will be treated as completely privileged and confidential.
"This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the articles. If you have specific legal questions, you should seek the advice of a lawyer."