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Regulatory Crackdowns Are Reshaping Sports Wagering.

Regulatory uncertainty in emerging gaming markets has proven itself to be a double-edged sword. On one hand, unregulated gaming products that do not squarely fall into the definitions of “gambling” or regulated fantasy sports offer greater accessibility, innovative entertainment, and lower fees to their customers. Such products include skill-based games, play-to-earn video games, peer-to-peer social wagering, and pick’em-style fantasy sports (most prominently championed by Underdog Sports and PrizePicks). On the other hand, pick’em fantasy sports has recently been under fire, as a number of states have either outright banned pick’em fantasy sports or are currently investigating them.

Pick’em As a Popular Alternative to Traditional Fantasy

Pick’em style fantasy sports found success in appealing to the younger, more casual player. Instead of assembling a roster, managing a virtual salary cap, and engaging in time-consuming balancing of performance vs. cost, the pick’em format simply awards points based on correct predictions of a better outcome. For example, the pick’em format will ask participants to pick an over/under point total between two outcomes or which player will score more points. This simpler and more straightforward format has enjoyed rapid success due to its accessibility and entertainment factor. However, state regulators have also cracked down on the format due to its functional resemblance to proposition-style sports bets.

Regulators Have Cracked Down on Pick’em in Late 2023 and Early 2024

As of the date of this article, Arizona, Arkansas, Florida, Kansas, Maine, Michigan, Mississippi, New York, North Carolina, Virginia, and Wyoming have taken the position that pick’em fantasy sports offerings are illegal under state law. Wyoming (which legalized online sports betting in 2021) targeted leading pick’em operators PrizePicks and Underdog in July 2023 with cease-and-desist letters. High-profile regulatory actions followed in Florida, New York, and Michigan. Florida takes the position that fantasy sports have not been and are not allowed in the state. Michigan and New York have amended their daily fantasy sports administrative rules to prohibit “any contests that have the effect of mimicking betting on sports or that involve ‘prop bets’ or the effect of mimicking proposition selection.”

Other states joined the effort. California is currently in the process of investigating and opining on the legality of DFS in the state. Kansas became the latest state to issue cease-and-desist letters to at least six fantasy sports operators. Notably, despite having a well-articulated and public position on the legality of its offering, Underdog voluntarily left Kansas in September of 2023. PrizePicks continues to operate in Kansas.

After Florida targeted the three market leaders – Underdog, PrizePicks, and Betr – with cease-and-desist letters in September 2023, it appeared that the companies were eager to fight for and defend the legality of their offerings. This no longer seems to be the case and at least one operator (PrizePicks) just settled the New York State Gaming Commission’s allegations of illegal fantasy sports operations by agreeing to pay a fine of nearly $15 million and ceasing operations in New York.

While the settlement is limited to PrizePicks, its a potential blow to all the other pick’em operators, whose legal position has been that their products either operate within the boundaries of permissible fantasy sports or are not otherwise regulated by state law. As a side note, New York is unique in that the settlement with PrizePicks acknowledges the general legality of fantasy sports in New York pursuant to license. PrizePicks’ “wrongdoing” was ostensibly operating fantasy sports without a license (not that their pick’em product was per se illegal).

Novel Game Markets Remain Uncertain and Subject to Rapid Adverse Regulator Actions

In any case, the cascade of regulatory actions (and the speed with which investigations turned into cease-and-desist letters and subpoenas) highlights the uncertainty related to novel gaming products. For instance, PrizePicks operated in New York since 2019 under a “good-faith belief” (and presumably in reliance upon legal advice) that it did not need to obtain any sort of fantasy sports or other license from the state. PrizePicks likely relied on the common-sense conclusion that its offering was a game of skill and therefore unregulated under New York law. Yet PrizePicks had to essentially pay back all the revenue it made in New York and agree to exit the state.

Out of all the real-money gaming offerings in the market, skill-based real-money gaming still appears to be most accepted model. Skill-based real-money gaming involves players paying an entry fee and competing for a prize, with the outcome determined by the relative skill of the players as opposed to chance. Peer-to-peer social wagering leverages the skill-based aspect of predicting sports outcomes, but involves direct bettor-to-bettor competition as opposed to bets against the house.

While legally untested, the peer-to-peer model also appears to be more palatable to regulators, as Underdog Fantasy revised its player vs. house pick’em model to function as a peer-to-peer skill contest in Alabama, Mississippi, Tennessee, and Wyoming in response to collaboration with regulators in those states. Play-to-earn is a concept most associated with Web3.0 and video games where in-game assets have tangible out-of-game value. Interest in play-to-earn is surging, as the crypto markets recover and Bitcoin exceeds the $50,000 barrier.

As more states legalize gambling and especially sports betting, regulators are taking a closer look at potential competitors. Licensed heavyweights like DraftKings and FanDuel (and their lobbyists) are allegedly involved in bringing regulators’ attention to potential competitors, especially if those competitors are operating at higher margins due to lower regulatory costs.

A Detailed Legal Opinion is More Important Than Ever

The current regulatory environment in the United States highlights the importance of hiring experienced and knowledgable counsel as part of your team. What was permissible or at least tolerated by regulators a year ago may not be acceptable now. Further, more states are taking a position against unlicensed sports betting or fantasy products, even if those offerings are firmly grounded in sound legal arguments. Careful consideration, a legal opinion, and a detailed analysis are more important than ever to a successful launch, especially as payment processors, vendors, investors, and other third parties are going to be engaged in a lot more legal scrutiny.


The qualified and specialized attorneys at Artaev at Law PLLC know gaming law – email or call us to set up your initial consultation.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, tax, or investment advice. Every situation is different and has its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

© 2024 Artaev at Law PLLC. All rights reserved.

The Three Types of Skill-Based Real-Money Games: Room for Innovation, Not Stagnation.

The skill-based real-money gaming market remains a popular and innovative business environment. The draw for players is that they can play games and win real money, but also improve their chances of winning through skill. Unlike gambling or casino-style games, skill-based gaming is not mathematically skewed in favor of “the house.” There are many types of games to choose from – card-based solitaire-like games, bingo, bubble puzzlers, trivia, and even sophisticated physics-based racing games. Best of all, unlike casino gambling and sports betting, skill-based real-money games are legal and available in the majority of U.S. states and internationally as well.

For developers, the upside is obvious. Monetization of gaming has always been profitable and a lucrative business – hence the tightly-regulated casino and sportsbetting markets. Designing a mobile game instantly gives the developer access to customers across the world through a well-established distribution network (i.e. the Apple App Store). When done right, real-money skill games are not required to be licensed or otherwise regulated in a majority of the states. This makes the real-money skill game market very accessible to most developers, including smaller studios with limited budgets and without the lobbying firepower that would otherwise be required to enter the money gaming market.

These factors combine into a highly-competitive market. This makes it difficult to design a profitable game without innovation. For example, the Skillz.com platform (publicly traded as SKLZ on the NYSE) boasts over 30 million players and over 30,000 developers. However, according to Skillz’s August 2021 prospectus filed with the SEC, only three games accounted for 74% of all revenue in 2021. These so-called “big three” are Tether’s “Solitaire Cube” and “21 Blitz,” and Big Run’s “Blackout Bingo.” Predictably, there are number of copycat games that are very similar to these “big three” in design and gameplay. To be successful, developers must innovate. As part of their development and marketing efforts, all companies in this space need to understand the three main types of skill games, each with its own set of regulatory nuances:

Pure-Skill Games

The first category of games is the “pure skill” variety that are similar to the popular Solitaire Cube, 21 Blitz, and Blackout Bingo that account for such a large share of the market. These games pit players in head-to-head contests, multiplayer battles, or tournaments the outcome of which depends solely on the skill of the player. For example, in Solitaire Cube, players are given the same deck and are scored on how well and fast they play Klondike Solitaire using these cards. Players pay an entry fee, with the winner receiving a cash prize.

These “pure skill” games do not involve any other factors than the players’ own skill in determining the outcome. There are limitless possibilities in this genre – anything from knife-throwing games, to cup flipping or “beer pong” style contests, to trivia games fall into this category. Some particularly innovative developers have even developed sophisticated physics-based games (similar to Angry Birds) that take serious dexterity, planning, and logic to master.

Pure-skill games are legal under U.S. federal law, as well as in the majority of U.S. states. Because skill games involve the opportunity to win real money, the Apple App store and various social media advertising platforms require special approval and an application that must be accompanied by a legal opinion from qualified gaming counsel. Payment processors also require special approval, a physical presence in the United States, and have their own set of standards and rules that must be met before your gaming account is approved.

Fantasy Sports or Market Games

The second category of skill games are those that are similar to the daily fantasy sports (“DFS”) contests offered by DraftKings and FanDuel. Generally, participants pay an entry fee and then are given a virtual currency budget to spend on a lineup of sports players to be on their fantasy team. The fantasy team then scores points based on real-world performance and the participants that accumulate the most points can win a cash prize.

Traditional sports and leagues like the NBA, NFL, MLB, and NHL are not the only options. There is at least one fantasy esports platform that lets players put together a lineup of their favorite gaming stars. There are also fantasy stock market games that let players pick a portfolio of real-world shares and win prizes based on how well their portfolio does against other players.

The key distinction between these fantasy games and pure-skill games is that the outcome of a fantasy game is not determined solely by a player’s skill. While it certainly takes knowledge and research to put together the best team, points are awarded based on real-world performance that is outside of the participants’ control. In fantasy sports, a particular player might have a bad game, get injured, or fall victim to bad officiating or adverse weather conditions. In fantasy stocks, a particular stock might enjoy a sudden price spike due to a merger announcement or a new product. Or, a stock might quickly lose value due to an SEC investigation or other unpredictable real world factors. In 2020, the IRS issued two separate memoranda analyzing and addressing this distinction, concluding that DFS involves “wagering” within the meaning of the Internal Revenue Code. At a minimum, the IRS’s position matters from a tax perspective: does your skill-based game involve “wagers” subject to excise tax?

DFS and similar fantasy games are more regulated than “pure-skill” games. DraftKings and FanDuel currently offer their DFS products in 43 states and are a good regulatory bellwether. In some states, DFS is offered as an unregulated skill-game product that falls outside of the state’s definition of “gambling.” In other states, legislatures have passed laws that expressly exclude DFS from “gambling,” but do not otherwise regulate or license DFS. In contrast, states like Michigan have enacted comprehensive licensing regulations for DFS. There are also states that outright ban any sort of real-money wagering. And, there are states that have issued DFS-adverse legal opinions and are embroiled in litigation to decide whether DFS constitutes illegal “gambling.” In other words, the regulatory landscape for DFS-type games is complicated and requires guidance from an experienced gaming attorney.

Arcade-Style Skill Games

The third category does not involve mobile phones, computers, or the internet at all. Rather, these games look like arcade cabinets or even like slot machines, and are found in certain bars, restaurants, and other public establishments. Originally, these games were purposefully designed to look and feel like slot machines, but introduced additional player choice or input features so that they would involve skill and purportedly fall outside of the definition of “gambling” in most states. Authorities in some states have cracked down on these types of machines (sometime called “nudge machines” or “skill slots”), concluding that the claimed skill element was a sham or otherwise insufficient to render the machine a true game of skill.

Despite the ongoing pandemic and the ubiquity of gaming options on mobile devices and the internet, these cabinet-type skill games are still thriving. One particularly popular game called “Dragon’s Ascent” has attracted the attention of regulators in the D.C. area and has sparked debate over whether the game (which pays out cash prizes) is an illegal gambling device. Players score points by shooting magic balls at dragons to capture them, using the joystick and buttons to direct and time their shots. The two-player version looks like a traditional arcade cabinet. The eight-player version adds an impressive-looking table that doubles as a screen. Both versions include drink holders, and the game’s promotional material specifically targets bars as a way for them to “offer something new.”

Although the barriers and start-up costs to enter into this specific market are significantly higher than the mobile game field, the presence of arcade-style skill games demonstrates the level of innovation and variety in the industry. Bars and restaurants that survive the pandemic may very well be interested in real-money skill games as one way to bring customers back to their in-person establishments. It is also possible that bars and restaurants will partner with more skill game developers to introduce mobile or more individualized real-money games to their establishments. After all, having a pint and betting $5 on a game of pool or darts is one of the most traditional and familiar ways to bet on a game of skill. Technology may advance, but people’s desire to compete, wager, and win real money remains the same.

Have more questions? Do you need a legal opinion or help getting your game through the regulatory process? Contact Dan Artaev today by emailing dan@artaevatlaw.com or by phone or text at (269) 930-0254.

Disclaimer: This guide is not intended to be and does not constitute legal advice. It is for informative and promotional purposes only. Do not take any action or refrain from taking any action based on this guide, and always consult with a qualified professional about the circumstances of your particular case. Each set of facts is unique and different circumstances apply to each individual business.

© 2021 Artaev at Law PLLC. All rights reserved.

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business law esports gambling law gaming law internet law tax law

IRS Rulings on Daily Fantasy Sports Wagering: What Does This Mean for Skill-Based Gaming?

Real-money skill-based games are very popular across the world and the United States is no exception. Generally, real-money skill games allow players to compete against others in various games where the outcome is determined by the relative skill of the players (as opposed to chance). In simple terms, it is the same betting your friend $5 on a game of darts or pool at the local pub. Except these games are played online – most frequently on smartphones. Games range from timed solitaire contests (using the same deck), to knife throwing or cup flipping games, to trivia contests. Because chance does not determine the outcome, most states’ anti-gambling laws do not prohibit skill-based games. U.S. based and international companies have been working to invest in this space, using the increasing availability of the internet and smartphone apps to provide entertainment to players seeking to compete against others and win some money in the process.

I have written extensively about legality of skill gaming, as well as the obstacles that developers need to overcome to get their games up and running and advertised.

Besides private company gatekeepers, local law enforcement, and regulatory authorities, there is a new obstacle for skill-based gaming companies. This time it comes from the IRS and could have broad market implications beyond simply paying taxes.

In 2020, the IRS issued two related memoranda regarding Daily Fantasy Sports (“DFS”) wagers. Recall that DFS is an accelerated version of traditional fantasy sports, giving players a chance to set lineups and compete on a daily basis, rather than having just one team for the entire season. DFS is available in 43 states through the two major operators: DraftKings and FanDuel. Similar to pure-skill games, DFS distinguishes itself from gambling by emphasizing that relative skill of the players determines the outcome (as opposed to chance). In some of the 43 states, DFS operates pursuant to government license. In other states, DFS is unregulated and either expressly or implicitly exempt from the statutory definition of “gambling.”

In the first 2020 memo, the IRS considered whether DFS operators (i.e. DraftKings and FanDuel) were required to pay excise tax on wagers pursuant to IRC §§ 4401 et seq. Under federal tax law, each “wager” is subject to excise tax – sportsbooks are very familiar with this provision that requires the bookmaker to pay tax on every bet accepted from a patron. In answering in the affirmative, the IRS defined “wager” without any reference to an element of chance:

“[T]he statutory language in IRC §§ 4401 and 4421 does not differentiate whether an activity involves skill, chance, or some combination of the two. Most importantly, whether DFS is a game of skill for state gambling statute purposes is not relevant for determining whether DFS is wagering for federal excise tax purposes.”

IRS AM 2020-009

At the same time, the IRS did not overturn Revenue Ruling 57-521, which was a 1957 opinion on whether a puzzle contest was a taxable gaming transaction. Rather, the IRS distinguished that in the puzzle contest “the contest participant’s own skill was the only factor involved in winning the puzzle game and there was no chance element at all.” In DFS, the participants use their skill to select a lineup, but then earn points based on the real-world performance of the selected athletes (over which the participants have no control). The IRS emphasized that no matter how educated and skilled a DFS participant may be, there is always a chance that the chosen player or players will perform poorly that particular day, get injured, or suffer adverse effects on their performance from the weather or officiating. Thus, the IRS concluded that the “skill” involved in DFS was similar to the skill involved in traditional sports betting or horse race “handicapping.” Finally, the IRS also explained that that the rate of excise tax (0.25% or 2%) depends on whether DFS is “authorized” under the law of the state where the wager is accepted. The IRS did not explain whether “authorized” means DFS is operating pursuant to express state license or is simply outside of the particular state’s anti-gambling legislation.

Two months after the excise tax memorandum, the IRS relied on essentially the same analysis to conclude that DFS wagers are “wagering transactions” that can be used to offset wagering income during a taxable year under IRC § 165(d). Effectively, DFS wagers are treated the same as gambling losses under the IRC. In its legal analysis, the IRS reiterated:

Any argument 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

IRS Memorandum 202042015

Why does the IRS’s DFS analysis matter for skill-based real-money gaming? Two main reasons: (1) The IRS’s interest in DFS transaction could signal increased tax scrutiny for real-money skill-gaming operators; and (2) the IRS’s legal analysis of whether a skill game is actually gambling/wagering could be adopted by states that currently do not regulate skill-based gaming.

1. Do real-money skill-based game companies have to pay federal excise tax?

There is no doubt that pure-skill games are still exempt from the definition of “wager” and “wagering transaction” for tax purposes. However, it is unclear whether there can be “any” chance at all. The first IRS memo cited a 1957 puzzle game ruling to distinguish pure-skill games, noted “there was no chance element at all,” and concluded that “[t]he existence of chance indicates that DFS contests are distinguishable” from the pure-skill puzzle game at issue in the 1957 memo.

In the second memo, IRS revised its position slightly to conclude that “the test is not whether there is an element of chance or skill, but which is the dominating element that determines the result of the game.” Regardless, the IRS took the position that the outcome of a DFS contest is predominantly determined by chance (as opposed to skill). DFS industry leaders have predictably issued statements opposing the ruling, calling it “deeply flawed” and inconsistent with state court decisions that have held that DFS is a game of skill.

If you are a real-money skill game developer, it is critical to determine whether your game has any element of chance at all. In other words, is your game more fantasy sports or pure contest? If there is any element of chance at all, you must determine whether skill “is the dominating element” of the game. Most, if not all, real-money skill games will pass this second test. At the same time, if your game is more like fantasy sports (for example a stock market or cryptocurrency picking game), your game will likely be considered to involve taxable wagering. This obviously subjects you to the excise tax under IRC §§ 4401 et seq. An added wrinkle is whether you owe tax at the 0.25% “authorized” rate or the 2% “unauthorized” rate. Most skill-based operators operate without a license or governmental approval – but at the same time, they only operate in states where their activities are not prohibited by state anti-gambling laws.

2. Will states adopt the IRS definition of “wager” to regulate real-money skill-based gaming?

Additionally, the IRS analysis may be adopted by states seeking to regulate or prohibit real-money skill games. For instance, if you are paying excise taxes to the IRS, a state regulator can easily use that fact to argue that your game is actually “wagering” and therefore constitutes “illegal gambling.” This is especially troubling because the first “excise tax” memo seems to require “chance only. It is also possible that real-money skill games will be considered “wagering” for the purposes of excise tax imposed by IRC §§ 4401 et seq but not “wagering” for the purposes of IRC § 165(d).

Stay tuned for more on this developing area. It is likely that DraftKings and FanDuel are headed for a showdown with the IRS over the excise tax issue. Any resulting Tax Court decision (or even settlement) will have significant repercussions for the skill-based gaming industry.

Have more questions? Contact Dan Artaev today by emailing dan@artaevatlaw.com or by phone or text at (269) 930-0254.

Disclaimer: This guide is not intended to be and does not constitute legal or tax advice. It is for informative and promotional purposes only. Do not take any action or refrain from taking any action based on this guide, and always consult with a qualified professional about the circumstances of your particular case. Each set of facts is unique and different circumstances apply to each individual business.

© 2021 Artaev at Law PLLC. All rights reserve

Real-Money Skill Gaming in the U.S: Is Your Game More Fantasy Sports or Pure Contest?

In 2021, there are many opportunities to play games for real money online, even if your particular state does not offer full-scale online casino operations. Daily Fantasy Sports (or “DFS”) is one hugely popular entertainment option. Real-money pure-skill contests are another. Video game tournaments, leaderboards, and prize pools are also available, as well as countless other options. Entrepreneurs all over the world want to enter the red-hot United States gaming market, but need to understand the legal nuances in order to effectively distribute their product and avoid legal issues with regulators, banks, and app platforms like the Apple App Store.

With skill-based games, it is important whether your game is more like fantasy sports or whether it a pure-skill contest. This distinction is critical because it determines where your game is legal (and whether you need a license) – and also affects your tax obligations to the IRS.

The following chart illustrates the three categories of games and the applicable regulations:

Description/type of gameCategoryRegulations
Players determine the amount of the wager and may apply certain level of skill to increase odds of winning (like hit or stay in blackjack), but odds always against the player. Winner is determined primarily by chance or chance is the dominant factor in determining outcome. Game is similar to a casino game like slots, blackjack, keno, or bingo. Game is a poker-like game. Game features a random mechanism, like a shuffled deck of cards, roll of the dice, or a spinning wheel. Bet is on the result of a single athletic competition, event, or performance of a single player.GamblingHighly regulated, illegal and criminalized activity (without a license)in all 50 states. Federal law also applies, including the monetary transaction restrictions through the Unlawful Internet Gambling Enforcement Act (“UIGEA”).
Players pay an entry fee, and then use research, data analysis, or other skill to build a team or portfolio to compete against other player-chosen teams or portfolios. Points or scores assigned based on real-life performance. Player does not control the performance of the players, stocks, currencies, or other portfolio components. Real-world events determine outcome. Similar to fantasy sports or a fantasy league. Prize pool must be known and fixed ahead of time.FantasyFantasy sports are expressly excluded from the scope of the UIGEA. Fantasy sports and leagues are permitted in about 80% of the states, but license and revenue tax is required in some. IRS views fantasy wagers as gambling bets and no different than sportsbook betting for tax purposes. Potential exposure to excise tax for providers.
Players pay an entry fee into a sports tournament or skill contest for the chance to win a prize (whether cash or otherwise) based on their own participation. Players determine the outcome through pure skill, such as strength, speed, agility, mental knowledge, mental quickness, or other physical or mental factor. Chance has minimal or no role in the outcome. Head-to-head games of timed solitaire, chess, checkers, blockbuster, Tetris-like puzzle games. Trivia contests. Most video game tournaments. Golf or tennis tournaments, hole-in-one contests.Pure Skill ContestUnregulated and not considered gambling in about 80% of the states. Regulated pursuant to license or outright prohibited in the remaining states. Not regulated under federal law. The IRS does not consider entry fees or skill wagers to be gambling bets.
Copyright 2021 Artaev at Law PLLC. All Rights Reserved. May not be reproduced without the express written permission of the author.

As a gaming company providing a new product, you obviously want to steer clear of classification as a gambling game. Unless you are a licensed casino (or working in partnership with a licensed casino) in one of the few states that have legalized online gambling, real-money gambling games are illegal. Not only do you risk fines and prosecution from state and federal law enforcement, but you will not be able to pass Apple or Google’s app vetting process, advertise on Facebook, or use a mainstream payment processor like PayPal.

Skill-based real money games are those where the outcome is not determined by chance. These games fall either into the “fantasy sports” or “pure skill contest” categories. In either category, the argument is that where chance is not a dominant factor, the game is skill-based and falls outside the definition of regulated “gambling.” Many real-money skill-based gaming platforms have adopted this “if it is not prohibited, then it is legal” approach to offer their products in about 80% of the United States. But there is a difference between the so-called “fantasy sports” and “pure skill contest” categories. The first difference is regulatory – state law treats “fantasy sports” and “pure skill contests” differently.

To fully understand the difference, it is important to know that the “it’s not gambling” argument is not new. In the early 21st century, it was widely used by online poker providers and then daily fantasy sports operators. Recall that between the early 2000s and 2011, Texas Hold’em became huge in the U.S., helped by online pioneers like PokerStars and PartyPoker that allowed anyone to play online poker from anywhere. ESPN was airing the World Series of Poker as part of its routine sports coverage. The 2006 James Bond franchise reboot Casino Royale even focused on high-stakes no-limit hold’em (as opposed to Baccarat in Ian Fleming’s original book treatment).

The primary argument for legality was that poker is a game of skill, not chance, and therefore not gambling. Advocates pointed to the fact that skilled poker players were consistently able to beat their opponents, even though the game did involve the element of chance with a random shuffle of a card deck. In response to growing concern about unregulated real-money poker, a number of courts concluded that chance played a significant role in the outcome and Texas Hold’em is indeed gambling. The federal government took further regulatory action by enacting the Unlawful Internet Gambling Enforcement Act (“UIGEA”). The UIGEA essentially killed off any off-shore poker and other grey-market online gambling operations by targeting U.S. banks and payment providers and prohibiting them from facilitating wagering transactions. Those providers that continued to offer U.S. players real money poker games were shut down through federal law enforcement action on so-called “Black Friday,” April 15, 2011, and their executives charged with a number of felonies, including money laundering and fraud.

Daily Fantasy Sports emerged as an entertainment alternative around 2007 and relied on the same “it’s not gambling” argument as poker. Players would stake real money for a chance to play in a fantasy sports contest, where they would set a daily lineup of their own fantasy team and compete against others for the highest score. The highest score or scores would be awarded cash prizes. DFS relied on the definition of “bet or wager” in the UIGEA that expressly excluded fantasy sports contests. But, just because DFS is not illegal under the federal UIGEA (and MasterCard or Discover can process the associated wagering transaction) does not mean it is automatically legal. Some states concluded outright that DFS is “gambling” and is illegal. Others enacted legislation that DFS is not gambling. And some have done nothing at all. Thus, DFS offerings vary state-by-state: as of the date of this article, DraftKings and FanDuel both offer DFS in 41 of the 50 states. But DFS law is far from settled and remains in a state of flux; for example, in New York, DFS was authorized by the state legislature, but a lawsuit challenging the constitutionality of the law is pending on appeal. Texas is another example – in 2016, the Texas attorney general issued an opinion that DFS is illegal gambling, but both FanDuel and DraftKings continue to offer DFS in Texas pending the final outcome of various lawsuits.

On the other hand, games that are head-to-head contests of pure skill are legal in most states because they fall outside the state’s definition of “gambling.” These games – whether online or in person – allow participants to pay an entry fee and compete for a prize (monetary or otherwise). Even if the game is played on a smartphone, it is no different than paying a fee to play in a money tennis or golf tournament. Or paying an entry fee to participate in an arm wrestling contest at the state fair. In fact, certain states expressly exclude so-called “bona fide contests of strength, skill, or speed” from the definition of gambling, provided that the only persons making the wagers are the participants themselves. But although the analysis seems straightforward, providers of pure-skill contests disagree about where exactly real money games are legal. Various platforms have different lists of “restricted jurisdictions,” demonstrating their different tolerance for risk, and that the law remains unsettled in this area.

The second difference between fantasy and pure skill is tax treatment. Under the Internal Revenue Code, gambling winnings are taxable income, but may be offset by gambling losses. In 2020, the IRS decided that wagers made on DFS constituted a “wagering transaction” (i.e. gambling) under Section 165(d) of the Internal Revenue Code and the Tax Court agreed. This ruling was consistent with another 2020 internal IRS memo that concluded DFS wagers were subject to an excise tax, which is normally applied to wagers made at sportsbooks. The IRS’s analysis and conclusion that DFS is essentially the same as sports gambling has significant legal implications. Not only does it potentially expose DFS providers to millions of dollars in unpaid excise tax liability, but it is also an indicator of how the nature of the game may determine the outcome of “is it gambling” analysis. A game could very well be “gambling” for tax purposes, but at the same time “not gambling” under a state’s definition of “gambling.”

The skill-based gaming market is an attractive, fast-growing industry in the United States. However, it is also plagued by an uncertain legal landscape and inconsistent treatment at the federal and state level. Tax implications are also something to consider when designing your game. Whether you are a start-up or a well-established company looking to introduce a new game product, Artaev at Law can provide you with consulting and legal analysis required to do it right.

Have more questions? Do you need help getting your app through the Apple, Google, or Facebook review process? Contact Dan Artaev today by emailing dan@artaevatlaw.com or by phone or text at (269) 930-0254.

Disclaimer: This guide is not intended to be and does not constitute legal advice. It is for informative and promotional purposes only. Do not take any action or refrain from taking any action based on this guide, and always consult with a qualified professional about the circumstances of your particular case. Each set of facts is unique and different circumstances apply to each individual business.

© 2021 Artaev at Law PLLC. All rights reserved.

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