Sick of all those daily fantasy commercials, where DraftKings implores you to trust your gut, or FanDuel barrages you with another seemingly-random promo code? If you live in New York, you're in luck. The industry received a major blow on Tuesday evening, when the aforementioned companies were officially classified illegal gambling sites in the state of New York.

It's a development that seemed inevitable after state Attorney General Eric Schneiderman penned these letters that opened an inquiry into the industry after a DraftKings employee won $350,000 on FanDuel during week 3 of the NFL season following the employee's release of nonpublic data of value to bettors, raising questions of wrongdoing. A DraftKings internal investigation found no improper use of insider information.

In the wake of the scandal and the resulting investigation, Schneiderman has ordered the two sites to stop accepting entry fees in the state. Both companies say they plan to fight Schneiderman's order.

But just because the legality is shifting in New York doesn't mean that fantasy players are off the hook for paying taxes on their winnings. In fact, quite the contrary. It could mean daily players, not just in New York, but around the country, might be under even more scrutiny to claim their prize money on their tax returns this April.

I recently spoke to Chris Grove, Las Vegas-based Senior Consultant at Eilers Research, who has researched and written about both the landscape of gambling and the industry of daily fantasy sports for his paper "eSports Betting: It's Real, and Bigger Than You Think." He told me it stands to reason that the IRS will take an extra hard look at the two companies, and players may expose themselves to risk if they don't disclose how much they've won on the sites.

"It seems inevitable at this point, where you have multiple federal agencies examining the issue, that the IRS would join the parade," Grove said when I asked him about potential scrutiny from the tax agency. "In the coverage of daily fantasy sports, you have numerous individuals talking about the hundreds of thousands of dollars, if not millions, they won on these sites. It would surprise me if these claims didn't attract some level of interest from the IRS."

Anyone with a television can tell you that the most vocal of daily fantasy sports sites' claims is the prize money they hand out. The industry has inundated the public with their big money success stories, and those familiar faces popping up on your screen telling you they've won a pile of cash represent just a fraction of all the action. ESPN's Darren Rovell said last month that FanDuel had given out "close to $2 billion" since its 2009 inception. DraftKings recently told the New York Times that it has 500,000 players in the state of New York alone. It all results in a windfall of cash being dished out every day, and it's all an easy target for the IRS.

But therein lies the problem. Grove speculates that many daily fantasy players might not even know that they owe the tax man.

"My understanding has always been that the players are always taxed where they reside," Grove said, explaining that residents of states that have income tax will have to claim their prize money. "Both sites say in their terms of use that there is a 1099 or a similarly generically-described 'tax form.' Whether players are aware of that or not is the question."

The Unlawful Internet Gambling Enforcement Act, passed in 2006, created the "game of chance" exemption daily fantasy has used to be treated differently than online poker when it comes to legality, but its winnings are treated exactly the same from a tax perspective. And now, with big electronic deposits from these sites likely going to the top of a watch list, this could be the year that players feel the wrath of the IRS.

"I think there's sort of a lack of awareness of tax law in general and daily fantasy is no different," Grove surmised. "I can say with poker that many players are surprised their winnings are taxable."

Unlike a 250-yard, three touchdown game from a "sleeper" running back, the tax surprise may not be a welcome revelation for daily fantasy players come filing time.

Correction: An earlier version of this column mischaracterized as facts the claims of wrongdoing by a DraftKings employee. The column has been updated to note a DraftKings internal investigation found no improper use of insider information.

Published on: Nov 12, 2015
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