Fantasy sports generally involve selecting team members and then earning points when the selected team players compete in real-world sports events - the players with the highest points win. Such games often require an entry fee and pay cash or other prizes to the winners.
Code Section 165(d) denies a deduction for losses from "wagering transactions" except to the extent they can offset wagering winnings. The IRS Chief's Counsel recently opined on whether the entry fee to play a fantasy sports event is a wagering transaction subject to this loss limitation.
The opinion concluded that the fee is a wagering transaction because there is an uncertain event (the live performance of the selected players) upon which winning or losing turns. It rejected the argument that fantasy sports is a game of skill (presumably the skill of drafting and/or acquiring good players) and would thus not be a wagering transaction under applicable case law. While it acknowledged that skill is an element, the element of chance dominates the outcome, and thus the entry fee is in the nature of a wager.
The opinion analogized fantasy sports to poker games and horse race betting, both of which involve some element of skill, but for which the dominant factor in winning or losing is an event that is beyond the control or skill of the player.