Whether the bet is legal or even if the winnings are officially reported to the IRS (using a form W2-G) as far as the IRS is concerned if you have gambling winnings you are supposed to report them as income on your tax return. 

Sports betting and taxes

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Daniel A. Mace, CPA

It seems like everywhere you look, you are seeing more advertising for both sports betting and daily fantasy sports betting (which is really just a specific type of sports betting). This is really no surprise as the U.S. Supreme Court opened the door for more legal sports betting in May 2018. Of course, whether it is legal to bet on sports will depend upon which state you live in and what the local laws allow.

Do I have to pay tax on sports bets?

The simple answer is YES. While sports betting has become more popular, income tax rules have been the same for some time. For tax purposes, sports betting is treated as gambling income. If your wager is in a legal casino or sports book, you will be issued a W2-G if the following applies:

  • You won $1,200 or more from a bingo game or slot machine
  • You won $1,500 or more at Keno
  • Your poker tournament winnings were more than $5,000
  • You won $600 or more and your winnings were at least 300 times the amount of your bet (think Sports Betting)
  • The payor is required to withhold federal income tax on the winnings

However, whether or not the bet is legal or whether or not the winnings are officially reported to the IRS (using a form W2-G) as far as the IRS is concerned if you have gambling winnings you are supposed to report them as income on your tax return.

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Can I deduct my losses?

This one is more complicated. The simple answer is YES, but with some caveats. The first requirement to deduct losses is that you must keep detailed records of your winnings and losses. This means that you really need to keep a log of your losses (and your winnings). Unfortunately, this is where many taxpayers have a hard time substantiating their losses.

Assuming you have a detailed log of your winnings and losses, you only get to take losses to the extent of your winnings. So, if you win a $5,000 bet but lose $8,000 in other bets, your deduction is limited to $5,000. There is no carryover, the losses must be incurred in the same year as the win. In addition, the loss is reported as an itemized deduction on Schedule A. If you are taking the standard deduction, you will not get any benefit for the allowed gambling deduction.

Note that these reporting requirements are for “Casual Gamblers”. If you are a “Professional Gambler” your rules are different and are beyond the scope of this article.

Can I just ignore gambling income and losses?

This is a really bad idea. There are no specific IRS rules relating to failing to report gambling income. Generally, the penalty for failing to pay the tax you owe is one half of a percent (0.5%) of the unpaid tax, assessed monthly until it reaches 25% of the unpaid liability plus interest. However, this penalty assumes that you reported the income on your return, you just did not pay the tax. The real penalties come from intentionally omitting income from your tax return. These penalties are very punitive, and if the IRS determines that there was a “Willful attempt to evade or defeat tax” you can be charged with a felony, up to $100,000 fine, five years in prison or both.

Does gambling income affect anything else on my return?

This is something that is often not considered when gambling income is included on your tax return. Since the income is reported “above the line” (which in simple terms means before deductions) and the losses are part of your itemized deductions, this income increases your Adjusted Gross Income. There are several items that are phased out as your Adjusted Gross Income increases, including:

  • Tuition and fees deduction
  • Student loan interest deduction
  • Education savings bond interest exclusion
  • Lifetime Learning and American Opportunity credits
  • Education savings account deductions
  • Child Tax Credit
  • Savers Credit
  • Earned Income Credit
  • Roth IRA contributions
  • Passive Loss in Active Rental Real Estate

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This essentially means that if you were able to take one of the above tax advantages without the gambling income, including the income may limit your benefit. This is true even if you are itemizing your deductions and have gambling losses that will offset the winnings.

As sports betting becomes more popular (and there is no reason to believe it will not) and as more states pass legislation to legalize sports betting, there is going to be a temptation to partake for some people. If you choose to place wagers, it is best to keep a detailed ledger of your bets so that you can maximize any deduction you may be eligible to take.

Daniel A. Mace, CPA, Senior Manager, specializes in providing tax services to small businesses, individuals and nonprofit organizations. You can reach him at (520) 836-8201 or DanM@hhcpa.com.