Until a few months ago, sports betting had to be done “under the table” since it was prohibited by law in all states except Nevada. This changed in May when the Supreme Court reversed the law that prohibited sports betting in physical locations like casinos.
While it’s easy to see why many sports fans are excited to be able to casually (and legally) bet on their favorite teams, many states and the IRS have also been keenly interested in this decision from a tax perspective due to the fact that the annual value of illegal sports wagers is about $150 million. So whether you are an infrequent gambler or you take gambling more seriously, the following are some tax implications you need to be aware of if you participate in sports betting, lotteries, and other gambling activities
What casual gamblers need to know
- In general, if you win $5,000 or more at a gambling venue, the proprietor of the venue will withhold federal taxes at the current tax rate of 24 percent.
- You may also be taxed at the betting venue if your win is 300 times the original bet, even if it is less than the $5,000 threshold. However, you can’t assume that is the only tax you will owe on your winnings. There may also be a state tax assessed.
- If you win $600 or more at a gambling facility be prepared to receive Form W-2G (Certain Gambling Winnings). A copy of this form will also be sent to the IRS, so be sure that any gambling winnings you report on your income tax return are at least equal to the sum of any Forms W-2G you receive.
- Depending on your income, if you are in a higher tax bracket, you will still have to pay any additional taxes when you claim your sports betting win as part of your income.
Taxes on gambling winnings differ from state to state
In addition, many states are currently determining if they will move to expand sports betting and how they will tax both service providers and gamblers. So far only a handful of states (New Jersey, West Virginia, Delaware, and Mississippi), have concrete sport betting tax legislation, but if you plan to gamble in different states you need to keep track of any additional state taxes you may owe on your winnings.
Gambling losses may mean a tax win
Even if you are incredibly lucky, it’s likely that you will have some gambling losses if you regularly gamble on sports or other games of chance. Under the tax reform laws that went into effect this year, you can deduct losses up to the amount of your gambling income if you choose to itemize your deductions, but you cannot carry losses over to the next year if they are in excess of your income.
Unless gambling is your profession and your losses are significant, the increase in the standard deduction for the current tax year (which nearly doubled to $12,000 for single filers) may make itemizing not worth the added hassle.
Record-keeping is essential
If you do plan to itemize your gambling losses, the IRS requires that you keep detailed records of each session of your gambling activities with specifics pertaining to:
- Where, when and with whom you gambled for each time you participated in wagering activity;
- The name, address and location of the casino, racetrack or other gambling venue; and
- How much you won and lost.
Be sure to keep your gambling receipts, wagering tickets and any canceled checks or other items to supplement your own recordkeeping.
What professional gamblers need to know
If you are a professional gambler (i.e., gambling is your full-time gig and you are generating revenue from it) then all of the above information applies to you. In addition:
- Tax reform may up your chances of winning from a tax perspective. This is due to an expansion of the scope of gambling loss deductions that can be claimed as trade or business expenses.
- Under the new tax law, allowable gambling losses include expenses related to gambling activities. This may include your travel expenses when you go to a casino and meals you buy when away from home when you are on business.
- For tax years 2018 through 2025, any expenses you deduct must be added to your gambling losses to calculate the value of your deduction. They cannot be written off as separate business expenses.
Remember, you can only deduct gambling expenses if you are also reporting your winnings as income on your tax return and itemizing your expenses instead of taking the standard deduction.
You can always bet on the IRS
Whether your gambling interests include newly legal sports betting, lotteries, raffles, animal races, casino games, or other activities, don’t overlook your tax obligations. Be sure to keep detailed records of your activity and, if necessary, consult with a tax professional to make sure that you are in compliance with state and federal tax laws related to gambling while also taking full advantage of any additional deductions allowed under tax reform.
Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He offers a free consultation to members of Freelancer’s Union and a monthly email newsletter covering tax, accounting and business issues to freelancers on his website, www.cpaforfreelancers.com, which also features a new blog, how-to articles, and a comprehensive freelance tax guide.
Jonathan is happy to provide an initial consultation to freelancers. To qualify for a free consultation you must be a member of the Freelancers Union and mention this article upon contacting him. Please note that this offer is not available Jan. 1 through April 18 and covers a general conversation about tax responsibilities of a freelancer and potential deductions. These meetings do not include review of self-prepared documents, review of self-prepared tax returns, or the review of the work of other preparers. The free meeting does not include the preparation or review of quantitative calculations of any sort. He is happy to provide such services but would need to charge an hourly rate for his time.