Sports Betting Taxes – Professional Guide
Taxes On Online Sports Betting In The United States
Have you ever wondered about online sports betting taxes and how your winnings are taxed by the IRS? This article covers taxes on gambling in the US for U.S. citizens plus the legality of betting sports online (spoiler alert: in most states, it’s perfectly legal). Paying taxes on any sports betting winnings is completely normal, and the IRS will view it as such.
Our guide, prepared by a professional accountant, will help you learn about the different ways that your winnings can get taxed and other information that will help as a gambler. For information on sports gambling taxes in other countries, head over to international sports betting.
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Sports Betting Taxes – You Have To Pay
Gaming income, from MyBookie, Fanduel or Draftking Sportsbook, is like most other income you receive during the year, is taxable. Whether or not you receive a W-2G, the income you “earned” is required to be reported on your personal income tax return. As an example, you will not receive a W-2G for slot machine play if your jackpot is under $1,200. The casino is not required to issue this form until your winnings reach $1,200 on a single jackpot.
Likewise, keno wins are not supported by a form W-2G until the winnings reach $1,500 per play. For poker, the amount is $5,000 from a tournament win. In other words, each game has unique rules as to when the casino is required to issue a W-2G. The receipt of a W-2G does not dictate whether or not the winnings are taxable. Any wins are reportable on your personal income tax return regardless of whether or not you received a W-2G.
W-2Gs are issued “on the spot” by casinos. You will not receive a duplicate at the end of the year. Therefore, it is important to keep track of any W-2Gs received throughout the year. The IRS also receives a copy and will notify you if your tax return does not match their records. Specifically, for 2018, the gross gaming income is reported on Form 1040, Schedule 1, Line 21 – other income. Reportable gaming income includes:
- All sportsbook winnings
- Horse or dog racing
- Bingo winnings
- Lottery winnings
- Game shows
- Raffle ticket winnings
- Prize winnings
- Gross winnings from all types of casino games
You cannot net your gaming winnings with your gaming losses and report that net amount on line 21 of the tax return. Gaming losses are reported separately in another location of the tax return. Line 21 is for gross gaming winnings regardless of losses or the cost of those winnings.
Example: You won $700 playing bingo and during the year you spent $600 to play. Line 21 of the tax return would show the gross winnings of $700 even though your net gain was only $100.
W-2G for your gaming income
If you receive a W-2G for your gaming income, it is easy to determine what to report on your tax return. But what if you do not receive a W-2G? It is then up to you to know that gross income number and report the correct amount of winnings accordingly. In fact, you are required, to keep a gaming diary or log of your winnings in order to be confident of your earnings.
Do you report the gaming losses or costs, such as the cost of raffle tickets? You report those amounts on Schedule A (itemized deductions) of the form 1040, line 16, “other itemized deductions”. In order to be able to legally deduct your gaming losses, the IRS requires that you maintain an accurate gaming diary or similar record of your losses on which we touch in more detail in a section below.
In any case, your gaming losses cannot exceed your gaming winnings in any one year. In other words, if your gross winnings are $1,000 for the year, you cannot deduct more than $1,000 on your tax return for the year even if your actual losses are higher than that. Excess losses are lost, not carried forward to the next year.
One of the problems that taxpayers are running into since the passage of the new 2018 tax law (Tax Cut and Jobs Act), is that many taxpayers will no longer be eligible to itemize their deductions. This eliminates the need for a Schedule A and thus eliminates a place to deduct gaming losses. Each taxpayer will be in a unique position of course, but for minimal gaming losses, you may not be able to shelter the gaming income at all.
Another thing to consider is the tax liability of your winnings. If your gaming earnings are represented on a W-2G, you have the option of having taxes withheld at the time of payment. This is advised, especially if the winnings are substantial, to avoid owing money when you file your personal tax return for the year.
If your winnings are not reported to you on a W-2G, and if you predict that your net winnings for the year will be impactive from a tax point of view, you may need to make an estimated tax payment during the year to avoid a penalty when you file your return in April. The form used for estimated tax payments is a 1040-ES.
Filing as a professional gambler
Unless you’re filing as a professional gambler. Professional gamblers can net their net their wins and losses for the year. However, the vast majority of gamblers and will be filing as recreational gamblers. Most will be putting their gambling wins on the “Other Income” spot, which is line 21 on their taxes. Their losses must be reported as an itemized deduction on Schedule A. More about being a professional gambler below in the article.
All Online Gambling Is Taxable
It’s worth hammering this point home, even with the explanation that given above. Even if you gamble online, and the site is located in another country, you still have to pay taxes on it. Internet gambling is unregulated in most parts of the country, but taxes are still due to what the government deems as illegal income. Just because you didn’t receive a W-2G form, doesn’t mean your winnings aren’t taxable.
One particular tax myth that is important when it comes to online sports betting is that winnings aren’t taxable if you haven’t withdrawn from an online sportsbook. According to IRS tax law, it doesn’t matter where the money is won, and for it to be taxable, it doesn’t need to be repatriated.
In other words, if you win your wager at an online sportsbook, with a local bookie, or in another country, you have gambling income. That income is required to be reported. When the wager is won, it counts as income. It’s still income even if it doesn’t hit your bank account or you haven’t received it.
Holding Funds In An Offshore Account
Many bettors think that if you’re holding funds in an offshore account in an online gambling site, that the money is not yet taxable. The IRS has stated in other cases that citizens “…are taxed on income that is available to you, regardless of whether or not it is in your possession.”
It’s hard to argue that the funds in a sports betting account aren’t “available to you.” You can continue to make bets with the money and earn more profits. The IRS won’t likely be on your side on this issue. The agency’s view of offshore gambling and financials isn’t exactly in a positive light, and they may view it as tax avoidance. There hasn’t been a landmark case when it comes to this subject and online sports betting. A case like this would likely end up in tax court, where it’s highly doubtful you will come out victorious.
It’s unlikely they would seek jail time and the fines might not be too bad, but it’s simply going to be an uphill battle trying to convince the Tax Court that the funds were not available to you. Most likely, it’s going to cost you extra time and money, and you’re probably not going to win.
Online Sports Betting Taxes – Record Keeping
Few gamblers know this, but the Tax Code requires filers to record their wins and losses by session. It’s debatable what this truly means, depending on the form of gambling, but the IRS requires you to keep track of “sessions.” Since both winnings and losses require you to keep a diary/log, what information does that diary need to contain?
- The amounts you won or loss
- The date and type of specific wager
- Name and address of the gaming establishment
In addition to the diary, the IRS recommends that you keep other supporting documentation such as bank statements (to substantiate an ATM withdrawal), credit card statements if applicable, voided lottery and/or gaming tickets, racing schedules, and the likes.
If you tend to frequent only a few casinos, you might find it easier to have a Players Card for each location. If you use this card every time you gamble in the casino, your wins and losses will be automatically tracked for you. At year-end, the casino makes a report available to you with all of the pertinent tax information.
Again, the biggest thing to remember here is that you must account for both your winning and losing wagers, but you can’t report a net amount on your tax return. The net amount being the amount you profited or lost from your gambling wagers or activity. You will need to calculate your winnings and losses separate, with both numbers going in different spots on your tax form.
Online Sportsbook Winnings Record Keeping
Let’s say that you won $15,000 betting sports in a particular year at MyBookie Sportsbook. The amount you won would be reported on the “Other Income” line on your tax forms. However, you also can report $10,000 in losses. The losses are reported as an itemized deduction, which is reported under Schedule A. Even though you had a net profit of $5,000, this isn’t how you report recreational gambling winnings to the IRS. It’s important to record your wins and losses in the appropriate sections and not to record your net profits in the “Other Income” line to keep your MyBookie tax liability correct.
You may not think that there is much of a difference between this and putting down the net result, but that is a major mistake. If you don’t itemize your deductions, you won’t be able to count your gambling losses. Many items on your return are also tied Adjusted Gross Income (AGI). Gambling income or losses increase your AGI. This can limit your deductions in other areas, like when it comes to medical expenses or other itemized deductions.
Betting Tax – Filing As A Professional Sports Bettor?
The rules and reporting methods for professional gamers are different than those for the casual gamer. A professional gambler is viewed as being engaged in a business and as such, reports the gaming activity on a Schedule C as part of the form 1040.
What determines whether or not you are a professional?
There are few factors that distinguish an amateur from a professional sports bettors. When gambling activities are pursued full time, in good faith, and with regularity, to the production of income for a livelihood and is not a mere hobby one can consider himself/herself a pro sports gambler.
The burden of proof is on the gambler to prove this status. The manner in which the gamer carries on the activity is considered; is it a studied, scientific approach using the same forecasting as used in a regular business. Below are other important considerations that lead to this determination:
- The adequacy of accounting and record keeping is considered
- The expertise of the gambler is considered as is the years of experience
- The time and effort expended in carrying on the activity is considered
- The overall success is considered as is the history of losses with respect to the activity
- The recreational aspect of the gambling is reviewed versus the attitude of it being a for-profit endeavor
There is a possible benefit of being a professional gamer from a tax point of view. In addition to deducting your gaming losses, you can also deduct any ordinary and necessary business expenses needed to pursue the endeavor. This might include your computer, internet fees, office supplies, research materials, travel, business meals, and telephone. As with any other business, you must have proper receipts and documentation to support the expenses you are claiming.
Also, remember from above, that if you don’t itemize, you lose your gaming losses. Reporting your gaming income on a Schedule C, eliminates this roadblock. The downside of a net gaming profit on a Schedule C is that the income is subject to self-employment tax in addition to the normal income tax. Even with the additional expense deductions, it may not end up to be worth it. This is something that needs to be analyzed carefully. Just keep in mind that the IRS takes a very hard look at taxpayers claiming to be professional gamers. You may really have to step up your game to qualify.
Will The IRS Know If I Don’t Pay Tax On Online Winnings?
As stated above, underpayment of income tax may result in penalty and interest being charged on your return. Many other components on the return are factored into whether or not you will owe a penalty so you will have to look at your return uniquely. The IRS is well aware that there is unregulated gambling going in the United States, to the tune of billions of dollars every year. A large portion of this money isn’t being reported and therefore isn’t taxed. IRS regulations state that all gambling is taxable, but they’re not really expecting a recreational gambler who has one big night at the blackjack table or poker room to report that income.
However, when you become a +EV bettor and start making serious money, you can bet that they want their cut. If you’re being paid by bank wire or check, all of that will easily be viewed if you’re ever audited. Even if you hold the funds in sports betting account or a bitcoin wallet, you’re going to have to cash them out eventually. If you become a truly successful sports bettor, the consequences of not reporting your income can be pretty disastrous. Ultimately, it’s your decision, but the penalties may be far worse than trying to save some money on your return.
Fraudulent Tax Return – Warning
Filing a fraudulent return can result in heavy fines, up to $250,00 for an individual or $500,000 for a corporation. There’s also the threat of criminal prosecution and prison up to 3 years. Even for lower dollar amounts, fines can be as much as $5,000 and 100% of the amount of unpaid tax owed.
If you become a highly successful sports bettor, it’s simply not worth throwing away your profits and potentially your freedom over not paying taxes. It’s sad that the government has done so much to attack both sports betting and online gambling over the years that we’re forced to subsidize their actions, (which make it harder for us to bet) but we still have to pay taxes on our winnings. The consequences of not paying and getting caught are one gamble that we suggest bettors don’t make.
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Kim Walker is a Certified Public Accountant residing in Las Vegas, Nevada. Her areas of concentration are small business owners and their specific accounting and tax needs. Services include business and personal tax return preparation, entity selection and business startups, business plan development, and IRS problem resolution and bookkeeping. You can inquire about her tax services by visiting her website.
For more tax information, you can go directly to the IRS websites and review their publications related to gaming income. Publication 525 discusses gaming income while Publication 529 discusses gaming losses and the required documentation.