TAXES ON ONLINE SPORTS BETTING IN THE UNITED STATES
April can sometimes make or break us, depending on your own personal tax situations. And with the rise of legalized sports betting in the U.S., many Americans have taken the plunge and placed a bet on their favorite team. According to the American Gaming Association, nearly 22 million Americans bet on Super Bowl LIII, with a staggering $6 billion wagered. Unlike past Super Bowls, this year’s game featured plenty of wagering in states beyond Nevada. A total of eight states offer legalized, regulated sports betting with a dozen more on the brink of legalization this year.
The state of New Jersey offers some insight into where the industry is headed as more states continue to open the betting windows.
Accordiing to the New Jersey Division of Gaming Enforcement (NJDGE), brick and mortar casinos in Atlantic City and Horse Tracks around the state along with mobile sportsbooks took $34,894,900 in wagers. They paid out a total of $39,469,147 from those wagers. In total New Jersey sportsbook operators lost $4,574,247 or 13 percent from wagers on the Super Bowl.
Do you wonder about online sports betting taxes and how your winnings are taxed by the IRS? SafestBettingSites.com has prepared an exclusive guide covering taxes on gambling in the US for citizens, and the legality of betting 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 professional accountant Kim Walker, will help you learn about the different ways that your winnings are taxed and other helpful information.
You Have To Pay Sports Betting Taxes
Gaming income from betting sites, like most other income, 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. A few examples:
■ 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.
■ 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.
A W-2G form is issued “on the spot” by casinos. You will not receive a duplicate at the end of the year. 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/lottery winnings
■ Sweepstakes and 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. 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; more details 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; even if your actual losses are higher. Excess losses are lost, not carried forward to the next year.
One of the problems that taxpayers are running into with new 2018 tax law (Tax Cut and Jobs Act), is that they 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 you predict 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.
All Online Gambling Is Taxable
It’s worth hammering this point home, even with the explanation 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 tax myth that is important when it comes to online sports betting is: 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 earned gambling income. You are required to report that income. When a 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: Keep Good Records
Few gamblers know this, but the Tax Code requires you to record 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.” As both winnings and losses require you to keep a diary/log, what information does it need to contain?
■ Amounts you won or lost
■ Date and type of specific wager
■ Name and address of the gaming establishment
The IRS also 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 frequent only a few casinos, it might be easier to have a player’s card or VIP card for each location. By using this card every time you gamble in the casino, your wins and losses are automatically tracked for you. At year-end, the casino makes a report available to you with all pertinent tax information.
The biggest thing to remember 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 while betting on sports at an online sportsbook. The amount you won is 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. You have a net profit of $5,000, but 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 record your net profits in the “Other Income” line to keep your tax liability correct.
It’s a big mistake if you don’t think there is much of a difference between this and putting down the net result. 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 to Adjusted Gross Income (AGI). Gambling income or losses increase your AGI. This can limit your deductions in other areas, like medical expenses or other deductions.
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 bettor. 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 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
■ The expertise of the gambler is considered, as is the years of experience
■ The time and effort expended in carrying on the activity
■ 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.
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 normal income tax. Even with the additional expense deductions, it may not be worth it. This is something that needs to be analyzed carefully. Just keep in mind that the IRS takes a close look at taxpayers claiming to be professional gamers. You may really have to step up your game to qualify. ♠
Sports Betting and Uncle Sam was published in Digital Casino Player starting on page 54. This article was first published at www.SafestBettingSites.com, The exclusive Professional Guide to Sports Betting Taxes. To read the full article, visit https://www.safestbettingsites.com/strategy/sports-betting-taxes.