With the biggest sporting event of the year just around the corner, and with sports betting being one of the largest growing industries, the tax implications of gambling is a very relevant topic. According to a New York Post article, the American Gambling Association is predicting that over $23.1 Billion in wagers will be placed on the “Big Game” in 2024. The report also notes that only $1.5 Billion of these wagers will be placed legally! Sports betting has not been legalized in all 50 states, so any wagers placed in states that have not legalized sports betting are included in this number of illegal bets. The remaining illegal bets can be attributed to tax avoidance. Some people dodge taxes on their gambling winnings by using non-regulated websites and other modes of gambling, or by simply failing to report their winnings as income on their individual tax returns.
When Do You Need to Report Winnings/Losses?
The answer to this question is simple… always! The IRS rules note, “You must report all gambling winnings on Form 1040 or Form 1040-SR (use Schedule 1, Form 1040), including winnings that aren’t reported on a Form W-2G.” Form W-2G is required to be issued by the payer if you receive certain gambling winnings subject to income tax withholding. However, whether you receive this form or not, taxpayers are required to report all activity.
Most individuals participating in sports betting would be considered “casual gamblers,” and are required to report winnings and losses on their individual returns. An individual can report losses in their itemized deductions; however, the losses can only be deducted up to the amount of winnings the bettor incurred. If the individual incurs winnings that exceed losses, that amount of income is taxed as ordinary income.
Generally, individuals are allowed to itemize and claim a deduction for their gambling losses up to the amount of their winnings reported on Schedule A. In 2017 the Tax Cuts and Jobs Act (TCJA) temporarily removed the limitation that losses could not exceed 2% of AGI (this change is set to expire at the end of 2025). Additionally, professional bettors could no longer carry a net operating loss in their business, above the amount of their winnings.
When Can Individuals Count Betting as a Business?
This question is becoming more relevant with the exponential growth of the sports betting industry. Professional gamblers are allowed to deduct any related expenses of “the business,” but are still required to abide by all existing tax laws and regulations regarding these deductions and relevance to the business. Most individuals would report these income/expenses via Schedule C; however, legal entities can be created in some scenarios (where all the income and expenses will be reported, and then will flow through to the individuals involved.) GYF is available to assist taxpayers in these situations.
If you plan to place any wagers on the Super Bowl this Sunday, it is important that you understand the tax implications of those bets. You also need to be diligent in keeping up with reporting your winnings or losses, as a failure to do so and pay the related taxes could result in significant penalties.
If you have any questions on this topic, please feel free to reach out to a GYF Tax Professional at 412-338-9300.