Sports Betting is Here – What’s the Tax Impact?

By Nate Somes December 20, 2023

Federal regulators don’t usually release gambling data tied to sporting events, but the IRS and state agencies collect a large share of this booming betting market from both operators licensed in the industry and the individual tax filers who gambled. Sports betting has increased in popularity and has been a hot topic nationwide over the last few years. A recent study conducted by Nielson Company last year showed that 46% of American adults, nearly 106 million people, have at least some interests in sports betting.

Over thirty states have legalized sports betting in one form or another. With the legislation passed last year, Maine became one of the most recent states to begin operations with legal sports betting. It is paramount for a quick refresher on how gambling can impact you from a tax perspective.

Here are five prevalent facts to keep in mind when sports betting, or gambling in the general sense:

1. Gambling Winnings may trigger the issuance of IRS Form W2G (Casino) or Form 1099MISC (Sportsbook)

When you receive winnings from a mobile or in-person betting operator that exceed a certain threshold, the IRS requires that the payer (casino/sportsbook) issue a Form W2G or Form 1099MISC to you reporting your gambling winnings. The applicable thresholds to receive a Form W2G for casino winnings are:

• $1,200 for bingo and slot machines
• $1,500 for keno winnings
• $5,000 for any poker tournament winnings or other casino winnings

Similar to a W-2 from your employer, the gambling winnings reported on IRS Form W2G must be reported on your individual tax return. Do not forget to provide your accountant with all your Form W2Gs because the IRS has a matching system that can match your social security number with the EIN of the casino/sportsbook that relays what should be reported as income on your tax return.

For mobile sports gambling, the online sportsbook has different thresholds and reporting requirements. Throughout the year, a taxpayer might receive a Form W2G for “one-time” winnings over the above thresholds at a casino, but sports betting is treated differently. In addition to the W2Gs that might be provided, if your net sports betting earnings are above $600, or 300 times your original wager, each player also can expect to receive a Form 1099MISC reporting that person’s net earnings throughout the previous tax year. Similar to the W2G forms, the issuer sends copies to both the player and the IRS, and the IRS will look for that detail on the player’s tax return.

The formula used from a sportsbook, Draftkings for example, is:

Net Earnings = (Cash Winnings – Cash Entry Fees) + Cash Bonuses

For calendar year 2023, if you have cash winnings of $2,000 and cash entry fees of $1,000, your net earnings for the year are $1,000. Since it is above the $600 threshold for a Form 1099MISC, in early 2024 you will receive a Form 1099MISC showing $1,000 to report on your 2023 tax return. Entry fees and winnings are based on the calendar year in which the contest or sporting event ends and the wager is settled.

Are winnings reportable on your tax return even if you did not receive a Form W2G or Form 1099MISC? Absolutely so. Taxpayers should be reporting all types of wagering and gambling winnings on their tax returns as “other income,” including winnings from your office football pool.

2. You can choose to withhold federal and state taxes on gambling winnings

If your gambling winnings are over $5,000 or more than 300 times your wager, the IRS requires that the casino/sportsbook withhold at least 24% from your winnings before the cash is paid out to you. It does not matter whether the winnings are in the form of cash, property, or an annuity. You can choose to voluntarily withhold income taxes from your winnings on a Form W2G even if not above the threshold, and the payer will usually inquire whether you would like to do so before issuing you the form. However, the choice is up to you.

One might think that the 24% withholding would cover the total amount of incremental tax created by the winnings reported on Form W2G. However, 24% is simply the default rate. If you are a high-income taxpayer, the tax impact of your winnings can easily exceed the withholdings. For example, if you won $100,000 and were in the highest tax bracket (37%), $24,000 would by default be withheld from your winnings at the federal level. However, the incremental tax would be $37,000, leaving you $13,000 short. The advice:  Don’t go spending all those winnings before you know how much you will owe with your tax return.

3. Unless gambling is your profession, your losses may not be deductible

It is a common but debunked myth that everyone can deduct their gambling losses when computing their taxable incomes. However, this belief can create an unfavorable surprise the next tax return you file.

Unless you are a professional gambler and can show the income and losses on your Schedule C, you must itemize your deductions in order to deduct your losses against your winnings. Alternatively, if you claim the standard deduction on your return, your gambling losses would not be deducted at all.

In order to itemize your deductions in 2023, for example, your total amount of itemized deductions (real estate taxes, mortgage interest, charitable contributions, etc.) must be greater than the standard deduction of $13,850 for single tax filers. If it is not, you could lose out twice, first for losing your bets at the casino or online, and a second time for not being able to deduct your losses against any large winnings that are includable in taxable income.

If you do not itemize deductions and use the standard deduction, the IRS and state agencies treat your losses as a personal expense; you might as well say it was spent on a movie ticket on a Sunday afternoon.

The amount of itemized deduction for gambling losses is allowed only up to the amount of gambling winnings reported as income on your individual income tax return.  In other words, no net losses may be reported.

4. Losses must be substantiated

Both online sports betting apps and in-person betting operators are getting better at substantiating gambling losses. While this is in progress, the IRS has made it clear that “to deduct your gambling losses, you must be able to provide receipts, tickets, statements, or other records that show the amount of both your winnings and your losses.” A diary of your wins/losses, tickets, credit card records, or payment slips can be invaluable if facing an IRS audit.

While most sportsbooks and casinos offer the ability to keep track of your winnings and losses, it is always prudent to keep good records personally. If there is no record of the losses you sustained, the IRS will disallow those itemized deductions.

5. State and local taxes may be applicable

Las Vegas and Miami are hot spots for fun, sun, and gambling. Florida and Nevada also do not have an individual state income tax. Most states charge excise taxes on the gross gaming revenue, but those taxes are remitted to the state by the casino or sportsbook operators.

Effective August of 2022, the required rate for gambling winnings in Maine became 7.15%, the highest personal income tax rate. This means that if you meet those winning thresholds stated under the first tip above, you will be withheld on 31.15% of those winnings: 24% federally and 7.15% to the state of Maine.

Unless you hate money, your primary goal when wagering is to turn a profit. The reality is that the federal and state governments view gambling winnings the same way we view our paycheck: It is income.

Always be safe, use disposable income that you are comfortable with wagering, and have fun gambling!

For more information, please contact Stanley Rose or your BNN tax advisor at 800.244.7444.