How Do Taxes Work on Sports Betting?
Have you ever been to a sportsbook and heard the term “You have to sign for it”?
Before the advent of legalized online sports betting in New Jersey and Pennsylvania, my friends and I used to head to Parx Racetrack outside of Philadelphia to wager on horse racing. Occasionally, someone would place a $2 trifecta and a bomb or two would come in the top three, and that small wager paid $2,000, maybe even $3,000.
When my friend went up to cash the ticket, the workers at the booth made him sign an IRS tax form. Those winnings would end up getting taxed at the end of the year.
If that happened to you for the first time, that was usually the moment that you found out how taxes work on sports betting.
How do taxes work on sports betting?
I was recently getting ready to watch the Manchester United Everton Premier League match, right after the Toffees were docked 10 points in the table.
While Manchester United was struggling, the Red Devils were still the in-form team in the top flight, and went to Goodison as a slight underdog with odds of +170 to win. I knew that Marcus Rashford had reunited with his ex-fiancee, which typically preceded a hot streak finding the net.
Real Madrid was playing as well that Sunday, and of course, you have to back Jude Bellingham, the recent Golden Boy winner. When I put together my parlay wager for that morning, I staked $50 with odds of +1380 on both players mentioned to score, and United and Madrid to win.
Guess what? I was nearly $700 richer by the time the two matches ended. I was thrilled to win that type of wager. At the time, I did not think about how much individual taxes I had to pay on my sports betting win, or even when I had to pay taxes on that sports betting victory.
But when you wager on sports in the United States (or horse racing, fantasy sports, any type of wagering that you can win money), you must pay tax on winnings. Yes, winnings are taxable income. And you might be required to pay taxes on the federal and state level when you file your individual income tax forms.
So how do know?
How do taxes work on sports betting: Federal (IRS) level
The rate at which your sports betting winnings are taxed depends on your total income, including your gambling winnings and losses from sports gambling.
According to the IRS, all gambling income counts as taxable income and must be reported on your tax return. This includes things like lottery wins, raffles, horse races, casino prizes, and even winnings from sports betting or fantasy leagues: you must pay taxes on anything you win.
Here’s the thing: You must report all your gambling wins to the IRS, no matter the amount. Some folks think you don’t need to report wins less than $600, but that’s not true. Even if it’s a few bucks, you gotta tell the IRS about it. And if you win more than $600 or over 300 times your initial bet (let’s say you bet $1 and win $400), the player must report that big win to the IRS.
How do taxes work on sports betting: State level
It is worthwhile to understand the tax considerations in the state you live in for your tax returns and other tax years in the future.
Each state has its own gambling tax laws, generally taxing winnings in the state of betting or the bettor’s residency. Online and app-based sportsbooks have proliferated, serving as platforms for sports betting.
Legal disputes persist regarding online sportsbooks’ jurisdiction. These entities claim bets occur where they’re registered or host servers, while tax and law enforcement agencies contend bets happen where the bettor resides or makes the bet. It depends on the state of residency.
Let’s explore the outcomes when you strike gold and the tax implications for your state earnings.
Here is a table showing how much each specific state taxes sports wagering winnings:
| State | Tax Rate |
|---|---|
| Arizona | 10% online, 8% retail |
| Arkansas | 13% of first $150 million, then 20% |
| Colorado | 10% |
| Connecticut | 18% online, 13.75% retail |
| Delaware | 50% |
| Illinois | 15% |
| Indiana | 9.5% |
| Iowa | 6.75% |
| Louisiana | 15% online, 10% retail |
| Maryland | 15% |
| Michigan | 8.4% |
| Mississippi | 12% |
| Montana | Revenue minus management fees |
| Nebraska | 20% |
| Nevada | 6.75% |
| New Hampshire | 51% |
| New Jersey | 14.25% |
| New Mexico | N/A |
| New York | 51% |
| North Carolina | Revenue minus expenses |
| Ohio | 10% |
| Oregon | Revenue minus management fees |
| Pennsylvania | 36% |
| Rhode Island | 51% |
| South Dakota | 9% |
| Tennessee | 20% |
| Virginia | 15% |
| Washington | TBD |
| West Virginia | 10% |
| Wyoming | 10% |
| District of Columbia | 10% |
How to pay taxes on sports betting?
Sportsbooks are mandated to disclose any winnings exceeding $600 to the IRS. However, this obligation doesn’t relieve you from personally reporting your income. You are required to report wins (and losses if you itemize and don’t take the standard deduction) when you file your taxes (both federal income tax and state tax if applicable, depending on the tax code in your state where you live).
Being meticulous in your tax filings is crucial, as many individuals tend to underreport their gambling winnings, even though the IRS might already be aware of this income.
Based on the type of bet, you may receive a Form W-2G, 1099-MISC, or 1099-K from the sports book paying out your winnings. This is if you are a professional gambler or someone who is placing bets for fun.
Irrespective of the received tax form, you must report gambling gains (inclusive of sports bets) on your Form 1040, Schedule 1, Line 8, categorized under “Other Income”.
Remember, this includes all winnings. Losses are only deductible if you itemize your taxes, and the same applies to the initial stake money. IRS guidance specifies that upfront stakes can be deducted on Schedule A, not available to those opting for the standard deduction.
The matter of whether upfront stakes reduce taxable winnings remains ambiguous. While some guidelines suggest paying taxes on the entire amount collected, others propose paying taxes only on the enriched amount after deducting the initial stake. This ambiguity pertains solely to wagers with upfront stakes.
How to correctly pay taxes on sports betting
Here is a step-by-step guide on the process:
- Calculate Your Winnings: At the end of each betting session or sports event, calculate your total winnings. This includes any cash or non-cash prizes won.
- Keep Detailed Records: Document the date, type, and amount of each wager, along with the name and address of the gambling establishment or the names of other people present with you at the gambling location. This evidence can be in the form of tickets, receipts, statements, or similar records.
- Determine Taxable Amount: Combine your winnings with your other income to determine your total taxable income. Tax rates on your gambling winnings will depend on this total income. Report all gambling winnings.
- Complete Appropriate Tax Forms: If your winnings exceed certain thresholds, the IRS requires you to fill out a W-2G form.
- Account for Losses: It’s important to note that you can deduct your betting losses, but only to the extent of your winnings. To accomplish this, you should itemize your deductions on Schedule A of your tax return.
- Make Estimated Tax Payments: If you anticipate owing $1,000 or more when your return is filed, you should make estimated tax payments throughout the year.
- Submit Your Tax Return: Finally, ensure you submit your tax return by the due date, usually April 15th. If you miss this deadline, you may be subject to penalties, and you’ll have to pay extra.
- Seek Professional Help: The tax laws surrounding sports betting can be complex. It’s advisable to consult a tax professional to make sure you are following the correct procedures and taking advantage of any potential deductions.
Methods to Pay Taxes on Sports Betting
- Online Payment: The IRS provides several online options to pay your taxes. These include Direct Pay, EFTPS (Electronic Federal Tax Payment System), and IRS2Go mobile app. You can also use debit or credit cards through a payment processor, although keep in mind that the processor may charge a fee.
- IRS Mobile App: The IRS2Go app allows you to make payments directly from your bank account. The app is free and available on Google Play, the App Store, and Amazon.
- Direct Pay: This is a secure service provided by the IRS that lets you pay directly from your checking or savings account for free.
- EFTPS: The Electronic Federal Tax Payment System is a free service by the U.S. Department of the Treasury. You can use it to pay your taxes online or via a toll-free phone service.
- Offline Payment: If you prefer the traditional method, you can pay your taxes offline by sending a check or money order to the IRS. Remember to include your Social Security number or Employer Identification Number, the tax period, and the related tax form or notice number.
Timing of Tax Payments on Sports Betting Winnings
Understanding when to pay taxes on sports betting winnings is crucial to avoid late fees or penalties from the IRS. If you’re a frequent or professional bettor with substantial winnings, you might need to make estimated tax payments on a quarterly basis.
The IRS requires estimated tax payments from individuals who expect to owe $1,000 or more when their return is filed. These payments are typically due on the 15th of April, June, September, and January. If these dates fall on a weekend or holiday, the deadline is the next business day.
Keep in mind that failing to make these payments, or making them late, can result in penalties. Therefore, it’s essential to stay aware of these deadlines and ensure timely payment.
Knowing how to pay taxes on sports betting is just as important as knowing how much tax you must pay on sports betting. Always consult a tax professional to understand your specific circumstances and leverage their expertise to manage your tax obligations effectively. You can also read more articles from our Betting Education section.
Remember, even if you have losses, you still need to report your winnings — you can then deduct your losses to offset some tax obligations. It’s recommended to keep detailed records of both wins and losses for accurate reporting and potential auditing purposes.
Common Tax Mistakes to Avoid in Sports Betting
When it comes to sports betting and taxation, bettors often make several common mistakes that can lead to significant issues.
One common mistake is failing to report all winnings. Regardless of how small the amount, the IRS requires that all gambling winnings be reported on your tax return. Another frequent error is overlooking the option to deduct gambling losses against winnings. This can be particularly beneficial for those bettors who have had a run of bad luck. However, to complete this, detailed records of both winnings and losses must be maintained — a task many bettors neglect.
Finally, another widespread mistake is not seeking professional help when it comes to reporting and paying taxes on sports betting winnings. The rules can be complex, and a professional can help navigate the tax landscape, potentially saving bettors money and ensuring they comply with all IRS requirements.
Ultimately, navigating the tax implications of sports betting can be complex, making it advisable to consult a tax professional for personalized advice.
Always stay informed on the issues
The world of sports betting is fascinating and complex, presenting both opportunities and obligations. Staying informed is key to making the most of your sports betting endeavors, particularly when it comes to understanding the tax implications.
We invite you to explore more of our comprehensive articles on sports betting strategies and financial management. These resources are designed to equip you with the knowledge and tools you need to navigate the landscape of sports betting and taxes. Don’t leave your winnings to chance; arm yourself with information and make informed decisions every step of the way.
As tax laws may change over time, regularly updating your knowledge base, or working with a reputable tax lawyer, accountant, or company like H&R Block and Intuit Turbo Tax is crucial. Negligence, intentional or otherwise, can lead to penalties, audits, or legal troubles. Therefore, becoming savvy about sports betting taxes is not just an option; it’s a necessity for every bettor invested in this activity.