With the growing number of states that permit gambling, the interest in placing bets is at an all-time high. More than 31 million Americans were estimated to have placed bets recently on Super Bowl LVI, an increase of 35% over 2021, according to the American Gaming Association.
And March Madness, the NCAA college basketball tournament, brings out the gambling instinct in even the most casual of viewers.
“What sets March Madness apart, even from the Super Bowl, is the sheer volume of sports betting opportunities,” said Bill Ordine, a national reporter for Gambling.com Group. “This is especially so on the opening weekend. Spread over four days, there are 48 games during that opening stretch, not including the so-called First Four play-in round. After that, the tempo of the tournament — roughly a weekend-to-weekend pace — keeps the gambling public engaged and typically makes the full event a betting bonanza for bookmakers.”
However, income tax issues generated by winning wagers may not be understood by most of those who place bets.
Placing a bet in the office pool is considered to be gambling, even though participants may claim some skill in selecting their bracket winners, according to Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting: “Under the Tax Code, any income earned from gambling is taxable whether the gambling is legal or illegal, and whether it is a hobby or a business.”
A gambler is engaged in gambling as a business if they gamble full time to earn a living and not merely as a hobby. If gambling is a business, losses can be deducted on Scheduled C against winnings.
“But for most people, gambling is not a business, it’s a hobby,” he said. “They can only deduct losses if they itemize, and then only to the extent of gambling winnings. So while in theory you can offset gambling losses against gambling income, in practice it’s difficult because you have to itemize, and you can only deduct losses to the extent of gambling income.”
Under a U.S. Supreme Court decision from 2018, all states are now permitted to offer sports betting, and many have enacted or are starting to enact enabling legislation. This will make it easier to do legal sports betting and may also help the Internal Revenue Service, Luscombe indicated
There are now 30 states, plus the District of Columbia, that have legalized sports betting, according to the American Gaming Association. Three more states have passed legislation legalizing betting but are not yet operational.
“Most of the states that permit gambling impose an excise tax on the licensed sports betting facility, and states with an income tax typically tax gambling winnings, as does the federal government,” Luscombe said. “Legal sports betting operations will be likely to report winnings to the IRS and state tax authorities and may even do tax withholding from larger jackpots.”
Fantasy sports are somewhat different. Under the 2006 Unlawful Internet Gambling Enforcement Act, fantasy sports were determined to be a game of skill rather than gambling. As a game of skill, it is either a hobby or a business depending on the facts. If the taxpayer can show profits for three of the last five years, or if the activity is the primary source of income for the taxpayer on a full-time basis, the individual can be considered to be engaged in a trade or business, which makes it more likely that related expenses can be deductible against income.
“There are a number of seemingly strange withholding requirements,” noted Luscombe. “There’s a basic 24% withholding on gambling winnings. For lotteries and sweepstakes it comes into play on winnings of more than $5,000. On other types, for example pari mutuel, withholding is required if the winnings are at least 300 times the wager. The payor is required to file Form W-2G. But the reporting requirements are different for other things — there’s a $1,200 threshold for bingo or slot machine reporting, $1,500 or more for keno and $5,000 for poker tournaments.”
The current $1,200 slot tax threshold has not been adjusted for inflation since 1977, causing a dramatic increase in the number of slot jackpots that casinos and their customers must report to the IRS. On March 3, 2022, a bipartisan bill was introduced by Congressional Gaming Caucus co-chairs Reps. Dina Titus, D-Nevada, and Guy Reschenthaler, R-Pennsylvania, to raise the slot tax threshold to $5,000 and provide a mechanism for future increases based on inflation.
“Increasing the slot tax threshold to account for inflation is a long-overdue change that will alleviate unnecessary administrative burdens on casino operators, their customers and an understaffed and overwhelmed IRS,” said AGA president and CEO Bill Miller.
The legislation is co-sponsored by Reps. Mark Amodei, R-Nevada, Anthony Brown, D-Maryland, and Steven Horsford, D-Nevada.
