This post answers the question, how are sportsbook winnings taxed? It’s all about the taxation of sports betting winnings. I’ll try to cover it from as many angles and in as much detail as possible.
Legal sports betting is becoming more common. And people are asking me to help them understand how their wins and losses at the sportsbook affect their taxes.
It’s a fair question. The American sports betting market is new and confusing. A Supreme Court ruling in 2018 paved the way for state-regulated sports betting.
In just a few years, 26 states and the District of Columbia have put together active, legal, regulated sports betting markets, with a dozen other states set to launch their concepts over the next couple of years.
Gambling Taxes – the Basics
If you’re a gambler and you’re reading this article, you’re likely concerned with how you’re going to deal with your hobby come tax time. That means you should make yourself familiar with IRS Topic No. 419 – “Gambling Income and Losses.” It’s a short read, but it contains useful information.
For example, right up at the top, it says plainly that the IRS’ rules on reporting gambling wins and losses apply to “casual gamblers who aren’t in the trade or business of gambling.”
Professional gamblers have their own set of rules. The IRS considers them self-employed. They tax pros at their normal effective income tax rate.
Most people don’t realize this, but as Topic No. 419 points out, you’re supposed to report all gambling winnings under the “Other Income” section of your taxes. Here’s another interesting note. You can claim gambling losses up to the amount of your gambling winnings under the “Other Itemized Deductions” section of your income taxes.
Reporting Sports Betting Winnings & Losses
You should be keeping a diary of wins and losses if you’re planning to report gambling income. People reporting gambling wins and losses are required, by the IRS, to maintain a record. It can be as simple as the date, the amount won/amount lost, time, signature, etc. The IRS can ask for this any time you report gambling income.
The full amount of your gambling winnings goes on Schedule 1 of your basic tax form. Losses up to the amount of winnings can be deducted from Schedule A. By the way, your losses can include expenses like travel, so long as it’s all recorded, and you have receipts and notes to back you up.
Here’s an important distinction. You can’t subtract your losses from your winnings and report the balance. The IRS stresses that you should report all winnings as income and claim losses (up to that amount) as an itemized deduction. That’s why you keep a record of wins and losses separately.
Keeping Notes for the IRS
The IRS says your notes should contain “at least the following information:”
- the date
- the type of wager
- the name and address of the sportsbook
- the names of anyone near you
- the amount of winnings or losses
- proof of winnings or losses (wagering tickets, canceled checks, credit records, bank withdrawals, payment slips, etc.)
The IRS has a useful tool called the Interactive Tax Assistant. It can run you through a ten-minute session to help you codify and work out your winnings and losses. Check it out here.
Understand that the IRS gets a report from your sportsbook or casino. The same W-2G or 1099 form they hand you goes straight to the government. Unlike other forms of income that are difficult for the government to track and tax, gambling winnings above the federal threshold trigger paperwork. And we know how much the IRS loves to nail people with paperwork.
The big danger is that the IRS looks at your bank statements, as part of some investigation, and finds gambling income (easily located based on the payer) and assesses all kinds of penalties and additional taxes. They’ll consider it unreported income, and that’s a serious infraction.
Sports Betting-Specific Tax Information
According to the IRS, when a sports bettor wins more than $600 for a sports wager (and the amount is at least 300 times the original bet), the book is required to withhold 24% of your winnings for federal taxes.
This is the same standard that applies to other popular forms of gambling. And it’s all reported on IRS Form W-2G, which is what the book or the casino will hand you when you get a win big enough to trigger an automatic federal hold.
The one thing in gambling tax law that’s different among different forms of gambling is the amount that triggers federal intervention. For sports bettors, it’s $600, but in bingo or playing slot machines, the US isn’t interested until you hit the $1,200 mark. Keno players are taxed automatically at $1,500. Poker tournament players don’t attract federal attention until they win $5,000.
The specificity of the numbers set by the IRS leads to some silly comparisons. I’ve seen it pointed out frequently that if you bet $2 to win $600, you’d get your full payout. And the expectation would be that you’d pay your taxes at tax time.
If instead that $2 bet won you $601, the automatic tax withholding would kick in. And then the book would only pay you out 76% of what you won.
Avoid Some Bets for Tax Purposes
What’s so different about those two bets? Why does the federal government get involved?
Of course, this isn’t why they have this rule. The federal government isn’t as concerned with a guy who bets $2 and gets lucky to the tune of $600. They’re more concerned about large volume bets. After all, the 24% federal hold on a $601 win is about $144. Imagine the 24% hold on Vegas Dave’s $2.5 million Kansas City Royals futures bet.
How can you avoid this automatic taxation?
You can stick to bets with payouts below $600, or you could stick to bets that payout less than 300x. Satisfying either of those conditions will prevent the automatic tax.
If you like to bet $100 per game in the NFL, that means avoiding a payout of $30,000 or more. I can’t think of a single money line, point spread, or game total bet that could payout that much on a $100 bet – so this probably just means avoiding futures and props with insane odds. You just don’t find a lot of +30,000 numbers in traditional sports betting.
State & Local Taxes on Sportsbook Wins
If 24% doesn’t sound too awful to you, remember that the feds aren’t the only entity that’s going to take a cut. State income tax applies if the win occurs in a state that has this kind of tax. In many cities, municipal taxes will take an additional piece of your win. Big winners at the sportsbook face as many as three separate taxation points.
Here are the six states that take the biggest cut of sports betting wins based on income tax:
- North Carolina – 5.25%
- Illinois – 4.95%
- Colorado – 4.55%
- Michigan – 4.25%
- Indiana – 3.23%
- Pennsylvania – 3.07%
Keep in mind that these hits come on top of the 24% taken by Uncle Sam.
That’s not the last layer of taxation that gamblers reporting big wins have to consider. Many US cities have their own income tax. And even though these are insignificant compared to the state and federal layer, it all adds up.
In Michigan, a state that’s going to hit you with a 4.55% tax on top of the federal government’s 24%, 24 cities add between 1 and 2.4% income tax. If you win a sports bet in Detroit, your total tax rate will be 30.65% – 24% for the feds, 4.25% for the state, and 2.4% for the city. That $601 win I joked about above becomes a $416.80 payout.
Forget the book’s juice, taxes are probably the thing killing your bankroll.
One way to avoid the extra hit from state and local taxes is to play in jurisdictions without them.
In Nevada, South Dakota, Tennessee, Washington, and Wyoming, sports bettors who trigger an automatic federal take won’t face any additional state or municipal taxation.
Paying taxes on gambling winnings is serious business. You can tell by all the links to and discussions about the IRS. When you place sports bets at sportsbooks or casinos, federal law controls what happens when you make a big win. The above information lays out as simply as possible the typical procedures for the taxation of sports betting wins and losses.
If you’re suddenly finding yourself betting on sports more than usual, as much of the country is, it’s important to know how to handle the taxation aspect of the hobby.