Tax Tip of the Week: You Scored with an Online Sports Bet. Do You Owe Taxes?

“Make each day your masterpiece.”

                                  -John Wooden

With football season back, I thought this article might be helpful to those who like to place bets on teams.

- Belinda Stickle

Here’s a good bet: Millions of fans of online sports gambling have no idea they’re racking up big tax bills on their wagers—at least as the Internal Revenue Service sees it. 

Sports betting has exploded since 2018, when the Supreme Court struck down a national ban, and it’s now legal in 37 states and the District of Columbia. In 2022, legal sports wagers totaled $93.2 billion versus $6.6 billion in 2018, and they account for about 15% of commercial gambling revenues.

The growth has been fueled by online sites like DraftKings, FanDuel and BetMGM that offer easy-to-use phone apps. Last year over 90% of legal sports bets were made online and about 32 million Americans placed one, according to the American Gaming Association. 

While the phone apps have made sports bets easy and fun, the taxes on them are not. A key change in the law plus other factors have combined to make taxes on online sports betting both unfavorable and murky. (This is generally true for casino gambling as well.)

These problems needn’t concern most casual bettors who wager a couple of times a year, but they matter for fans who bet frequently or have a big win.  

“It seems like everyone wins except the bettor—the companies, the IRS, and the states. When I explain the rules to clients, they say, ‘Is this worth it?’” adds Mike Feuerstein, a CPA with DFS Accounting & Tax, a Chicago-area firm that prepares tax returns for online sports bettors. 

Here’s where things stand. Gambling winnings are taxable at ordinary income rates, and they’re reported on Line 8b of Schedule 1 of the 1040 form unless the filer qualifies as a professional gambler, which is hard to do. For nonprofessionals—think most online bettors—losses are deductible up to the amount of their winnings. So if someone wins $700 and loses $750, then $700 of losses are deductible. 

There’s a big catch: Gambling losses are an itemized deduction on Schedule A, along with deductions for mortgage interest, state and local taxes and other items. But the 2017 tax overhaul greatly increased the standard deduction taxpayers get if they don’t itemize, so only about 10% of filers now itemize compared with about 30% before.

The upshot is that millions of non-itemizers won’t get a specific deduction for their gambling losses, while their winnings remain fully taxable.

Say that Joe is a single tax filer in his 20s who bets on college sports. This year he wins $4,000 and loses $4,200. For 2023, Joe’s itemized deductions add up to $9,000—$4,000 of allowed gambling losses plus $5,000 of other items like state taxes. As $9,000 is below the standard deduction of $13,850 for single filers this year, Joe will take the standard deduction. To get a specific tax break for his losses, his total deductions would have to exceed $13,850.

If Joe keeps a tally of his wins and losses, he may think he’s only behind by $200—but in reality he’ll also owe tax on $4,000 of winnings. 

Why can’t Joe and other sports bettors subtract their losses from winnings and then enter the result on Schedule 1? The law doesn’t directly allow this, and the IRS opposes it. 

However, some tax specialists think bettors can net losses and gains, based on court decisions and proposed IRS rules for slot-machine players. The rules for slots players, which were never made final, would have allowed for netting of losses and gains for each “session,” as when a player begins at 8 p.m. and ends several hours later. 

Larry Campagna, an attorney with Chamberlain Hrdlicka in Houston who has represented high rollers in tax cases, agrees with this logic. He thinks filers should be allowed to deduct each year’s gambling losses against each year’s winnings if they keep good session records even if they don’t itemize—and that a judge might side with the taxpayer in such a case. 

But he warns: “If you’re only betting a few hundred bucks a week, it’s not worth going to war with the IRS.”   

Feuerstein, whose firm prepared dozens of returns for online bettors for last year, says he has advised sports bettors they can net losses against winnings for periods in which they bet continuously. He stresses this is a gray area of the law and evaluations should be case by case.  

One source of solace for online sports bettors is that the IRS won’t hear about most winnings. Under longstanding rules, firms don’t have to report sports-bet winnings to the IRS on a Form W-2G unless the odds were 300 to one or greater with a payout of $600 or more. That would be about $7,500 on a $25 bet, and such payouts are rare. Of course the taxes are still owed, even if the IRS isn’t aware of them.  

The bottom line is that millions of online sports bettors are in a triple jam. Either they pay tax on winnings and forgo loss deductions because they don’t itemize; or they net losses and gains based on gray-area session rules and risk an IRS challenge; or they flout the law by not declaring gambling winnings and hope the agency won’t notice. 

In a difficult area, here’s more to know. 

Keep meticulous records

Campagna strongly advises gamblers to keep detailed logs, as such records can persuade revenue agents to back off in audits and are essential in court cases. The good news is that records from online firms are often available and reliable, while standard casino records often aren’t detailed enough for use in court. For more requirements, see IRS Publication 529.  

Check state taxes

Some states don’t allow a tax break for federal itemized deductions, so even if a bettor deducts losses on the federal return they don’t always count for the state. Two in this category are Illinois and Ohio, says Grant Thornton state-tax specialist Jamie Yesnowitz.

Don’t count on professional gambler status

Gamblers who qualify as professionals can net losses against winnings without itemizing and even use them to reduce other taxable income. But this status is hard to attain; Feuerstein says he often advises against claiming it.   

Avoid underpayment penalties

Filers with taxable gambling winnings should consider adjusting paycheck withholding or paying quarterly estimated taxes to avoid charges based on underpayments. 

Have a gambling child? Be careful.

If the bettor is your dependent—such as a college student—consider the tax consequences. According to an IRS spokesman, the child typically must file a return as the winnings can’t be reported on the parent’s return.

In addition, the child’s standard deduction may be limited, and there’s no IRS guidance on whether the “Kiddie Tax” applies to gambling winnings. This levy taxes children’s income at the parents’ rate, above an exemption.

Credit goes to Laura Saunders. Published June 9, 2023 in the Wall Street Journal.
 
Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.
 
This Week’s Author, Belinda Stickle

-until next week