According to the Internal Revenue Service, the size of the U.S. sports-betting industry has reached hundreds of billions of dollars per year, and it’s in the beginning of football season that interest in betting peaks. According to statistics from the American Gaming Association, nearly 68 million Americans, a 35% increase from 2023, wagered an estimated $23.1 million on last year’s Super Bowl.
The tax ramifications of betting are not likely to be on top of people’s minds. Yet it’s crucial for them to know how to deal with losses and protect their winnings when they’re doing tax planning.
The IRS treats professional gamblers as self-employed taxpayers who must file a Schedule C with their tax return. Their winnings are treated as income at individual income tax rates and their business activities have all the regular Schedule C deductions.
The IRS has other rules for “casual” gamblers, where income includes winnings from lotteries, raffles, horse races and casinos in the form of cash or prizes.
The federal tax rate is 24% on winnings exceeding $5,000 (minus the wager) from gambling venues such as football pools when the winnings are at least 300 times the wager. The IRS also stresses that all winnings are income no matter the size and should be declared as such on the client’s tax return.
“Gambling winnings aren’t just subject to federal taxes; state and local income taxes can also apply, with specific rules varying by location,” says Paul Brahan, a financial advisor at Fort Pitt Capital Group in Pittsburgh. Also, “offshore or out-of-state betting can trigger tax reporting requirements with the IRS.”
Though reporting thresholds can differ, states generally tax gambling winnings from both online and retail outlets; the rates for both are the same in the many states. Tax rates for online winnings are at single-digit percentages in Indiana, Iowa, Mississippi, Tennessee and Wisconsin, but they can rise to about 50% in New Hampshire, New York and Rhode Island.
States and some localities generally tax sports winnings if the money was made on a wager placed within that state. Depending on the size of the win, a client may have to file a tax return in a state where the bet was placed if that state has an income tax.
The IRS draws no distinction between retail and online gambling.
“While most people are aware that substantial winnings are taxable, they often forget that even smaller sports betting wins must be reported,” Brahan says.
Clients who’ve won on sports contests or any other gambling activity will receive an IRS Form W-2 G if the winnings were reported to the agency. Advisors say clients should earmark at least a quarter of their winnings for taxes.
“If you win a significant amount, you may need to pay estimated taxes throughout the year to avoid penalties,” Brahan says.
Another common misconception is the tax deductibility of losses. Advisors note that many taxpayers may not realize that their losses can also be deducted against gambling winnings.
However, those losses “are only deductible if you itemize your deductions and, again, are limited only to the amount of your gambling winnings,” says Richard Koenigsberg, a CPA and partner in EisnerAmper’s private client services group (he’s also national leader of the firm’s entertainment and media practice).
To claim these deductions, a client must itemize them on IRS Schedule A with their tax return—which fewer clients have generally done since 2017’s tax reform.
“Let’s take an example of someone who won $500 and lost $100,” Koenigsberg says. “If the person is not itemizing, they still pay tax on $500. If they itemize, [they pay tax on] $400. Another individual had no winnings and lost $500. Zero deduction.”
As with many potential tax problems, sports wagering comes down to paperwork, advisors say. That’s why, Brahan says, people should keep detailed records of their gambling activities, including their winnings, losses and the dates of their wagers.
“Most betting platforms keep records of your wagers,” he says, “including the date and time of the bet, the amount wagered, the odds and the outcome. It’s still important to keep your own records as well, as betting platform records may not be accurate or stored indefinitely.”