Sports Betting and Gambling: Business or Hobby?

First, it’s essential to understand that the tax implications of sports betting depend on whether you engage in it as a business or a hobby.

If you are a professional sports bettor, your winnings are considered taxable income, and you must pay taxes on them accordingly. You can also deduct your gambling losses, but only up to the amount of your winnings.

On the other hand, if you engage in sports betting as a hobby, your winnings are still taxable income, but you can only deduct your gambling losses if you itemize your deductions on your tax return. Additionally, your deductions for gambling losses cannot exceed your winnings.

Regardless, your gambling income is fully taxable and must be reported on your tax return — meaning you are responsible for keeping accurate records of your activity, including winnings and losses, the amount you won or lost, the date and type of wager, and the name and address of the establishment where you placed the bet. This information will calculate your tax liability and support any deductions you may be eligible for. You also should be prepared to provide documentation, such as receipts, tickets, and other records.

Additionally, sports betting winnings may also be subject to state and local taxes, depending on where you live. It is important to check your state and local tax laws to determine your tax liability.

Are fantasy sports and online betting considered gambling for tax purposes?

The classification of fantasy sports as gambling has been the subject of debate, with some arguing that, as they require knowledge to play effectively, they are games of skill and not of chance. However, the IRS has affirmed multiple times in rulings that daily fantasy sports are considered gambling for tax purposes and subject to federal tax law.

That means fantasy sports winnings are taxable, and players must report them to the IRS. Additionally, fantasy sports platforms must report any winnings of $600 or more.

Daily fantasy sports, like sports betting, can be considered a business or hobby depending on whether it involves skill. However, if the individual can demonstrate profits for at least three of the last five years or if playing is the primary source of income, then it can be classified as a business or trade. This classification makes it easier to deduct expenses related to the activity from the income if necessary.

The tax rules for online betting vary depending on the state in which you reside, but generally, online betting is also considered a form of gambling subject to federal tax law. That means that any winnings should be reported on your tax return.

Sports Betting and Gambling: The Tax Implications

When paying taxes on gambling winnings, the amount you owe will depend on the money you win and the type of gambling you engage in. If you win $10,000 or more from a single bet, the payer must withhold 24% of your winnings for federal taxes. However, if your winnings are less than $5,000, you can offset your losses against your winnings.

If you itemize your deductions on your tax return, you can deduct gambling losses up to the amount of your winnings. However, you must have accurate records to support your deductions. It is also important to note that some states do not allow gambling losses to be deducted, so it is essential to check with your state’s tax authority to determine your tax liability.

In addition to federal taxes, many states also tax gambling winnings. The tax rate and rules vary by state, so it is crucial to determine your tax liability with your state’s tax authority. Some states may require you to pay taxes on your winnings even if you are not a state resident.

Once again, keep accurate records of your gambling activity, report your winnings on your tax return, and check with your state’s tax authority to determine your tax liability. Doing so can avoid penalties and interest and ensure that you stay on the right side of the law.

Can you claim gambling losses on your taxes?

The good news: Yes, gambling losses can be claimed as an itemized deduction on your taxes, but only up to the extent of your gambling winnings and only if you itemize. In other words, you can’t claim more in losses than you have in winnings, and you cannot claim the standard deduction.

Furthermore, you cannot offset your winnings from one day with your losses from another day, and the IRS typically requires winnings and losses to be reported separately. However, you can net your wins and losses if you win and lose on the same day for the same type of wager.

Withholding and Reporting Requirements

Suppose you can win money from lotteries, sweepstakes, wagering pools, horse track betting, bingo, slot machines, keno, or poker tournaments. In that case, there are federal withholding and reporting requirements to remember.

  • For lotteries, sweepstakes, and wagering pools, winnings over $5,000 are subject to a 24% withholding requirement.
  • At horse tracks, withholding kicks in when winnings are 300 times the wager or more, and the payer must file Form W-2G.
  • Bingo, slot machines, and keno all have a $1,200 threshold to file Form W-2G, while poker tournaments have a $5,000 threshold. However, it is essential to note that any winnings are subject to a federal income tax withholding requirement, regardless of the amount.

For table games such as blackjack, craps, baccarat, and roulette, W-2G forms are not required, regardless of the amount won. However, it is still important to report all winnings on your tax return, no matter how small.

It is also worth noting that even if you don’t win an amount that meets any of the thresholds mentioned above, you are still legally responsible for reporting your winnings at tax time. Failing to report any gambling winnings can result in penalties and interest charges, so keeping accurate records of all your gambling activity throughout the year is important.

In closing…

As the legalization of sports betting and gambling sweeps through an increasing number of states, a strong understanding of the tax implications is essential for anyone participating in these activities to avoid costly penalties or fees.

Experienced tax professionals (like us!) can help you fully understand and navigate the implications of sports betting and gambling to prepare better to minimize liabilities and plan effectively.

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If you are a client and would like to book a consultation, call us at +1 (212) 382-3939 or contact us here to set up a time.

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