Less than three years ago, the United States Supreme Court ruled in Murphy v. NCAA that states could legalize sports betting, and now more than half the country1 has adopted some form of legalized gambling. In a big win for the U.S. gambling industry this election season, Maryland, South Dakota, and Louisiana have all approved sports betting, joining 20 other states. Additionally, Virginia approved four casinos, Nebraska added casino games at already established horse racing tracks, and Colorado continued to expand the number and type of games offered.
With the continued expansion of legalized gambling and the meteoric rise in popularity of fantasy sports leagues, opportunities abound to play and possibly win — or to lose big, potentially. Players beware: depending on how the cards fall, you could be in for a tax surprise you weren’t betting on.
Jackpot…Now What?
So you’ve come out on top of your fantasy league, beat the one-armed bandit, or made your ace high straight on the river and are taking home some winnings. As a casual player, the winnings are reported on your individual tax return as “other income” and are taxed at ordinary rates. A form W2-G is required to be filed by the entity making the payout if it pays more than $600 to an individual in a single year. Similar to a regular W2, this form is given to the player, and a copy is filed with the IRS.
Not everyone is so lucky. Statistically speaking, most players will part with more than they win. While winnings are always income, losses may be deducted only up to the amount of winnings. This may sound as though a casual player who generally loses more than they win will net out to zero over the course of the year, resulting in no real tax effect. But, as they say, the house always wins, and so could the IRS.
Winnings and losses are not netted in determining overall income for the year. Gambling losses are treated as miscellaneous itemized deductions, which means the benefit of gambling losses is only useful if a taxpayer itemizes deductions in excess of their available standard deduction (currently $12,400 for single filers and $24,800 for married filing joint).
For example, a single filer taking the standard deduction who wins $10,000 over the course of the year and has $5,000 of losses will include the $10,000 as income, but will not deduct the $5,000 of losses. In addition, gambling losses are not allowed to be carried over into future tax years. You cannot lower your tax bill by sustained gambling losses without first receiving gambling income.
While a horse bet or poker ante is easily identifiable as a wagering transaction, in a win for sports fans, the IRS chief counsel recently released an opinion stating that fees for daily fantasy sports are wagering transactions, as opposed to entrance fees, and can be deducted subject to the limitations discussed above. In order to deduct any losses, a player must keep an accurate record of gambling winnings and losses throughout the year, with receipts, statements, or other records to support the deduction.
Professional Gambling
Professional gamblers are treated a little differently than casual players. They are considered to be in the trade or business of gambling. As such, the professional gambler would report gambling winnings and losses on Schedule C, Profit or Loss from Business. The professional gambler can net all wagering activity, but cannot report an overall wagering loss. In addition, professional gamblers may deduct any ordinary and necessary business expenses incurred. A net profit from professional gambling activities would be subject to self-employment taxes. If business expenses exceed income, the professional gambler may report a business loss.
The standard to be treated as a professional gambler is as follows: “If one’s gambling activity pursued full time, in good faith, and with regularity, to the production of income or livelihood, and is not a mere hobby, it is a trade or business.” The burden of proof rests on the gambler, and they will need to consider all facts and circumstances in making a determination, such as the manner in which the activity is carried out, expertise, time and effort expended, and a history of income or losses.
Summary
The thrill of the win or agony of a loss can have significant impact for your overall tax picture. Whether you are a casual player or proven professional, consideration should be given to the proper tracking and reporting of winnings, losses and deductions, as well as the overall classification of the player. Good luck and happy playing! For question or assistance, contact your Marcum tax professional.
