Fact file: Online sports betting and income taxes

In recent years, online sports betting has significantly increased.

Following the 2018 Supreme Court decision that struck down the federal ban on state authorization of sports betting, 37 states and the District of Columbia now allow online sports betting.

However, notwithstanding the current proliferation of online sports betting, the IRS believes many fans of online sports gambling are unaware of the income tax consequences of their wagers. 

Here is a summary of the income tax aspects of gambling, including online sports betting.

Basic federal income tax rules regarding gambling winnings and losses

All gambling winnings are taxable ordinary income

Gambling winnings are taxable at ordinary income tax rates. A payer of gambling winnings is required to issue Form W-2G, Certain Gambling Winnings, to a gambler who received more than $600 dollars in gambling winnings. The threshold is $1,200 for slot machine winnings, $1,500 from Keno, and $5,000 from a poker tournament. Generally, if you win more than $5,000 on a wager and the payout is at least 300 times the amount of the bet, the IRS requires the payer to withhold 24% of the winnings for income taxes, with special withholding rates for winnings from bingo, keno, slot machines, and poker.

The gross amount of all gambling winnings, including amounts received that were below the Form W-2G reporting thresholds, should be reported as “other income on Schedule 1 on Form 1040 or Form 1040-SR.

Gambling losses are generally only deducted as itemized deductions

With respect to gambling losses, unless you are a professional gambler, the losses are only deductible as itemized deductions on Schedule A of Form 1040. Unfortunately, after the federal income tax law change in 2017 increased the amount of standard deductions, many taxpayers do not claim itemized deductions. Therefore, if you claim the standard deduction, you will receive no additional deduction for gambling losses. Furthermore, even if you do claim itemized deductions your deductible gambling losses for a tax year are limited to your reported gambling winnings for the year, and the losses must be supported by receipts, tickets, or other records that show both your winnings and losses.

Other considerations: Gambling and online betting

• Keep good records of gambling winnings and losses – As indicated above, to claim gambling losses, it is necessary to support the gambling winnings and losses with records. Therefore, the IRS suggests keeping a diary or similar record of gambling activities. This could include dates and types of wagers, the name and address of the casino or gambling establishment, and the amounts you won or lost.
• Possible higher audit risks due to gambling winnings – The IRS gets a copy of every Form W2-G you receive and is expecting to see those amounts reported as “other income” on your Form 1040. If the amounts are not reported on your return, you will likely receive a notice from the IRS regarding the omission and possibly trigger an IRS audit.
• State and local taxes may apply - Form W2-G includes a box for state and local income tax withholdings. This is because some states tax gambling winnings. For example, as indicated here PA Taxation of Gambling and Lottery Winnings, Pennsylvania has a separate class of tax income for gambling and lottery winnings for PA personal income tax purposes.

Additional IRS information regarding the federal income tax aspects of gambling can be found at Topic No. 419, Gambling Income and Losses, and using this interactive interview How Do I Claim My Gambling Winnings and/or Losses?

If you have questions regarding this article or the income tax aspects of gambling, please contact your Herbein tax consultant through the form below.

Article contributed by Shreeni Patel