Did you know that in 2021 sports betting brought about $4.33 billion in revenue money to the United States?
As sports betting keeps on growing in popularity, many people now question if they must pay taxes on their profits. The short answer is yes; you must declare your sports betting earnings on your federal income tax return in the US.
Any earnings you win from gambling or wagering are taxed according to the Internal Revenue Service (IRS), and the tax rate is determined by the amount and your total income tax bracket.
Before we continue with this post, let’s explain what the Internal Revenue Service is.
What Is Internal Revenue Service (IRS)?
The Internal Revenue Service (IRS) is a federal organization that is in charge of enforcing every tax law and collecting taxes in the United States.
It is a key component of the Treasury Department and functions directly under Congress. The IRS collects taxes from US citizens to fund the federal government and its different programs.
On top of that, IRS is in charge of processing tax returns, determining tax liabilities, and enforcing tax regulations. It also manages a range of tax perks that assist both individuals and corporations pay less in taxes, like tax credits and deductions.
To look into tax fraud and other illegal tax actions, the IRS collaborates closely with other federal authorities like the Department of Justice and the Federal Bureau of Investigation.
How Sports Betting Winnings Are Taxed by the IRS?
Whether you are a professional gambler or a recreational wager, the IRS taxes winnings differently. In this post, we will cover gambling earnings and individual taxes on it.
Bear in mind that, business taxes are claimed as Schedule C revenue over costs and are outside the subject of this post.
According to the IRS, gambling wins are completely taxable, and you are required to disclose the income on your tax return.
Lottery, raffle, horse racing, and casino earnings are just a few examples of gambling income. In addition to the fair market value of items like automobiles and vacations, it also includes cash winnings.
Any earnings from wagering on sporting events or taking part in fantasy leagues fall under this category.
Regardless of the amount, you must report all gambling gains to the IRS. It’s a common misconception that earnings under $500 are tax-free. That is not true. All winnings must be reported to the IRS for tax purposes by the winner. When someone wins more than $600 or 300 times their starting stake, the payer is required to declare any winnings to the IRS.
For instance, if you wagered $10 and won $4000, the payer is obligated to report that gain to the IRS because you would have received 400 times your initial wager.
When filing federal income taxes, it is irrelevant how you place the wager. For instance, whether you place the wager in person or through an app, the tax consequences for the IRS are the same.
How States Tax Winnings from Sports Betting
Every state has a different set of rules when it comes to sports betting, as well as different betting taxes. Based on your state, sports betting could include a mixture of betting in person, placing a bet online, and a retail option.
When it comes to gambling taxes, each state has its unique set of regulations. Most states either tax winnings in the state where you made the bet or where you live.
A bookie, or sportsbook, is an establishment where you can bet on sports. However, online sportsbooks continue to raise legal problems that have not yet been entirely resolved.
These organizations believe that all betting is placed in the jurisdiction in which the business is registered or maintains its servers.
Many tax authorities believe that all bets either take place in the bettor’s state of residence or the location of the betting at the time it is placed.
For instance, earnings from sports betting are subject to a 6.75% tax in Nevada, which is home to numerous sportsbooks and casinos.
Winnings are subject to an 8.5% tax in New Jersey, where sports betting has recently been made legal. It’s critical to understand your state’s tax regulations and to pay any state taxes due on any gains from sports betting.
Paying Taxes on Winning Bets
All earnings over $600 at sportsbooks must be reported to the IRS. However, this doesn’t relieve you from submitting taxes on your own.
Even so, when submitting you should do it carefully as many gamblers tend to underreport their winnings.
Depending on the specifics of your wager, the company that administers your winnings may give you a tax Form W-2G.
As an alternative, the payer may send you a 1099-MISC or 1099-K. This is especially the case if they use a third-party organization of any kind to process your transaction.
Bear in mind that If you are an individual, you must declare gambling winnings (including sports betting) on your Form 1040, Schedule 1, Line 8 under “Other Income,” regardless of the tax form you receive.
Moreover, that applies to any winning prizes.
However, money that you wager as a prospective loss but do not initially stake is not deducted until you lose. Let’s take the scenario where you bet $10 on a football game and win $1,000.
You can deduct $10 from your Schedule A if you receive $1,000 back later. You cannot deduct a bet for $10 on your Schedule A if you give the bookmaker nothing upfront and only agree to pay him $10 in the event of a loss. Therefore, you have not put any up-front stakes.
Although your payer’s W-2G or Form 1099 should reveal taxable income, consult a tax expert if you’re uncertain of how to approach your taxes.
The money you win from sports betting counts as income, just like profits from other types of gambling do. No matter how much you win, you must pay federal income taxes, and you can also owe state taxes.
However, because state tax regulations vary greatly depending on the jurisdiction, it is important to familiarize yourself with your state’s specific requirements.