Attention sports bettors: The taxman may be coming for your winnings.
Over $ 42 billion has been legally bet on sports since betting expanded into more states in 2018, and the industry is still growing. If you placed bets on sites like DraftKings DKNG, -10.73%, Penn National Gaming PENN, -9.83% or MGM MGM, -6.57% in 2020, you could have to pay taxes.
Here’s what you need to know about legalized sports betting and taxes.
Do I have to pay taxes on my winnings?
Sports betting winnings are considered income. Just like you report your income, you must also report how much money you won via legalized sports betting.
While all winnings must be reported to the IRS, you only have to pay federal taxes on them if you made over $ 600. The sportsbooks you use will also be reporting those winnings to the IRS.
“Gambling winnings are fully taxable and you must report the income on your tax return,” according to the IRS. “Gambling income includes but isn’t limited to winnings from lotteries, raffles, horse races, and casinos.”
Whether you’re a professional bettor who makes all of his income betting on sports, or somebody who bets occasionally on NBA games in New Jersey, all winnings must be reported.
How does it work?
Taxpayers can only deduct losses up to the amount of their winnings under the “gambling-loss deduction” of the federal tax code. Therefore, after your loss deductions are made, the remaining winnings will be taxed.
For example, if a bettor had $ 10,000 of sports betting winnings in 2020, and $ 8,000 in losses, he could deduct the $ 8,000 of losses if he itemized his tax deductions. A more detailed look at itemized deductions vs standard deductions can be found here.
You’re not being taxed based on each bet, but on the aggregate for the tax year.
How much do I have to pay?
According to the IRS, if you make $ 600 or more gambling on sports, you have to pay federal taxes on it. This includes non-cash winnings based on their value.
“Fair market value of prizes, such as cars and trips” must be reported as income, and then the amount of taxes can be determined, according to the IRS website.
Winnings that hit the $ 600 threshold will be taxed at a 24% rate. Those taxes can come either at the time the winnings are paid out in the form of withholding from the casinos or sportsbooks, or when you file your taxes.
The 24% rate applies to both cash and non-cash winnings.
What if my winnings amounted to less than $ 600 — do I still have to report it?
Yes, all income must be reported to the IRS — even though it wouldn’t be taxed in this case.
“You must report all gambling winnings as Other Income,” according to the IRS. There is an “other income” section of the 1040 form.
What happens if I don’t report it?
Failing to report taxable income like sports betting winnings could result in penalties.
“The late payment penalty is 0.5% of the tax owed after the due date, for each month or part of a month the tax remains unpaid, up to 25%,” according to this IRS website.
Furthermore, “any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined* not more than $ 100,000 ($ 500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.”
What about state taxes?
In addition to federal taxes payable to the IRS, some state governments tax sports betting income as well. Each state has its own distinct tax formulas for gambling income.
New Jersey for example has a 3% withholding tax on gambling winnings as the state considers it has taxable income. But Nevada has no tax at all on winnings because there is no income tax in Nevada.
See also: The IRS paid billions in interest on delayed tax refunds because of pandemic-related backlogs
The state tax rate is determined by which state the bet was placed in, not the state where the bettor is from. Some states have alternative taxes for residents and non-residents when it comes to sports betting.