March Madness’ Impact On Sports Betting And Taxes

A considerable increase in sports betting has been seen as more states begin to permit gambling. With a growth of 35% compared to 2021, 31 million Americans were estimated to have placed bets recently on Super Bowl LVI. With March Madness just around the corner, gambling instincts are in full swing, even in the most casual of viewers. While the Super Bowl is a single event to gamble on, March Madness offers a torrent of sports betting opportunities.

Although there are many betting opportunities for individuals, many winners may not understand the income tax issues generated by those winning wagers. Placing a bet in the office pool is gambling, no matter how good you may think you are at selecting winners. A gambler is engaged in gambling as a business if they gamble full time to earn a living and not merely as a hobby. If gambling is a business, losses can be deducted on Scheduled C against winnings. Due to a 2018 U.S. Supreme Court decision, all states are now permitted to offer sports betting. Many have enacted or are starting to enact legislation that will make it easier to do legal sports betting and may also help the Internal Revenue Service. There are now thirty states, plus the District of Columbia, that have legalized sports betting with three more states having passed legislation legalizing betting but are not yet operational.

Fantasy sports on the other hand are different. Under the 2006 Unlawful Internet Gambling Enforcement Act, fantasy sports were determined to be a game of skill rather than gambling. Meaning that it is either a hobby or a business depending on the facts. If the taxpayer can show profits for three of the last five years, or if the activity is the primary source of income for the taxpayer on a full-time basis, the individual can be engaged in a trade or business, which makes it more likely that related expenses can be deductible against income. 

It is to be noted that there are several seemingly strange withholding requirements. Such as basic 24% withholding on gambling winnings. It comes into play for lotteries and sweepstake winnings of more than $5,000. On others like pari mutuel, withholding is required if the winnings are at least 300 times the wager. The payor is also required to file Form W-2G. But there is a $1,200 threshold for bingo or slot machine reporting, $1,500 or more for keno, and $5,000 for poker tournaments. Due to the current $1,200 slot tax threshold having not been adjusted for inflation since 1977, there has been a dramatic increase in the number of slot jackpots that casinos and their customers must report to the IRS. On March 3, 2022, a bipartisan bill was introduced by Congressional Gaming Caucus co-chairs to raise the slot tax threshold to $5,000 and provide a mechanism for future increases based on inflation.

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