How Even Casual Sports Bets Complicate Federal Taxes: Explained

This tax filing season is on track to be the biggest yet for sports betting. Next year is on track to be even bigger.

Commercial sports betting notched its first $100 billion in annual revenue though January 2023, and Ohio’s new market set a single-month state record, according to the latest tracking from the American Gaming Association. Two of the biggest events occur at the outset of the year—Americans wagered an estimated $16 billion on this year’s Super Bowl and $15.5 billion on the recently concluded NCAA men’s college basketball tournament, according to the trade group.

Federal regulators don’t release much gambling data tied to sporting events, but the IRS and state agencies collect a share of this booming market from both business taxes on the industry and individual tax filers who gambled. For those individuals who placed bets, keeping records of winnings, losses, and filing forms, as well as betting legally, should make filing taxes easier than washing nacho cheese out of your Patrick Mahomes jersey.

What Do I Need to Report?

When it comes to the IRS, the threshold that sportsbooks and other gambling operators use to send tax forms is a win of $600, or 300 times your stake. A winning casino bet means the operator will send you a form W-2G. The form also will be issued if your winnings are subject to withholding, including backup withholding and regular gambling withholding. For 2023, gambling withholding is equal to the cost of backup withholding: a flat 24%.

Receiving a tax form is not the trigger for filing, however. A side bet with a friend and even wagering with an illegal outlet is treated as income by the IRS. You must include the full amount of your gambling winnings as income on Schedule 1, Form 1040 if you’re gambling for fun. And yes, anything you won from fantasy sports leagues are gambling winnings, according to the IRS.

If you gamble professionally, you’ll report your winnings and losses—up to the extent of your winnings—on Schedule C, since it’s business income. In addition, you may be able to deduct allowable business expenses incurred in carrying on the business and also may be able to claim other tax benefits associated with being self-employed. Also be prepared to pay self-employment tax on the net income.

Claiming Losses

For tax years 2018 to 2025, professional gambling loss and expense deductions are limited to the amount of the professional’s winnings. Casual gamblers can do the same but only up to extent of their winnings. A diary of winnings and losses, as well as documentation, such as tickets, credit card records or payment slips, and records from betting apps, can be invaluable to an IRS audit.

If, instead, you put down $1,000 and lose it on a bet, you can write that off as a loss on Schedule A of your 1040, reducing your tax liability—but only if you itemize. Otherwise, your loss is a personal expense: the IRS treats that like spending money on a movie ticket.

Fewer people itemize deductions, however, since a 2017 tax law significantly increased the standard deduction. This means no write-offs on Form 1040 Schedule A for many gamblers.

Professional gamblers don’t have to itemize to claim losses—those also can go into a Schedule C.

The 2017 tax law, known as the Tax Cuts and Jobs Act, also modified the definition of “gambling losses” under Section 165(d). With $10,000 in winnings, you can deduct combined losses up to that amount. Before the law, professional gamblers could deduct travel and other costs related to gambling without regard to wins and losses.

A New World

The Supreme Court struck down the Professional and Amateur Sports Protection Act in 2018, and since then, sports betting is now legal in 37 states plus Washington, D.C., though four—Florida, Kentucky, Maine, and Nebraska—aren’t operational yet. Kentucky just joined the list in March. The ways to wager have expanded as well. An online option where most bettors use their phones is legal in 27 states plus D.C., but not operational yet in three—Florida, Kentucky, and Maine. Retail on-premise sports betting is legal in 36 states, but isn’t up and running yet in four states yet—Florida, Kentucky, Maine, and Nebraska.

The IRS levies an 0.25% excise tax on all legal sports bets. Taking a closer look at the revenue from these wagers, based on the most recent data available in tax returns filed in 2021 for 2020, the IRS reported 1.7 million individual returns with gambling winnings on a Schedule 1, with a total gambling income of $28.4 billion. Just 363,420 individual returns reported losses on Schedule A of their 1040 returns, totaling $17.1 billion.

State taxes on the industry have added another $2.6 billion to government revenues since legalization in 2018, according to the Legal Sports Report.

Illegal Wagers

Illegal gambling isn’t a relic of smoky back rooms. Nearly 50% of bettors used an illegal sportsbook operator in the last year, according to a 2022 American Gaming Association report, and of those more than half believed they were wagering legally.

There’s a lot of confusion about which online gaming operators are legal and which aren’t, especially when it comes to big offshore sites purporting to be legal, said David Forman, vice president of research at the American Gaming Association. If you want to find out which gaming operators are legal, you can check with your state regulator or visit the American Gaming Association website, which lists the legal operators in each state.

But if you did wager with an illegal operator, just make sure you include those winnings on your taxes as well.

“I don’t believe there’s a mechanism for the IRS to go back to people and tell them they were betting with an illegal operator, [but] they would have broken a tax law by not reporting it,” Forman said.

— With assistance from Sam McQuillan.