When the U.S. government shut down several weeks ago, it left many people wondering how the special taxes and fees imposed by the government on sports betting would affect them. Generally, these taxes and fees are added to your winning wagers and paid out of the federal government’s general fund. However, since October 2019, these taxes don’t apply to sports books. Instead, they are now collected by the states and allocated to the states’ general funds. So what does that mean for you, the sports bettor? Let’s dive into the tax implications of sports betting so you can make the right decisions and understand the ramifications of each option.
How Do I Pay Federal Income Taxes On My Sports Betting Income?
If you are in the 25% federal income tax bracket, then you will need to pay taxes on your winnings. However, there are several ways to avoid paying federal income taxes on your sports betting income. One way is to play in a state where sports betting is legal, but the federal government still taxes all winnings. For example, in most states, winning from sports betting is considered non-taxable winnings, so long as you report your winnings to the IRS. Another option is to set up a separate bank account to store your winnings from sports betting. When you make a withdrawal from this account, it will be considered non-taxable income. Moreover, if you are carrying over winnings from one sports season to the next, you will not have to pay any federal income taxes on these winnings. However, if you are a bettor who plans on playing in the same state year after year, then you should consider paying state income taxes on your winnings, no matter what. The best option is to play in a state that does not tax sports betting, or if you are already playing there, to open an account with an IRS-approved tax-free betting service. With this option, you will not have to worry about paying taxes on your winnings, regardless of whether you win or lose.
What Are The Different Types Of Sports Betting Taxes?
The IRS publishes comprehensive guides to help people understand their legal obligations in regards to paying taxes on their incomes and expenses. One of these guides is for taxpayers who engage in wagering activities, such as sports betting. Here, the IRS breaks down the different types of taxes that you are liable for, depending on what type of activity you are engaged in.
- General Sales Tax: This is an additional tax on all retail purchases in California. If you are based in California and want to make a purchase from an out-of-state business, then you will have to pay this tax. However, if you are doing all your shopping from an in-state business, then you won’t have to pay the general sales tax.
- Wagering Tax: For every type of wagering activity, there is a specific tax. For instance, if you are a professional sports bettor, then you will have to pay a tax on your winnings that is equal to the rate of the surcharge imposed by the IRS. This tax will be added to your total winnings and will not be considered income. Moreover, if you are an individual who gambles recreationally, then you will have to pay a 3% tax on all your wagers. This tax will be applied to your total earnings and will not be considered income.
- Strip Club Fee: If you are a member of a strip club and you make a wager on the outcome of a sporting event, then you will have to pay this 3% fee. This fee is imposed on all wagers and it is separate from any other types of taxes that you may be liable for.
- Fee On Expenses: In some situations, the IRS will charge you an additional 3% tax on all your gambling-related expenses, such as your car rental and travel expenses. In order to avoid this extra tax, you have to meet two requirements. First, you have to keep a log of your travel and other expenses that are related to your gambling activity. Second, you have to declare the total amount of winnings and expenses on your tax return. If you meet these requirements, then the IRS will not charge you the 3% fee on these expenses.
- Inactivity Incentive Fee: If you don’t actively participate in any type of wagering activity for more than three years, then you will have to pay an Inactivity Incentive Fee. The amount of the fee is based on how much time has passed since your last wagering activity. If you meet this criteria, then you will have to pay the IRS $1000 per year, plus any unpaid installments. The Inactivity Incentive Fee is imposed on taxpayers who don’t participate in wagering activities for more than three years. If you do wager, but consistently lose money, then this option may be right for you. You can’t apply for an installment plan if you don’t have any winnings, so this could be a way to avoid paying the full amount of the fee. However, it is not recommended because it could end up costing you more money in the long run.
How Do I File My Taxes For Winning At Sports Betting?
When you win at sports betting, the IRS requires that you report your winnings on your tax returns. However, there are a few different ways that you can report your winnings. One way is to track them on your income statement. Another way is to enter the winnings on your tax returns as a business expense. Yet another way is to enter the winnings as non-taxable income, since you are not carrying over your winnings from one year to the next. This is usually the best option for recreational bettors, since it prevents you from having to file a return in case you lose. But keep in mind that this option makes it easier for the IRS to discover your gambling activities, and it could end up costing you more money in the long run.
How Do I File My Taxes For Losing At Sports Betting?
When you lose at sports betting, you have to report your loss. But there are a few different ways that you can report your losses. One way is to enter the loss as a business expense. Another way is to enter the loss as non-taxable income, since you are not carrying over your loss from one year to the next. This is usually the best option for recreational bettors, since it prevents you from having to file a return in case you win. But keep in mind that this option makes it easier for the IRS to discover your gambling activities, and it could end up costing you more money in the long run.
Setting up a separate bank account to store your winnings and paying state income taxes on your winnings is the best way to ensure that you are not paying any federal income taxes on your sports betting income. Moreover, if you plan on playing in the same state year after year, then you should consider paying the state income taxes on your winnings, no matter what. The burden is on the government to prove that you were engaged in illegal activity, and they have a difficult time doing this if you are reporting your income correctly.