Sports betting is a fantastic way to pass time at work, especially during the offseason. Whether you’re a sports enthusiast or just enjoy the occasional game, there’s no question that sports betting has caught on in a big way.
Unfortunately, taking a wager on sports can also lead to some tax obligations in certain states. In this article, we’ll discuss the various ways that taxes bite when it comes to sports betting and how you can avoid them.
The Various Taxes On Sports Betting
When you’re preparing to place a bet on sports, the first thing you’ll encounter is the IRS. Since sports betting is often considered a form of gambling, it’s likely that the IRS has labelled your activity as income and reports are often sent to the state (for residents).
Here’s a breakdown of the various taxes that you’ll need to pay when gambling on sports:
In most states, including California, you’ll have to pay sales tax on all winnings from sports betting. Although some states, like Nevada, don’t charge sales tax on winning bets, taxes apply for both sides of the wager. In some places, you might also have to pay an additional 2% surcharge on top of the regular sales tax for “services” like wagering and lotteries.
In the event that you’re a corporate franchise (such as a sports franchise), you’ll need to pay franchise tax on all your winnings as well. This is a fairly common and straightforward form of taxation, but it can be a bit tricky to figure out the franchise tax rate in your state.
For instance, in California, the franchise tax is currently 4.5% of your winnings from wagering.
In a number of states (such as Colorado and Pennsylvania), you’ll need to report all your winnings from sports betting as well. In these states, you’ll need to pay taxes on winnings between $100 and $150,000 as “gambling income”. In the event that you have winnings over $150,000, you’ll need to file a form W-7 (as your winnings surpass $350,000) and include your tax ID when you report the income.
In many states, you’ll need to withhold taxes from your winnings if you wager on sports. In those that require withholding, you’ll be responsible for paying the IRS out of any wins. This is often the case for professional athletes and celebrities who rack up massive winnings from sports.
Withholding isn’t complicated, but it can be a bit cumbersome if you’re not used to it. For instance, if you’re playing at a sportsbook that’s located in another state, you’ll need to find out what taxes need to be withheld in that state as well. Depending on how large your earnings are, you might also need to figure out what tax rate you need to pay in order to satisfy the IRS.
Many sportsbooks have a wide range of additional fees. Some sportsbooks charge an enrollment fee, while others charge a yearly fee that must be paid in advance. Additionally, some sportsbooks will charge you for accessing your account and making inquiries while others will charge you for using a credit card.
Keep in mind that not all of these fees will be tax deductible, so you’ll want to make sure you find out what is and isn’t tax-deductible before you begin making wagers. However, the fees that are not tax deductible are typically lumped in with the other taxes and fees that you’re responsible for paying. The exception is if you meet the requirements of an IRS “matched-funds plan”, which we’ll discuss below.
Can You Departure From/Reduce Bylying?
Some states allow for sports betting tax deductions, while others don’t. In the event that you’re able to claim a deduction in a state that does allow for it, you might be able to reduce some of your taxes. In order to do this, you will need to be in the business of investing in athletic events. If you trade stocks or funds of any kind, you can use the money you would’ve spent on taxes to buy more stocks/financial instruments. This is not necessarily considered a tax-deductible expense, but it is a strategy that has been used by many small business owners and self-employed individuals in the past.
The Matching-Funds Plan
An IRS “matched-funds” plan allows you to pool your winnings from various taxable events (such as wagers made on sporting events) and use them to purchase “matching-funds” (such as stocks, bond funds, or cash) that are then used to buy additional stock at a lower price. In the event that you qualify for this plan, you can use the money you’d otherwise owe in taxes to purchase the matching funds that you’re pooling with while reducing your overall tax bill. You cannot, however, use your tax savings to pay bills that you otherwise would’ve paid with cash.
One of the benefits of this plan is that you can purchase and sell stocks without risking capital loss. In the event that you qualify for this plan, you can make unlimited transactions without owing taxes on your gains. You also don’t have to report your holdings in the event that you qualify for this plan.
More Ways To Lower Taxes
If none of the above strategies seem viable, you have additional ways to lower your taxes. Many states grant taxpayers residency, which allows you to file your taxes based on your residency instead of your citizenship. Additionally, some states allow for the filing of an “amended return”, which can be used to lower your overall tax bill. It is essential that you consult a tax attorney or accountant for the best way to properly utilize these resources.