Although the USA is still some way off from legalizing sports betting, the industry has been thriving without regulation for some time now. However, this could be changing soon as the Internal Revenue Service (IRS) has indicated that it intends to tax athletic betting winnings. If this happens, it could mean significant tax hikes for the average sports bettor.
What Is The Tax-Free Exemption Amount For Sports Betting?
The federal government has set a limit (the “exemption amount”) on how much money that you can keep from income tax without having to pay tax on it. The exemption amount for 2018 is $600. This amount is reduced by the amount that you owe in taxes at the end of the year. Although the law exempts sports betting winnings from taxation, it does include a caveat that states:
- The IRS may challenge your claim that your winnings are exempt if they determine that you have a gambling problem.
- You can never be sure that your winnings are actually going to be tax-free because you cannot prove a “profit” – e.g., you could lose money on a bet.
- If the IRS decides to challenge your claim, you will not be able to deduct the tax you would otherwise owe on your winnings.
How Does The IRS Determine Whether You Have A Gambling Problem?
The IRS has an “Addiction Detection And Treatment Program” (ADAPT) that they use to determine whether or not you have a gambling problem. If they determine that you do have a problem, they will contact you to set up an appointment for a diagnostic assessment. The appointment will have to be scheduled within ten days of receiving the letter from the IRS.
The diagnostic assessment is a 90-minute interview that is meant to help the assessor determine if you have a gambling problem. The entire process is strictly confidential, and only your addiction counselor and the IRS will know what happened. Once the assessment is complete, the IRS will have a clearer idea of whether or not you have a gambling problem and what kind of treatment you need.
Will The IRS Consider Sports Betting As A Form Of Gambling?
It is very likely that the IRS will consider sports betting to be a form of gambling and subject it to taxation. This is because the industry is still largely unregulated, and there is no way to tell what impact it is having on the broader economy. The fact that some states have not only legalized, but also regulated and taxed it is evidence that it is still seen as “risky” by the federal government.
What Are The Possible Penalties For Not Paying Taxes On Sports Betting Winnings?
The IRS has a list of “penalties that apply to non-compliance” that they use to encourage taxpayers to pay their taxes. One of the penalties that can apply to you if you do not pay taxes on sports betting winnings is a “50% addition to the tax”. The other possible penalties include a “additional amount of tax” or a “additional amount of tax and a penalty”. It is very unlikely that you will be able to avoid paying taxes altogether though as it appears that Congress has exempted gambling winnings from taxation.
More On Betting Taxes From A Legal Perspective
Although it is not yet clear if or when the IRS will begin taxing athletic betting winnings, it is safe to assume that they will eventually do so. As a legal document signed by the IRS Chief Counsel for Excise and Federal Income Taxation, Erick L. Boal Jr., stated:
- In general, wage and salary income and gambling winnings are treated as earned income for federal income tax purposes.
- The IRS considers all gambling transactions to be transactions of chance. Therefore, the winnings from gambling are generally subject to federal income tax as ordinary income. However, if you can establish that your gambling activities are not for profit, you can exclude most, if not all, of your gambling income from taxation.
According to IRS Chief Counsel Boal, establishing that your gambling activities are for the purpose of “making a profit” can be a “challenging task”. This is because there is usually “no clear line separating a sporting event winner from someone playing for fun”. What’s more, he noted that the IRS does not always agree on what constitutes “making a profit” and can even see certain “casual games” (e.g., roulette) as a form of gaming rather than gambling.
However, even if the IRS decides to tax your sports betting winnings, there are ways that you can minimize or avoid paying the extra income tax. If you meet certain conditions, you may be able to exclude certain winnings from taxation altogether. According to the IRS, the following are some examples of situations where you might be able to exclude certain winnings from taxation:
- You are an enrolled member of a federally regulated sports league (e.g., the NFL). If you are a member of a private sports club that is not a part of a sports league, you may still be able to exclude your winnings from taxation if the club competes in a sanctioned sporting event. You must notify the IRS of your association with a sports club within 30 days of joining the club.
- You participate in a casino employee program in which you receive casino benefits. In some cases, these benefits could include free tickets to sporting events, free room and board, and even a tax exemption for the associated fees (e.g., membership fees).
- You participate in a government-sponsored student loan program. As a condition of participating in this program, you agree to exclude certain winnings from taxation. For example, if you are in the military and you participate in a service-related program, you may be able to exclude some of your winnings. This could include money you win from playing video, card, or lottery games while stationed abroad. Alternatively, if you are in school, you may be able to exclude some of your winnings from taxation if you participate in a student loan program sponsored by the federal government or a state government.
Many big-name sports franchises generate a significant amount of revenue through the sale of luxury items and memorabilia. Although this may not apply to all teams, it is certainly the case for the Dallas Cowboys, Tennessee Titans, and New York Yankees. Because these teams frequently sell out their stadiums and have highly dedicated and passionate followings, it’s not difficult to understand why fans might want to show their support for their favorite teams by buying expensive items.
Where Can I Go To Learn More About Betting Taxes?
If you’re interested in learning more about the taxation of your sports betting winnings, you can visit the IRS website. On the website, you will find a wealth of information regarding how to claim your exemptions, what forms you need to file, and more. For a step-by-step guide to claiming your exemptions, you can review the “Claiming Exemptions When You Win” section of the website.
The IRS has also published a form, “Exemptions and Allowances for Organizations”, that you can use to file your exemptions. As noted above, the form allows you to claim certain winnings as tax-free. In some cases, this could mean that you pay no taxes on certain winning amounts. One of the things that makes this form so useful is that it allows you to claim an “annual gaming revenue” as an exemption. This is a revenue that is not attributable to any single event but is the aggregate of all of your gaming activities (e.g., your annual bet revenue from the previous year).
Some individuals and organizations may be able to benefit from an HSA or HSK account. An HSA or HSK account is a type of health savings account that can be used to help pay for medical expenses. If you’re interested in learning more, you can consult with an accountant or medical expert to see if an HSA or HSK account might be right for you.