Question: Now that the Supreme Court says gambling on sports is legal, do I have to pay taxes on my winnings? I’m really good at predicting sports but never gambled on it because I’m a school teacher, and I’d get fired if I got caught. But now that it’s legal, I plan to pay down my student loans by making money on sports book.
— Jim in North Carolina
Jacob Dayan answers…
Before I answer your question as a tax expert, let me quote some of the other experts here at Debt.com when I told them you planned to pay down your student loans by gambling on sports.
“It shouldn’t need to be said, but gambling isn’t the same thing as saving or even investing,” warns Debt.com chairman Howard Dvorkin. “By definition, who wants to gamble with their finances? This is a terrible idea. I don’t know how else to say it.”
Adds Steve Rhode: “Say what? That’s crazy!”
We’ll get back to your student loans in a moment, Jim, but let’s talk about taxes and gambling winnings.
Hi, I’m Jacob Dayan, CEO and co-founder of Community Tax.
First, you need to know this, gambling on sports is not yet legal everywhere in this country. The Supreme Court didn’t just wave a magic wand and declare bet on the NBA and NFL in all 50 states; it simply struck down a law that bans sports betting. Now, it’s up to those states if they want to allow it.
That can take months or even years for them to decide. One thing that’s for sure, though, the IRS is already tough when it comes to gambling that’s legal right now. We’re talking casinos horse racing, and the like.
So yes, if and when the states make sports betting legal, you’ll need to document everything that you win and lose. Things can get complicated so shorten your odds of messing up by consulting a tax pro. You can learn by visiting Debt.com.
It’s not a done deal yet
First, let’s clear up some confusion: gambling on sports is not yet legal all over the country.
Jim is referring to the Supreme Court ruling in Murphy v. National Collegiate Athletic Association. In May, the Supreme Court decided that the Professional and Amateur Sports Protection Act, which stopped new states from legalizing sports betting in 1992, violated the 10th Amendment of the Constitution.
Don’t remember that one? It means that unless there’s a specific power given to the federal government, that power resides with the people or the states. This is essentially the “states’ rights amendment,” and the Supreme Court ruled that the Professional and Amateur Sports Protection Act granted authority to the federal government power when it really belonged with the state — because the act ordered states to take specific actions to ban sports gambling. Only four states Nevada, Oregon, Delaware, and Montana were grandfathered in under the Professional and Amateur Sports Protection Act because sports betting was already legal.
The Court’s ruling does not, in itself, make sports betting legal. However, many states are looking into how to regulate sports betting so that it may become legal. Gambling revenues in taxes alone could be enough incentive for the state to make at least some forms of sports betting legal before the end of the year.
Then again, the Court’s ruling does not stop Congress from passing legislation to directly ban sports gambling. So your student loan repayment plan needs to wait at least a little while.
Don’t gamble with the IRS
Even now, the IRS takes reporting legal gambling winnings and losses very seriously. Auditing gambling losses is one of their favorite past times.
Let’s say that sports betting spreads and more Americans participate. What are their income tax obligations on any gambling winnings? The first step to staying fully compliant with IRS tax law is to report all income received. The IRS list six key points when it comes to reporting gambling earnings…
- Gambling winnings include lotteries, raffles, horse racing, casinos, or any cash or fair market value of physical prizes you win such as cars or trips.
- Look out for forms W2-G from the source of your winnings. You’ll receive a copy, but so will the IRS directly from the payer. Therefore, the IRS knows when something is missing from your returns!
- You must report all gambling winnings on a tax return even if you don’t receive a W2-G.
- Gambling income is reported as “Other Income” on your tax return.
- You may deduct your gambling losses up to the number of your total gambling winnings as an itemized deduction on a Schedule A. You may not claim a loss on gambling income.
- Accurate records are a must. The IRS requires you keep detailed records in the form of a diary of all of your winnings and your losses. Receipts, tickets and other documentation you may have should be saved as well.
While the Court’s ruling may not have legalized sports betting nationwide, it has certainly bulldozed a path. If you’re even a casual gambler, you might want to consult a tax professional to help you maintain the correct records in case you’re audited.
Finally, about those student loans. Jim, if you’re a public school teacher, you might qualify for student loan forgiveness. You should check it out, because it’s a federal program, and it’s more reliable than betting against the spread on the NFL or NBA.
Jacob Dayan is co-founder of Community Tax LLC, a full-service tax company helping customers nationwide with all of their tax resolution, tax preparation, bookkeeping and accounting needs.
