The millions of taxpayers who win some form of wager on the NCAA basketball tournament will range from rank amateurs to seasoned professional gamblers — and the income tax obligations generated by gambling wins may not be fully understood by many of them.
After being canceled last year, March Madness is back. Even though it will be watched at 25 percent capacity in-person, approximately 47 million people will place wagers on the tournament this year, according to the American Gaming Association. Bracket betting is expected to decline, but more traditional sports bets placed online or at brick-and-mortar shops are expected to more than double. The association projects 30.6 million people will place a non-bracket bet, up 72 percent from 2019.
“Placing a bet in the NCAA office pool is considered to be gambling, even though participants may claim some skill in selecting their bracket winners,” said Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting. “Under the Tax Code, any income earned from gambling is taxable whether the gambling is legal or illegal.”
Under a 2018 Supreme Court decision, states are now permitted to offer sports betting. “Many states have enacted or are starting to enact enabling legislation,” he said. “Currently, 25 states plus the District of Columbia now have authorized sports betting. Most of these states impose an excise tax on the licensed sports betting facility, and states with an income tax typically tax gambling winnings, as does the federal government.”
The fact that it is legal in half the states may also help the IRS and state tax authorities track sports betting activity, Luscombe indicated. “It may not be great news for some gamblers, because a lot were betting on sports all along and now that it’s legal it’s harder to avoid tax on it,” he said.
Bill Ordine, who provides analysis and legal advice at Bookies.com, Gambling.com, and GreatLakesStakes.com, agreed. “Many sports gamblers are unfamiliar with the Tax Code requirements because they have been doing it ‘off the books,’” he said. “Now that a lot more are doing it through legal bookmakers, they find themselves in new territory.”
Fantasy sports are different. “Under the 2006 Unlawful Internet Gambling Enforcement Act, fantasy sports were determined to be a game of skill rather than gambling,” Luscombe explained. “As a game of skill, it is either a hobby or a business depending on the facts involved. Income from a hobby or business is also taxable. If an individual can establish profits from the activity for three of the last five years or if that activity is the primary source of income for the taxpayer on a full-time basis, the individual can be considered to be engaged in a trade or business, which makes it more likely that related expenses are deductible against income.”
If the gambler is not a professional, their gambling winnings are separate from their gambling losses — they cannot net them, Luscombe observed. “Winning gets reported as ‘Other Income,’ while losses have to be itemized to be deducted. With the increased standard deduction, it’s less likely that the casual gambler will itemize. And even if they do itemize, they cannot deduct gambling losses in excess of gambling income.”
There’s a difference between the thresholds that require the payer to report to the IRS, and what the gambler is required to report, remarked Ordine. “Different activities have different reporting thresholds. The most common is the threshold for slow machines. A payout of $1,200 triggers a W-2G — that threshold was established decades ago and has not been indexed for inflation.”
“Some gamblers make the mistake of thinking it’s the documentation that triggers their reporting requirement. But the requirement for the gambler to report is when they win their first dollar,” he added.
Ordine noted the disparity between in the treatment of gambling winnings and Wall Street. “When you report winnings, it increases adjusted gross income, which can impact a number of benefits, such as qualification for stimulus checks, and how much Social Security is subject to taxes. But if you day trade on Wall Street, you get to enjoy the ability to net out your losses against your winnings.”
