Online sports betting continues to sit in a relatively murky area within United States’ law. While deemed illegal by the UIGEA, offshore online betting sites are able to skirt the law, thereby operating with some sense of legality — or at least non-harassment. And although online gambling is still technically illegal — even in offshore contexts — no American gambler has thus far been punished for offshore online sports betting. That being said, if you engage in online sports betting, the government still expects to play a role, and the role it will play without fail is that of Tax Man.
Even in regards to illegal activity, the IRS assumes you’ll pay taxes on any income. While it may seem strange that the United States government expects to be paid when you profit from what it has declared illegal, the result is the same: Every April 15th, you’re required by law to report on your online sports betting wins — and pay up. Whether you’re new to online sports betting, or you’re new to making sure you and Uncle Sam are on good terms, here is a quick primer on taxes in the world of online sports betting.
Whether you’re an amateur gambler or a serious professional, anytime you win money from placing a bet, the IRS considers that money taxable income, which means you’re required to report it on your tax return. From one crazy night at the blackjack tables in Vegas to the wagers you placed on World Cup soccer matches with a reputable site you found at http://www.usasportsbooksites.com, every time you won during the previous year, you need to report the amount you won on that year’s tax return as income, and regardless of how much you lost, you need to always report your gross winnings on the income part of your return. Losses are also taken into account, but they’re taken into account of a different part of your tax form. So, in order to be kosher with Uncle Sam, don’t deduct the $2,000 you lost on the Kentucky Derby from your gross winnings — that’s the sort of shady dealing that could land you in the middle of an audit.
So, how do you report your losses, so you can ensure your losses and winnings are appropriately and mathematically balanced? Your losses are deducted on Schedule A as a miscellaneous deduction, and you’re allowed to claim all of them up to the amount of your winnings, but there are a few caveats. First, you have to be able to substantiate your losses, which means you need to keep detailed records of what wagers you made, when you made them, the sites you placed them on, and the amount of money you made or lost. That way, in the event of an audit, you can prove to the IRS that you deserved to take all the deductions you claimed. Secondly, your bank statements will also need to verify your losses, so do not fudge the math. The IRS is skilled at catching people who mishandle the financial truth, and the penalties can be steep. Lastly, bear in mind that while illegal winnings are still taxable winnings, deducting illegal losses may land you in hot water. While the IRS seems like it won’t split hairs in this department (after all, how unfair would it be for the IRS to take money from illegal activity but not grant leeway when that same illegal activity causes you to lose money), the state you live in may not be so kind.
Gambling — like many other activities in the United States — falls under both federal and state laws, and sometimes those laws and their enforcement are not in agreement with one another. It’s possible that the state you live in won’t allow tax deductions for illegal activity, while the federal government most likely will. That state may also still expect you to report all your winnings — all your gross winnings, which means that if you won $50,000 last year, but you lost $45,000, the state would want to be informed of the $50,000 but would possibly choose to ignore the $45,000, resulting in a large — and arguably unfair — tax bill. If you’re engaging in online sports betting, you’ll want to contact your state’s Tax Board and find out how the rules apply to you and your gambling situation, just to be safe.
On a good day, gambling results in winning money. Just remember that every time you win, Uncle Sam is there, too, reaching out his hand, and he expects to be paid.