Super Bowl XLVII was and will be the largest gambling day of 2013. Legal gambling on the game topped $98 million in Nevada alone. Illegal betting? Well, no one knows for sure, but a conservative estimate is at least $8 billion. There a lot of staggering statistics on the Super Bowl (most watched TV event of the year, most watched musical performance of the year, $3.8 million cost per 30-second commercial clip, 70 million pounds of avocados sold, etc.), but I’d argue that the total amount bet, which is equal to winning every single Powerball lottery in 2007 eight times over, is at the top of the list.
The Super Bowl is just a piece of the pie: In the US, legal sports betting is a $2.8 billion market, while illegal sports betting, according to the National Gambling Impact Association, topples $385 billion. Other estimates range upwards of $500 billion. That’s more than the IRS estimated non-compliance gap, meaning there is more money spent on illegal sports gambling than the total revenue lost by tax fraud or filing errors in any given year. Woah.
Speaking of the IRS, say you are one of those lucky guys who placed a $5 bet and beat the odds to walk away with $15,000. Congratulations, but unless your win went undocumented and you’re going to stuff the cash under your mattress, you better report it to the IRS. Bummer right?
Here’s what winners need to know: If you placed a legal bet and won over $600 or more than 300 times your wager then you should have received a federal form W-2G. There you can choose to have the standard 25% withheld —if the winnings minus the wager exceed $5,000 and the winnings are at least 300 times the wager, or 28% — if the winnings are at least $600 but not more than $5,000 and are at least 300 times the wager. If the winner provides a Taxpayer Identification Number (TIN) they can opt-out of withholding altogether or choose to have more withheld to cut their tax liability (recommended). A form W-2G can be requested at any legal gambling organization for any amount won. If the winner does not give a TIN, than he/she will automatically be subject to the 28% rate, known as the backup withholding rate. If you were not provided a W-2G, you’re not off the hook. You may be sent a form 1099-G at year-end, but even if you aren’t sent any forms, all gambling income is taxable, and therefore must be reported.
Include any withholding from W-2Gs on line 62 of federal form 1040 (Federal income tax withheld from Forms W-2 and 1099) and report your total gambling winnings for the year on line 21 (other income). Line 21 should also include any amounts you won that did not trigger a W-2 filing.
The rules get a little tricky for different gambling activities and amount of winnings (see IRS rules here), but some guidance for the responsible taxpayer are simply to bet legally, withhold your taxes immediately, keep a log of all wins and losses, and pay close attention to forms 1040 and W-2G when preparing your taxes.
The good thing about legal gambling is your losses are deductible, to a certain extent. If you itemize your deductions using federal form 1040 schedule A, your gambling losses can be reported up to the amount which you reported as gambling income. Example: In 2013 you bet $1,000 that the 49ers would win, and like many, lost it all. During march madness, you make a little back by winning $200. These are your only two gambling activities for the year. Although you lost $800, you had $200 of gambling income so on your 1040 schedule A you can claim….. $200. Okay, it’s not great, but the government doesn’t reward what they see as undesirable behavior. Think sin taxes. The good news is gambling losses are filed under “miscellaneous deductions,” and are not subject to the 2% limit.
By the way, to claim any gambling losses the IRS says you’ll need: “receipts, tickets, statements or other records that show the amount of both your winnings and losses.”
The IRS doesn’t care how you made the money. As far as they’re concerned, gambling winnings are ALWAYS taxable income. At least by reporting your illegal gambling activity as other income on your 1040 you’re only committing one crime (illegal gambling), not two (tax fraud). Speak to a tax attorney if you have significant illegal winnings, and remember: financial institutions are required to report any check or related checks over $10,000 to the IRS.
Not much to say here; this group is out-of-luck. There were some high-profile losers during Super Bowl XLVII, including six men who were arrested and charged with gambling-related offenses after police raided their 2,000 person private Super Bowl party in Toronto. At least $2.5 million in cash was collected from the event (AP).
The Real Losers
It’s a close call between the 2 million Americans who suffer from pathological gambling (4-6 million are considered problem gamblers) or the IRS who loses out on collecting revenue from over 98% of all gambling payments. There’s also the 49ers and the millions of people who lost money on them. Last, for they few honest taxpayers who do report their gambling activity, most will will stem from the home of the 49er’s and Ravens – California and Maryland – two of the highest taxed states (See: States the Rich Should Ditch). Whoever said it pays to be honest?
- The Super Bowl is the Super Bowl of sports gambling (behindthesteelcurtain.com)
- Can You Claim Gambling Losses on Your Taxes? (turbotax.intuit.com)
- Not So Fast Lotto Winners (joyoftaxlaw.com)
JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.