The lottery is often referred to as the idiot tax.
We have a new contender ascending in the rankings.
The lack of clarity on how online sports betting is taxed may make gamblers question whether their precarious prop bets are worth the hassle.
In 2018, the Supreme Court declared a national gambling ban illegal. Since then, online betting hasn’t looked back.
Thirty-Seven states have legalized sports gambling.
The numbers are mind-boggling. In 2018 sports wagers added up to $6.6 billion. In 2022, the total catapulted to north of $93 billion!
Currently, about 90% of sports bets are placed online. The American Gaming Association estimates over 32 million Americans are participating in the new national past-time.
Sites like DraftKings, FanDuel, and BetMGM offer tantalizing incentives and apps ten-year-olds find user-friendly. Virtual sports betting has become a thing. Vice states: Welcome to the world of virtual sports betting, where nothing exists except for the cash you’re shredding.
What could go wrong?
It turns out – a lot.
Being the parents of twenty-year-old twin boys, we own a front-row seat to the carnage.
Tales of teen addiction are rampant. These include thefts of parents’ rare coins to settle gambling losses. Pilfering Mom’s Pocketbook is another creative way of funding one of the seven deadly sins.
Some kids resort to setting up their own illegal sports books and get taken to the cleaners by unpaying clients.
Besides the social mayhem, there’s another gorilla in the casino.
How does one report their gambling activities to the IRS?
Casual bettors needn’t be concerned. The problem is in the universe of specifically designed addictive apps; the casual bettor is becoming an anachronism.
The potential for tax hell is giving CPAs unnerving nightmares.
According to the Wall Street Journal:
Gambling losses are an itemized deduction on Schedule A, along with deductions for mortgage interest, state and local taxes, and other items. But the 2017 tax overhaul significantly increased the standard deduction taxpayers get if they don’t itemize, so only about 10% of filers now itemize compared with about 30% before.
The upshot is that millions of non-itemizers won’t get a specific deduction for their gambling losses while their winnings remain fully taxable.
Since 90% of filers use the standard deduction of $13,850, most gamblers won’t be able to write off their losses but must pay taxes on their gains.
Not exactly a direct path to wealth creation.
Some attorneys believe regular gamblers may deduct yearly losses against winnings if they keep meticulous records. This is a murky area. The IRS hasn’t ruled conclusively and may challenge this strategy.
There’s another method to avoid the Catch-22 of paying taxes on winnings but not deducting losses. Declare yourself a professional gambler. Professionals can net losses against winnings without itemizing and use gambling losses to offset other taxable income. Most legal experts advise against this strategy. Attaining this status is arduous and could lead to hefty taxes and penalties if not done correctly.
The Wall Street Journal summarizes these unpalatable options.
The bottom line is that millions of online sports bettors are in a triple jam. Either they pay tax on winnings and forgo loss deductions because they don’t itemize, or they net losses and gains based on gray-area session rules and risk an IRS challenge, or they flout the law by not declaring gambling winnings and hope the agency won’t notice.
The English Heavy Metal Band Motorhead was prescient concerning our nation’s gambling addiction in their 1980 song, Ace of Spades.
You know I’m born to lose.And gambling’s for fools But that’s the way I like it, baby I don’t want to live forever
For most, your best wager is not making one.
This isn’t meant to be tax advice. Please consult a qualified CPA when tax filing.