How is Online Gambling Taxed?

Online gambling winnings are subject to tax. Just like any gambling income, online or in person, the IRS and state governments treat gambling winnings as taxable income. This includes winnings from poker, sports betting, casino games, and any other form of online gambling.

For most people, gambling winnings are reported on the federal tax return Form 1040. For most, this is on the line for “Other Income.” The tax rates on gambling winnings depend on your overall income. There is no specific tax rate on gambling income.

Usually, if your net gambling winnings are more than $600, the agency (including online gambling platforms) paying out your winnings is required to issue you a Form W-2G, which reports the amount of your winnings to the IRS.

Additionally, players can also deduct gambling losses, but only up to the amount of their winnings, and only if they “itemize” their deductions. Proper record-keeping of all gambling activities, including winnings and losses, is crucial for accurate tax reporting.

Keep in mind that these gambling winnings are reported both to winners and to the IRS.

Online Betting Tax, IRS Tax Attorney (Naperville IL)

What if a W-2G Form Was Not Issued

Even if you don’t receive Form W-2G, you are still required to report all winnings on your tax return.

Many players are tempted to keep those winnings a secret from the IRS. They don’t realize that eventually, most of those winnings are still reported, even if late.

The IRS will audit tax returns based on unreported gambling income. The tax on the unreported winnings is usually subject to interest and a 20% negligence penalty. Also, challenging the amount of tax may require a lawyer.

What About State Taxes?

In addition to federal taxes, state taxes on gambling winnings vary. Some states have specific regulations and tax rates for gambling income, while others may not tax gambling winnings at all. Other states, just like the IRS, may allow winners to offset their losses against the winnings. Some states (including Illinois, Indiana, Michigan, and Wisconsin) do not allow this offset or deduction.

This related article:  Deduct Gambling Losses on Your State Taxes

Best Ways to Track Online Sports Betting Losses for Taxes

Again, failure to report online betting winnings can result in penalties and interest on unpaid taxes. Keeping complete, well-organized records of your bets and winnings throughout the year will save time, and prevent being over-taxed. These records can potentially reduce your taxable income.

The best way to do this is by maintaining detailed records of all your bets. Players cannot rely alone on the statements generated from the “loyalty program” accounts. Here’s how you can best track these losses:

1. Keep a Betting Log: Create a spreadsheet or use a dedicated app to record every bet you place. Include details such as the date, type of bet, amount wagered, outcome, and the net result (win/loss). This log will serve as the primary document for tracking your betting activities.

2. Save Receipts and Statements: Retain copies of receipts, betting slips, and online statements from betting platforms. These documents are essential for verifying your claims in case of an audit.

3. Use a Separate Bank Account and Debit Card: Consider using a dedicated bank account solely for your betting activities. This makes it easier to track deposits, withdrawals, and losses without mixing them with personal finances.

4. Also Use a Separate Credit Card: Just like with the bank account, the expenses should all be tracked from a specific account. I the player must borrow using a credit card, those transactions are easier to identify from a single, dedicated credit card account.

5. Never Use Cash: Generally, for all wagers, avoid using cash. Instead, always use a trackable form of payment like cards, checks, etc.

Following these few steps are not always easy. But using these tips will help the better to be certain that gambling records are complete, accurate, and ready for any potential IRS audit.

Can a Tax Lawyer Reduce Taxes on Gambling?

Tax laws regarding gambling are not always simple. But there are opportunities to lower the taxes on gambling.

For example, a “safe harbor” treatment could help reduce overall taxes, in the correct fact situation. The calculation is complex but valuable. A tax lawyer can help you understand what losses are deductible, how to report them correctly, and develop an opportunity to use the session’s safe harbor.