As a general rule, gambling income is taxable, and with the advent of sports wagering in Iowa, now is a good time to review the rules.
Most people know that you can deduct your gambling losses, but only to the extent of your gambling income. So if you win $1,000 on one wager, but lose $2,000 on another, you can only deduct $1,000. Losses do not, however, directly offset winnings. The IRS requires that you report the full amount of your gambling winnings on Schedule 1, line 21. Gambling losses are deducted on Schedule A, line 16. While in theory the losses offset winnings, in practice that often doesn’t happen. The losses only help you if your itemized deductions exceed the standard deduction. Recent increases in the standard deduction result in far fewer taxpayers itemizing – it is estimated that only about 10% of taxpayers will have itemized their deductions in 2018.
Assume, for example, that you are a college student, still claimed as a dependent by your parents, earning $10,000 from part-time and summer jobs. For entertainment you bet on sports. During the year you win $3,000 on half your wagers, and lose $3,000 on the other half – you’ve broken even. The IRS doesn’t see it that way – you report the $3,000 in earnings, but your standard deduction stays the same ($10,350 in this example). Your taxable income increases from ($350) (without gambling) to $2,650, and your tax is $265, rather than $0. It doesn’t get any better when you graduate and get a job paying $30,000 per year. Assuming that income, and the same wagering income and losses, your tax increases by $360 due to the gambling. And keep in mind that these tax increases occur even though you break even, or even lose money, on your overall bets during the year.
Legalized sports betting didn’t create this problem, it has existed for a long time. The rules regarding the taxation of gambling income developed when gambling was, generally, illegal throughout the United States. Even if the rules were unfair, there wasn’t much sympathy for illegal gamblers. Gambling is now “mainstream”, and promoted as a form of entertainment, but still the rules haven’t changed. The fact is that most casual gamblers don’t report their winnings, either because they didn’t realize they should, or because they figure it’s a small amount and they’ll never get caught. Sports betting may change that for one reason – the advent of betting via an app on your phone. An evening out at the horse races generally didn’t leave a trail – you bet in cash, won some and lost some, and no one knew (unless you won over $600 and it was reported to the IRS). With sports betting via an app there will be a record of each and every wager, win and loss. And keep in mind that the IRS has fairly strict requirements regarding the records that must be kept of your winnings and losses, even if the app doesn’t track them.
So as you place your bets, remember that the IRS may want a cut of your winning bets, even if you lose overall.