Attention sports gamblers: The tax authorities may come for your winnings.
About $ 42 billion has been legally bet on sports since gambling expanded to more states in 2018, and the industry is still growing. If you have placed bets on sites such as DraftKings
Penn National Gaming
in 2020 you may have to pay tax.
Here's what you need to know about legalized sports betting and taxes.
Do I have to pay tax on my winnings?
Profits from sports betting are considered income. Just as you declare your income, you must also declare how much money you have won on legalized sports betting.
While all profits must be reported to the IRS, you only have to pay federal taxes on them if you've made more than $ 600. The sportsbooks you use also report these gains to the IRS.
“Gambling winnings are fully taxable and you must declare the income on your tax return,” said the IRS"Gambling income includes, but is not limited to, winnings from lotteries, lotteries, horse races and casinos."
Whether you are a professional gambler betting all of your earnings on sports, or someone who occasionally bets on NBA games in New Jersey, all winnings must be reported.
How does it work?
Taxpayers can only deduct losses up to the amount of their winnings under the "gambling loss deduction" of the federal tax law. Therefore, the remaining profits will be taxed after your loss deduction is taken.
For example, if a gambler had $ 10,000 in sports betting winnings in 2020 and $ 8,000 in losses, he could deduct the $ 8,000 in losses if he itemized his tax deductions. A more detailed look at itemized deductions versus standard deductions can be found here.
You are not taxed on each bet, but on the total for the tax year.
How much should I pay?
According to the IRS, if you make $ 600 or more gambling on sports, you will have to pay federal taxes on it. This includes non-cash profits based on their value.
"Fair market value of prizes, such as cars and rides" must be reported as income, and then the amount of taxes can be determined, according to the IRS website.
Profits that reach the $ 600 threshold are taxed at a 24% rateThose taxes can come when the winnings are paid out in the form of withholding to the casinos or sportsbooks, or when you file your taxes.
The 24% rate applies to both cash and non-cash winnings.
What if my winnings are less than $ 600 – do I still need to report it?
Yes, all income must be reported to the IRS, even if it wouldn't be taxed in this case.
"You must report all gambling winnings as Other Income," the IRS said. There is a "other income" section of the 1040 form
What happens if I don't report it?
Failure to declare taxable income, such as sports betting earnings, can result in penalties.
“The late payment penalty is 0.5% of the tax due after the due date, for each month or part of a month that the tax remains unpaid, up to 25%,” according to this IRS website.
In addition, “any person who intentionally tries in any way dodge or beat any tax imposed by this title or the payment thereof will, in addition to other penalties provided for by law, be guilty of a felony and, when convicted, be fined * not more than $ 100,000 ($ 500,000 in the case of a corporation ), or a term of imprisonment of no more than five years, or both, along with the costs of prosecution. "
What about state taxes?
In addition to federal taxes payable to the IRS, some state governments also tax income from sports betting. Each state has its own different tax formulas for gambling income.
New Jersey, for example, has one 3% withholding tax on gambling profits, as the state believes it has taxable income. But Nevada does not tax profits at all because there is no income tax in Nevada.
See also: The IRS paid billions in interest on tax-deferred refunds due to pandemic-related backlog
The state tax rate is determined by the state in which the bet is placed, not the state the bettor is from. Some states have alternative taxes for residents and non-residents when it comes to sports betting.
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