Gambling Taxes FAQ

Gambling Taxes FAQ

Unabated Staff
Professional Gambling
taxes
December 28, 2023

 

Recently, Unabated did an Ask Me Anything in our Discord with CPA Zak Zimbile, who specializes in filing taxes for gamblers, both professional and recreational.

He answered wide-ranging questions from users about whether to file as a recreational or professional bettor; when you should form an S corporation or other entities; and more.

If you missed the chat, we’ve rounded up the questions from that session. Both questions and answers have been edited for length and clarity. Questions are aggregated from users in the Discord. Answers are all courtesy of Zimbile.

Does the IRS understand how sports betting works?

Zak Zimbile: The IRS has a very basic understanding of gambling. They don’t have specific knowledge into any area of gambling like sports betting, poker, advantage play, etc.

In audits, your representative should start by educating the agents about the type of gambling involved and how a taxpayer operates to give them an idea of what is happening. Most agents are generalists and have little idea of the space or lifestyle.

 

What do you think the future holds for sports betting tax law?

ZZ: There will be a considerable lobby to improve things. Gambling has always held a stigma from a tax perspective – so changes may not be for the better – but the focus is making the best of it based on current laws.

 

Do many recreational gamblers get audited?

ZZ: Audits, in general, are less frequent now than they have been in the past. The most frequent thing to happen to recreational gamblers is that they will receive an automated notice if their reporting winnings do not align with what was reported on their behalf, such as on a W-2G.

 

Is it more likely someone would be audited if they received dozens of PayPal 1099-Ks?

ZZ: Any time you include more information in a return, it increases your likelihood of audit. It’s not quantifiable, but more complex returns are more likely to be selected for audit.


If you correctly include the 1099-K income on your return, it should not have a noticeable impact on that chance. If you do not report it, you will receive an automated notice. 

Can I use the win/loss statement from my sportsbook account to report my winnings to the IRS?

ZZ: You can use a win/loss statement to help substantiate your log, but don’t rely on it as a standalone measure. 

Everyone should keep a log in whatever format they see fit. Also use third-party information to support their records. You may think operators track all bets accurately, but that’s often not the case.

Is it a red flag to report only your net profit rather than report gambling winnings and then deduct losses?

ZZ: It’s most likely a red flag for the IRS, and for some state agencies, since the taxpayer derives a significant tax benefit when reporting net profit instead of reporting gross figures as required. Logically, it’s a red flag since very few gamblers will incur no losses.

 

If your ROI is in the 2-3 percent range and you’re only making a few thousand dollars as a recreational bettor, aren’t you losing most or all of your profit to taxes?

ZZ: This depends on a few factors, including your other sources of income, deductions and state of residence. For those that already itemize their deductions and have no credit eligibility, there are no “penalties” to filing as a recreational bettor.

If you do not itemize or qualify for certain credits/deductions that are income-based, then there are negative consequences to consider. Do a quick analysis to see the net penalty of an increased adjusted gross income.

 

How do you define gambling “sessions” for tax purposes for someone who bets online only? Is it reasonable to say each day is a session? Each week? Every time you open and close an app?

ZZ: The unfortunate answer is: each wager is most likely a session. There is no language that applies directly to sports betting, but there is language that applies to horse racing and that can be applied to sports betting. That being said, there are always certain scenarios that arise (arbs, for instance) where sessions need to be adjusted.

 

If you hedge a bet or make an arbitrage play, does the IRS understand that your net for that game is your profit? Or would an arbitrage still incur the normal “take your wins, itemize your losses” advice?

ZZ: These are one bet and the net result should be reported as such. It is a reasonable position to take that you would never bet Game B if you didn’t have an arb opportunity with Game A.

 

How does the IRS treat income from person-to-person betting, settled via payment processors? What needs to be reported?

ZaktheCPA: It should be reported the same manner in the rest of your gambling winnings. While it is not reported to the IRS on your behalf, it is your requirement to report it (similar to untracked cash game winnings in poker) and pay the associated tax.

It is important to remember the settlements themselves only represent a transfer of money. You may receive a transfer from someone for $2,000, but this represents five different gambling sessions in which you won $10,000 and lost $8,000. You are required to report those gross amounts. 

 

What should I do if I’m having a down year besides delaying expenses to the new year if possible?

ZZ: Unfortunately gamblers get the short end of the stick in many aspects of the tax code, including losing years. Deferring expenses is one of the only options from a gambling perspective. From a general tax planning perspective, it could be a good time to recognize gains or convert IRAs to Roth IRAs (depending on your other sources of income).

 

If you have income from multiple aspects of the game, like consulting for others by writing code; income from DFS winnings; and regular sports betting income, should you set up separate entities or combine them all into one?

Zak zimbile: Your gambling income/expenses must stand alone from your consulting income. Since it is two different lines of work, you cannot combine them. If you are a pro gambler, you would need to have a separate profit/loss for the consulting business and for the gambling business. DFS can be aggregated with betting income since DFS is considered gambling for tax purposes. 

If you have a losing year from the gambling side, you cannot deduct it against your consulting income, even though your consulting income is related to gambling. You are not able to change the nature of the income.

 

If you’re involved in multiple disciplines like sports betting, poker and horse racing, would they all go on the same Schedule C? Does that change if you’re up in, for example, sports betting but down at poker?

ZZ: Usually, yes. Everything is taken into consideration together. While you should be tracking the results of each game type, the gross results from each are aggregated for reporting purposes. You do not need to report each game type separately on a line item.

 

If I have a lot of futures that don’t pay out until 2024, are those considered losses for 2023?

ZZ: These are recognized as losses (or wins) when they are graded. Since many futures will not be graded until 2024, the loss is not recognized until 2024.

If you had a Super Bowl future on the Panthers, you could make the argument to take the loss in 2023 since they are eliminated from playoff contention.\

 

 

What should guide your decision to file as a recreational versus professional bettor? 

ZZ: It’s important to make the determination of status based on the necessary guidelines, instead of what is most advantageous from a tax perspective. 

Filing as a pro will definitely help reduce state tax in those states that do not allow losses as a deduction, but you cannot allow the tax impact to direct your filing status. There are many times where one should file as a pro based on play, even though it could result in higher tax The important thing is to document your reasoning and, if you are a pro, capitalize on the other advantages like expenses, retirement contributions, etc., to minimize the impact 

 

What’s the minimum amount of profit you have to generate in a year before you can file as a pro?

ZZ: It does not rely on income generated. You should be able to show profitability at some point, but there are recreational bettors who have won six figures and pros who have made $10,000 or even had losing years. It’s more about treating your play like a business and the time spent.

 

Do you need approval from the IRS first to file as a pro? 

ZZ: You do not need to submit anything to the IRS prior to filing as a pro. When you file your tax return, the IRS will be aware that you are filing as self-employed based on the schedules included with the return. 

If they audit the return and determine you are not a professional gambler, the return will then be “re-submitted” as a recreational bettor. If additional tax is owed, you would be subject to penalties and interest on any unpaid amounts.

 

What are the advantages for a professional bettor of a sole proprietorship vs. LLC vs. S corporation?

ZZ: An LLC is a legal entity registered at the state level that gives you liability protection. If someone were to sue you (as a gambler), your LLC should limit the liability to your business assets. That is the general idea of LLCs. 

You do not need to create an LLC to file as a sole proprietor. If you are doing any “side hustle” work like consulting or rideshare you default to a sole proprietorship and will file on Schedule C. 

If you choose to create an LLC for your side hustle, you will still file on Schedule C and nothing will change from a tax perspective. In short, there is no tax advantage to an LLC, only a potential legal one.

Should you create a limited-liability corporation to file as a professional bettor? 

Zimbile: If you are filing as a sole proprietor, you do not need an LLC to do so. An LLC is a legal entity that provides certain liability protection. It is disregarded for tax purposes. A majority of sole proprietors do not have LLCs and they can still deduct any business-related expenses without an LLC 

 

What’s required when you file as a professional but aren’t forming an LLC or S Corp.?

ZZ: Just a Schedule C.

 

Do you need an LLC to contribute to a SEP IRA? Or can a sole proprietor without an LLC do this?

ZZ: A sole proprietor can do this. You will need an employer identification number from the IRS, but you do not need an LLC. You can also open a solo 401(k).

Are there tools that can show you the tax advantages/disadvantages as you increase or decrease your AGI?

ZZ: Your best bet is tax software and running analyses with different levels of winnings/losses. It can be done manually, but you would have to be conscious of all credits/deductions you qualify for and account for the phaseout range of each, as well as any possible state benefits. 

If you are working with a tax professional, they can definitely do this for you. If you are using commercial software, it may take a but of time, but can be done.

Is there any tax software aimed at gamblers?

ZZ: Tracking usually comes down to personal preference. Many use Excel to track everything, primarily so they can customize the output. It doubles as a tracker for profit purposes and can then be used for tax reporting. 

Excel is likely the best bet at this point, although there are apps like Pikkit to help log your bets as well. 

 

If filing as a professional, how much of one’s expenses such as software, subscriptions, computer equipment and the like can be deducted from one’s earnings before the end of the tax year?

ZZ: Taxpayers follow the cash-basis principle. Any expenses paid in 2023 can be deducted in 2023. This includes prepaid expenses for software, subscriptions, rent, etc. Depending on income levels, it could make sense to accelerate these expenses, especially since pro gamblers cannot deduct these expenses in a losing year. The best you can do is break even. 

Expenses are a dollar-for-dollar reduction of your net business profit. Self-employment tax and income tax are based on your net earnings. If you are in the 22 percent income tax bracket, you would save about $37 in tax per every $100 in expenses incurred. This is $22 in income tax and $15 in self-employment tax. That’s not exact in all circumstances, but it should give you an idea. 

If I’m tracking bets in Excel do I need to maintain a version history, documenting the state of the spreadsheet month by month?

ZZ: This definitely helps. This shows that you have been concurrently tracking and didn’t create a spreadsheet at year’s end (or as an audit was occurring) and strengthens the reliability of your documentation.

What tax forms are sportsbooks required to send you?

ZZ: Sports books will only issue W-2Gs or 1099-MISCs for amounts won through bets or prizes/drawings. They are not a payment processor and will not issue a 1099-K. There are different thresholds for W-2Gs depending on the game type, but it is more than $600 and 300-1 odds for sports wagers.

 

What tax forms are PayPal, Venmo, or other payment processors required to send you?

ZZ: Any third-party payment processor is required to send a 1099-K if they processed more than 200 transactions totaling more than $20,000 in a given year. This is per payment processor. These amounts do not include any payments from “friends and family.” 

That being said, they can send you a 1099-K for any amount and any given number of transactions. But, 99 percent of companies default to the IRS thresholds because it is more work for them to issue 1099-Ks for small amounts and it annoys customers.

 

If you receive a W-2G from a sportsbook because you hit something like a 300-1 parlay, will the form be for just that wager/winnings or for all of the winnings in that year?

ZZ: W-2Gs are issued on a per wager basis. The only time you can expect to receive a tax form for year-long activities is from DFS as they are still considered a “game of skill” from a reporting standpoint. They issue 1099-MISCs based on net results for the year, for now.

 

Why doesn’t the IRS push for books to 1099 players like DFS does?

ZZ: DFS is currently not treated as gambling from a legal perspective. However, DFS’s day may be coming and if so, they will fall under the same reporting requirements as gaming operators. The 1099s issued by DFS operators are relatively useless anyway. They only report your net profit for the year, when each tournament/entry is a session itself and needs to be reported on a gross basis. 

If Congress tried to lessen the W-2G threshold for individual wagers, books and taxpayers would heavily lobby against that. They are actively trying to increase the thresholds across all game types now.

Some states don’t allow gambling losses for recreational bettors and will tax all of the winnings. When states reverse that position, do they ever go back and retroactively apply the new guideline allowing gamblers to amend their past tax filings?

ZZ: We’ve seen two states pass retroactive legislation (Michigan and West Virginia). Both now allow taxpayers to deduct gambling losses at the state level. West Virginia allowed taxpayers to go back two years and apply the same logic, so you could amend those years and potentially receive a refund at the state level. Moving forward, any state that passes legislation will be on a case-by-case basis to determine if it is retroactive or only forward-looking.

If you’re using a proxy in another state, can you draw up a legal agreement between two parties regarding tax liabilities on winnings?

ZZ: You could set up a legal agreement of sorts. The legal framework falls outside of the scope here, but from the tax side of things, there are a few different ways it should be handled depending on how exactly the process is working. 

There’s always a chance of breaking a sportsbook’s terms and conditions, but even if that occurs, it doesn’t change the obligation of one or both parties regarding the tax impact.

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