Since June 2023, when sports betting legislation was passed, I and other North Carolina residents have seen a constant stream of celebrity ads or promotions from the likes of DraftKings, FanDuel, BetMGM, ESPNBet, and Caesars.
On March 11, North Carolina became the 30th state to legalize mobile sports betting and the 38th to allow sports gambling in general. Prior to this, any sports betting in the state could only be done through casinos on Native reservations, most notably the Harrah’s in Cherokee.
For some, this was a long time coming, and you may be wondering what the tax implications are on your winnings or if you can deduct any losses after a string of “bad beats.” Let’s explore more about taxation and gambling…
Which Type of Gambler Are You?
Before getting into the taxation of gambling, the IRS usually puts bettors into two categories: professional gamblers or casual gamblers.
The overwhelming majority will fall into the casual category because a substantial amount of their income comes from jobs outside of gambling and is done as a hobby. So, unless you are Phil Hellmuth or Billy Walters, you most likely will not get professional gambler treatment.
In the professionals’ case, all winnings and expenses are usually run through their Schedule C or another entity on their tax return since it is their full-time job and their living is made from betting, playing poker, etc. The IRS requires professionals to keep meticulous records of dates, times, wins, losses, receipts, expenses, slot machine numbers, venues, etc.
How Are Gambling Winnings Taxed, and Are There Any Tax Forms?
As you would expect, the IRS deems all gambling winnings (whether from lottery, raffles, slots, cards, or sports) fully taxable, and you must report the income on your tax return. As far as reporting goes, if your winnings totaled $600 or more on a betting app, they will send you and the IRS a 1099-MISC for reporting that income.
For those of you who hit it big on the card tables or slot machines, the form typically used in the casinos is a W2G for reporting winnings over $1,200 (potentially to be raised to $5,000-$5,800 if the SLOT Act passes). If your winnings total over $5,000, taxes will usually start being withheld at 24%, but this can vary depending on the state. This income will ultimately end up being taxed at your ordinary rate of anywhere between 10-37% based on current tables and your gross income.
Am I Able to Deduct Gambling Losses?
Unlike realized losses on stock sales reported or carried forward on Schedule D, as a casual gambler, you are only able to deduct gambling losses if you take the itemized deduction on Schedule A of your tax return.
Since the Tax Cuts and Jobs Act in 2016 raised the standard deduction substantially, most taxpayers take that since they do not have enough itemized expenses. If you can itemize and deduct gambling expenses, you can only deduct losses up to the amount of winnings you had, so keeping good records is important. Professional gamblers can deduct these losses on their Schedule C or other entity as a business expense.
What if I Have Dependent Children Who Are of Gambling Age Making a Profit?
If you have children between the ages of 21 and 24 who you still claim as dependents, you want to be aware of whether they are using these betting apps or making a profit, given the ease of access to smartphones and betting apps. Gambling winnings are considered unearned income, so if they end up earning over $1,250, they will have to file their own tax return to report, and any overage is taxed at 10%.
If they end up earning over $2,500, then that amount is taxed at the parent’s marginal rate. You can read more about the kiddie tax from my other blog post from March 2023 here: Does Your Child Need to File a Tax Return?
Besides Taxes, What Are Some Other Things to be Aware of With Gambling?
As the old saying goes, “All things are good in moderation,” and that certainly applies to gambling. If you do decide to start placing bets for fun, the best thing to do is budget for it and set a limit on how much you are willing to lose. Knowing when to walk away and keep from having that “breakeven” mindset if you do lose a string of bets is just as important. Most betting apps allow you to set deposit limits on a weekly and monthly basis, and they can be changed to a different amount following a 2-3 day freeze.
Recently, many credit card companies have stopped allowing transactions with known gambling companies and only allow you to use bank transfers. Casinos and betting apps are not your friends, and they prey on those who are not smart about it. We have all heard horror stories from our relatives or friends of others who ruined their lives due to addiction, and gambling can be just as brutal financially and mentally.
If you or someone you know is struggling with it, start by disconnecting any bank account links and deleting the apps. There are plenty of support groups out there, and you can get more info through the national and NC hotlines here:
- North Carolina Problem Gambling Helpline: 877-718-5543
- National Problem Gambling Helpline: 1-800-GAMBLER (1-800-426-2537)
