Why you should care
Because gambling deductions can be legal even if the bet was not.
So you put down a cool $50 in your March Madness pool and confidently selected Duke as your 2019 Men’s NCAA Tournament champion. After all, with three top prospects in this year’s NBA draft, the Blue Devils were as close to a sure thing as possible in the tourney.
But that’s why they call it madness. No. 2 Michigan State knocked off No. 1 Duke in the Elite Eight, busting millions of brackets — and leaving millions of people out of millions of dollars. You might think the Super Bowl is the most popular betting event of the year, but you’d be wrong. “March Madness in aggregate has more than double the betting of the Super Bowl,” when you add up all the games in the NCAA Tournament, says RJ Bell, a sports betting expert and lead oddsmaker for The Associated Press.
How much? A conservative estimate is in excess of $10 billion worldwide. And for those of us who live stateside, there’s a little-known step we can take to salve our pride (and our bank accounts) after losing bets: Deducting gambling losses to the extent of our gambling winnings on our taxes — even if that office pool wasn’t exactly legal.
The IRS doesn’t care whether it’s from a legal activity or an illegal activity; just because it’s illegal doesn’t make it tax-free.
Nathan Rigney, lead tax research analyst at H&R Block
Before you scramble to write in an additional deduction on your 2018 tax return, however, know the guidelines to avoid getting audited. To start, “you cannot lower your other taxable income with a gambling loss or with a wagering loss,” explains Nathan Rigney, lead tax research analyst at H&R Block. “You cannot deduct a gambling loss that then offsets other income, like your wages or investment income. You’re only decreasing the taxable amount of winnings.”
What does this look like? There are two types of sports betting deductions. The first is the wagering transaction, “where you spend money to try to win money, and if you win money, you can offset winnings by the cost of that wager,” per Rigney. The second deduction is writing off gambling losses, which gets trickier. “If you want to deduct gambling losses other than the costs of entering that winning wager, you have to itemize any gambling losses you have throughout the year,” explains Rigney. For example, if you bet $10 and won $50, your income for that wager is $40. You can write off your $10 wagering transaction. Then, any unrelated wager losses can be “deducted as itemized deductions to the expense of your net winnings,” Rigney explains. “So if you lost $100 on other bets, you can deduct $40 on that, and, if you itemize effectively, reduce your gambling debt to zero.”
There are some key considerations to remember. First, you must keep track of all your gambling expenses — including the date and type of wager, name and address of the gambling establishment, amount you won or lost and even names of anyone who was with you. (The IRS may actually ask for this information if you’re ever audited.) If you’re just tracking annual pools and fantasy games, this log shouldn’t take too much time and will allow you to write off your losses if you do happen to win big. After all, even casual office pools and fantasy leagues can still reach four-figure payouts.
Second, in order to deduct your gambling losses, you are, naturally, informing the IRS how much you won. When you win through legitimate channels, such as FanDuel or Vegas sportsbooks, you’ll get a clean account statement to report the income on your Form W-2 G. This will be more common as more states legalize sports betting; as of April 2019, eight states have full-scale legalized sports betting, two more have passed bills, and 29 have introduced bills to legalize sports gambling.
Betting on college sports, however, isn’t necessarily legal in all states. For example, a recent bill introduced in Virginia would exclude betting on events involving Virginia-based colleges. And Tennessee’s recent sports betting bill may be amended to include an “opt-out” for colleges, per ESPN.
But a fair amount of sports betting takes place illegally. What happens then? “The IRS doesn’t care whether it’s from a legal activity or an illegal activity; just because it’s illegal doesn’t make it tax-free,” explains Rigney. And while your local law enforcement likely has better things to do than prosecute your office March Madness pool, disclosing your illegal activity to the IRS may not be worth the amount you’d be hoping to deduct against gambling winnings.
Thus, some people may never take advantage of this tax trick. But if you fall into a certain category of sports gambler, and most of your winnings come by honestly, you may be able to reduce your taxable income significantly. Either way, it certainly couldn’t hurt to start keeping a wagering log to give yourself the option to deduct losses and expenses.
“It’s not as relevant to people who don’t win much money gambling, but once you win that big pool or tournament, you’re going to realize, ‘I wish I would have been keeping track of all those expenses,’” says Rigney.