On January 8, 2022, online sports betting launched in New York much to the excitement of sports fans and betting enthusiasts. The 2018 Supreme Court decision that struck down the Professional Amateur Sports Protection Act (PASPA) opened the door to allow individual states to pass laws legalizing sports betting. New York passed a law in 2013 to allow this and began to allow in-person betting in 2019. New York authorized mobile wagering in April of 2021 and has approved 4 licenses for various companies to provide mobile wagering. Given the ease and security of these operators and the aggressive offers for new players there is certainly a lot of interest in sports betting for both new and experienced players alike; however, much like nearly everything else, there are tax implications for individuals to consider.
The 51% Tax Rate Myth
One of the immediate headlines of New York sports betting was that bettors were going to be subject to a 51% tax rate. While there is a 51% tax rate, it is not imposed on individual bettors, but rather on the gross revenues of the operators. As of the launch, the operators have not yet passed this cost on to the individual consumers, but such a heavy rate is likely going to lead to long-term difficulties for operators in the state. It is possible that over-time the operators will need to adjust the vigorish in order to deal with this heavy burden. Luckily, so far the lines offered to New York consumers have yet to be any different than offered elsewhere.
Perhaps no area of the Tax Code is as counter intuitive as gambling income and losses. Most casual and even serious gamblers will look at their results on a net basis – how much they are up or down in a year (hint: the answer is usually down) and then determine if they have any reporting obligation on this net income. While this approach certainly passes the commonsense test, it is not how the laws are currently written.
Under the current laws, technically speaking each wager is its own event – this is true for any form of gambling, whether its table games, slot machines or sports betting. For non-sports gambling, the typical measurement would be a “session,” which while there have been improvements, is still somewhat ambiguous under the tax code. The current understanding and guidance indicate that a session would be considered on a per calendar day, per game basis (while the guidance is explicit to slot machines, it is likely (but unsettled) that the same logic when applied to table games would be acceptable for each type). For sports wagering, the idea of a session is far less defined and surely if you ask a bettor, you will get a different answer than perhaps what the IRS has in mind. The Tax Code requires income or loss to be reported on a per transaction basis (session for many instances) but does not explicitly define what a transaction is. Given the overall legislative and court history, sports bettors will likely per IRS Regulations have to account for each game wager individually, making each wager a separate taxable event.
So what does all of that have to do with the idea of netting wins and losses? Under the tax code, taxpayers will have to report all winning wagers as an item of income and would only be able to deduct losses as an itemized deduction (should they so itemize). This result can have some particularly interesting consequences for taxpayers, such as increasing the taxable portion of social security benefits or limiting access to IRAs and certain tax credits.
As an example: Joe wagers $200 on a University of Connecticut (UCONN) vs Maryland college basketball game for UCONN to win, getting +3.5 at -110. Joe wins this wager and has gross income of $181.82 for this game. That same day, he also bets the over/under of 57.5 (also at -110) on the Giants and Eagles game for $150, and loses this bet. On the day, he is net $31.82 in gambling profit and decides to quit, rather than betting the Hawaii basketball game late at night on ESPN 8.
On his tax return for the year, he would report $181.82 of gambling income on Line 21 and then take an itemized deduction of $150 for his losses. Even if he were to have another $500 of losses for the year, he would still be required to report that winning wager as income and deduct losses (up to his winnings) for the year. If Joe does not itemize then he cannot take these deductions and such income would be included in his Adjusted Gross Income, which could result in him not being able to make a Roth IRA contribution. Also too remember that gambling loss deductions are limited to the amount of winnings reported.
Free Play and Comps
With the entry into the New York marketplace many operators are launching aggressive advertising and customer acquisition campaigns. Given the aforementioned 51% state tax on gross revenue operators will need to capture a large segment of the market in order to achieve certain economies of scale to overcome this large tax burden hence the aggressive approach. The 2 most common methods of attracting customers are sign-up and/or first deposit bonuses and complimentary items (comps).
There is no definitive ruling either way on the IRS treatment of free play, such as the sign-up or first deposit bonuses that require playthrough (which are the most common type on mobile sportsbooks) or free play/direct bets at casinos. Given the restriction on use and inability to withdraw until wagered and won, it is likely that a taxpayer would not have constructive receipt of these items and therefore the act of granting and wagering the free play is non-taxable; however, any money won with these would be taxable and subject to the reporting requirements listed above.
For other items of value given to entice play, such as free jerseys (a common promotion in New York) or items of property (common in casinos) these items do in fact constitute taxable income to the recipient and should be reported as other income. These are considered to be income from gambling transactions and can be offset with an itemized deduction for gambling losses.
Information Reporting & Recordkeeping
Unlike many other types of income (wages, interest, etc) the information reporting requirements for gambling transactions is far less comprehensive. Operators are only required to report information (in the form of a W-2G to the IRS if certain thresholds are met)
- For Slot Machines & Bingo if the winnings are greater than $1,200
- For other games, if the winnings are at least $600 or more and at least 300 times the amount of the wager
For sports betting it is unlikely (but certainly not impossible) that many payouts will reach the reporting threshold, except for large, multi-leg parlays that are rarely hit.
However, just because the information is not reported it does not mean that taxpayers are “off the hook” for reporting the income; the burden to report income always falls on the individual taxpayer, regardless whether the information is reported to the IRS or not. The IRS requires that taxpayers keep a log of gambling activity in order to deduct losses and as a mechanism to record income. Per the IRS, a complete log should include
- Date and type of the wager or activity
- Name of the Gambling Establishment
- Address and Location
- Names of other persons present
- The amounts won and lost
As much of the sports betting is done on electronic devices, most of this information should be readily available on the account history of each individual bettor.
Mobile sports betting is a welcome addition to New York and can certainly make sporting events even more exciting to watch. The revenue from this is expected to be $480 million per year to New York and is primarily ear marked for property tax relief and education. Individuals should always bet responsibly, within their limits and for entertainment purposes and should seek help if they feel overwhelmed. They should also be prepared, like in all other facets of life, for the tax man to take their piece of the pie and make sure they understand the rules around gambling income.
Edward McWilliams, CPA
Ed is a Partner in the firm’s tax and business advisory practice focusing on providing services to middle market private companies across different industries as well as to early stage startups. Ed has over a decade of experience providing tax and business consulting services to these companies of different sizes and across different industries, bringing a broad and diverse knowledge base and strategic solutions to the many complex issues that businesses face.