When it comes to gambling, you can bet the IRS is paying attention

We’re a few weeks away, and things aren’t going well for my soccer team. If you’re wondering how bad it could get, I had New Orleans Saints running back Alvin Kamara on the bench last week. Yes, that Alvin Kamara—who rushed 20 times for 115 yards and scored four touchdowns against the Dallas Cowboys.

Fortunately, in my league, we don’t play for money—just for bragging rights. But many Americans participate in gambling. About 50% of Americans bet on sports at some point—and not all of them are legal. According to the American Sports Association, the annual revenue from the illegal sports betting market in the United States is estimated at more than 700 million dollars.

Rear end

Not all gambling is illegal, although it wasn’t always so. This is especially true when it comes to sports. Beginning in 1992, the Professional and Amateur Sports Protection Act (PASPA) greatly restricted states from allowing gambling. A few exceptions existed – for example, it was legal in Nevada casinos and a few states, such as Oregon, allowed limited pools or lotteries.

To Atlantic City’s credit, the law allowed New Jersey to create a gambling policy within the state’s casinos, as long as it does so within a year. However, New Jersey was not in a hurry and it was 20 years later that the state decided to vote. New Jersey argued, in response, that PASPA was unconstitutional.

The issue eventually reached the United States Supreme Court, which, in 2018, struck down PASPA, opening the door for states to legalize sports gambling. Justice Alito, wrote for the majority Murphy v. National Collegiate Athletic Associationdeclared, “Congress may regulate gambling directly, but if it chooses not to do so, each State is free to act on its own.”

Predictably, a clamor for a piece of gambling ensued. Legal sports betting is now partially legal in many countries.

Tax Leaders

The dollars involved in legal gambling are huge—and growing, perhaps because of sports betting. Last year, 30 of 36 countries set annual records for commercial gaming revenue—and their coffers benefited from that badge. Commercial sports generated $14.67 billion in sports tax revenue paid to state and local governments, not including the other billions paid in income, sales or other taxes.

It’s not just state tax authorities who have an interest in making sure the stakes stay high — the federal government is paying attention, too. Between fiscal years 2020 and June 2024, IRS-Criminal Investigation (CI) initiated 151 investigations into illegal gambling totaling more than $178.8 million. The investigation resulted in 71 convictions with an average prison term of more than two years.

“Betting on sports has increased dramatically in the last five years and is more common than ever. Although online gambling is readily available, it is not always legal,” said Director of IRS Criminal Investigation Guy Fico. “As this year’s football season begins, IRS-CI special agents continue to monitor trends and use our expertise to eliminate criminal activities related to illegal gambling such as about money laundering and tax evasion.”

Millions Are At Risk

In May 2024, CI and Homeland Security Investigations special agents discovered that former Major League Baseball (MLB) pitcher Shohei Ohtani, Ippei Mizuhara, had been gambling through an operation illegal to make books for several years.

According to court documents, on March 8, 2018, Mizuhara accompanied Ohtani to a bank in Phoenix, Arizona, to help him open a bank account to deposit his salary. Importantly, Mizuhara also translated Ohtani when a bank employee provided login information for an account on the bank’s website. With that information, Mizuhara illegally withdrew nearly $17 million from Ohtani’s bank account—without Ohtani’s knowledge or consent—to pay off his numerous gambling debts. Mizuhara had racked up debts after he started placing sports bets at an illegal bookmaker—and started losing. According to court documents, even though he owed his bookmaker more than a million dollars in losses, the bookmaker continued to increase his betting limits.

At tax time, Mizuhara told a different story. He reported to the IRS that, in 2022, his total taxable income was $136,865. By law, he must report ill-gotten gains—and he didn’t report the $4,100,000 he stole that year. He also said that he was single when he was married. Because of the incorrect information on the return, Mizuhara owes approximately $1,149,400 in additional taxes for the 2022 tax year (before interest and penalties).

Tax & Gambling

From friendly bets to jackpots, gambling winnings are reported for federal income tax purposes. When the numbers are large enough, those earnings are also reported to the IRS using Form W-2G. Form W-2G is issued when gambling winnings other than those from bingo games, slot machines, keno and poker games are $600 or more and at least 300 times the amount wagered. A W-2G form will also be issued if the salary is paid, including the backup withholding and the gambling ban. Currently, denying a gamble is equal to the cost of holding a backup: a flat 24%.

Even if you don’t receive a tax form, if you gamble for fun, you must include your winnings in your tax return. According to the IRS, a casual gambler is a gambler who is not a real gambler or who is not “engaged in the business or business of gambling.” If you’re wondering about the line between fun and business, the IRS uses a set of facts and circumstances, saying, “[l]like any other taxpayer, the gambler has the burden of proving that his activities rise to the level of a trade or business.”

Here’s why that’s important. Although all gamblers must report their winnings, gamblers may deduct losses up to the amount of their winnings as a deduction listed on Schedule A. gambling losses remain after the 2017 tax reform. Miscellaneous expenses that exceed 2% of your gross income (AGI) are eliminated, but miscellaneous expenses that are not subject to 2%, like gambling losses, remained. The amount you can withdraw, however, cannot exceed what you report in gambling winnings.

(It’s important to note that the increase in the standard deduction, combined with changes in mortgage interest rates and state and local tax deductions, makes it less likely that taxpayers will get less. This means that Most taxpayers will claim the standard deduction instead of writing off your deductions, so any normal gambling losses are essentially lost.)

When gambling is your business or business, gambling-related income and expenses are reported on Schedule C. The best part? You do not need to provide information to claim your loss. However, the Tax Cuts and Jobs Act (TCJA) changed the definition of “gambling loss” under section 165(d) of the Internal Revenue Code to include any deduction allowed in carrying on a business of to bet. That means that taxpayers whose business is gambling can no longer deduct non-gambling expenses, such as travel to and from the casino, aside from losses. So, for example, a taxpayer who wins $10,000 can deduct that amount from combined losses and related expenses. This change applies to gamblers for the years 2018 to 2025.

(Prior to the TCJA, professional gamblers could deduct travel and other gambling-related expenses without capturing winnings and losses, a rule upheld by the Tax Court in the past. Mayo v. Commissioner).

Keeping records

But most of us are not considered professional gamblers (and, in my case, it’s obviously for the best). Professional or not, if you plan to bet, keep very good records. Your records should include the date and place you bet, as well as the amount and type of bet. It’s easy when you’re at Sugarhouse Casino, but harder when you’re with friends or office workers at your local bar. Consider writing them down in a notebook or carrying them on your cell phone so you can present them to your tax professional at tax time. Be as detailed as possible. Upon review, it will be your responsibility to substantiate your claim – as a recent taxpayer in the Tax Court.

Remember: Whether you’re cheering on the Red Sox at Fenway or rooting for the Bears in your living room, the gambling and tax laws are the same. Breaking those rules can be costly and, in some cases, illegal.

If you’re still not sure what to report—or how—to report your gains and losses, help is available. Contact your tax professional or visit IRS.gov for more information.

IRS-CI

IRS-CI, the sixth largest law enforcement agency in the United States, is the criminal investigation branch of the IRS, responsible for investigating financial crimes such as tax fraud, drug fraud, embezzlement money laundering, public corruption, health care fraud and identity theft. While other federal agencies also have the authority to investigate money laundering and other bank secrecy violations, the IRS is the only federal agency that can investigate potential violations. of the tax code.

The agency has 20 field offices located throughout the US and 12 foreign offices.

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