Betting on the Kentucky Derby, Tax Law, and You

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Photo Credit: Mark Zerof-USA TODAY Sports

(*Citrin Cooperman is a proud partner of Front Office Sports)

In 2018, $149.9 million was bet on the Kentucky Derby. Churchill Downs officials expect that number to increase even more at the 145th running of the race on Saturday. While it’s easy to forget, betters who win big this weekend don’t just get that money with no strings attached.

In the U.S., gambling winnings are taxable as ordinary income irrespective of how much a person wins. Gambling winnings are legally defined as the full amount of the winnings minus the cost of placing the winning bet.

“Gambling winnings are required to be reported to you and to the IRS on Form W-2G when you win at least $1,200 from bingo or slot machines, $1,500 or more from keno, more than $5,000 from a poker tournament and $600 or more from other types of gambles when the payout is at least 300 times the amount of the wager,” says Allison Brack, a Tax Partner at assurance, tax, and advisory firm Citrin Cooperman. “In addition, these winnings may be subject to withholding. However, regardless of how much you have won and whether you receive Form W-2G or not, all gambling winnings are taxable as ordinary income.”

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On the other hand, gambling losses are deductible as an itemized deduction. Unless someone is a professional gambler, however, the amount of losses they can deduct is limited to the amount of their winnings. In other words, someone can never have a net gambling loss as far as taxes are concerned.

Circumstances are different for professional gamblers who can deduct all of their losses. Whether someone is a professional gambler or just gambles as a hobby depends on each person’s facts and circumstances. The general standard to be used to determine if the person is in the trade or business of gambling is that the activity is pursued full-time, with regularity, for the production of income for one’s livelihood and not as a sporadic activity, mere hobby or for amusement.

Gambling losses include losing wagers plus expenses incurred in connection with the conduct of the gambling activity. Such activity includes travel to and from a casino or track. When reporting gambling losses, a person must be able to prove their losses with receipts, tickets, statements or other documents that show how much they have spent. A gambler betting on the Kentucky Derby Day program this weekend, for example, should save those unredeemed losing tickets. Losing tickets alone, however, are not enough since there are certainly plenty of those on the floor that anyone can pick up and claim as their own.  

“Maintaining a diary of your gambling activity is the best way to ensure gambling losses are sustained under examination by the government,” says Brack. “The diary should contain the date and type of wager, the name and address of the location of the gambling establishment and the amount you lost. This, in most cases, can be presented alongside losing tickets as proof of gambling losses.”

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When it comes to joint tax returns, couples have a unique benefit when it comes to gambling gains and losses. If a husband and wife file a joint tax return, their gambling gains and losses are pooled together so that one spouse’s winnings can offset the other spouse’s losses.

Whether you’re gambling as a professional or for fun watching the race this weekend, keep this info in mind when next tax season rolls around.

Citrin Cooperman guides the sports world’s best companies and individuals when it comes to traditional accounting and tax support, guidance on developing business and financial plans, and much more. Visit their website to learn more.