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March Madness: Taxation of Gambling

March 10, 2014 : Brad Polizzano – Guest Contributor

Ed note: Sure, your annual March Madness office pool is a lot of fun, but what does it mean for your taxes – that’s right, taxes – come April? Here are some important things to keep in mind before filling out your bracket.

March Madness basketball tournament betting pools“Selection Sunday” for the 2014 Men’s NCAA Basketball Tournament is upon us. This annual tournament is one of the top wagered sporting events in the country. According to the FBI, approximately $2.5 billion is illegally wagered on March Madness each year.

Is participating in an NCAA bracket pool for money illegal? Possibly. A pool for money could violate a host of federal and state laws, although participants are rarely prosecuted.

Whether or not legal, there are tax implications from winning money or prizes in an NCAA pool.

Under the Internal Revenue Code, all gambling winnings or prizes of U.S. residents are taxable.

Whether gambling winnings are $5 or $500,000, all amounts are taxable. It is inaccurate to state that gambling winnings or prizes only reported on informational returns (such as a Form W-2G or Form 1099-MISC) are taxable. And whether the winnings are from a legal sports book in a Las Vegas casino or a legally murky office pool, all of the winnings are taxable.

The Internal Revenue Service requires taxpayers to maintain an accurate diary of all gambling winnings and losses.

If insufficiently documented, gambling losses may be disallowed on examination, resulting in additional tax, interest, and penalties.

IRS Publication 529 states a taxpayer must keep an accurate diary or other similar record of all losses and winnings. The diary should contain:

  • The date and type of the specific wager or wagering activity.
  • The name and address or location of the gambling establishment.
  • The names of other persons present at the gambling establishment.
  • The amount(s) won or lost.

In general, gambling winnings are reported as “other income” on Form 1040, and gambling losses are deductible up to the extent of winnings as an itemized deduction on Schedule A.

A taxpayer must separately record each gambling winning “session” and gambling losing “session,” and report the corresponding totals. A taxpayer cannot simply net all gambling winnings and losses from the year and then report that single amount.

Some states with an income tax do not allow gambling losses as an itemized deduction at all.

These “bad states” for gamblers include: Connecticut, Illinois, Indiana, Massachusetts, Michigan, Ohio, Rhode Island, West Virginia, and Wisconsin; with Kansas joining this list for 2014 and beyond. In these states, a taxpayer could pay state income tax on “phantom” income.

Suppose for the year I have $250,000 gambling winnings and $250,000 gambling losses in Connecticut. I can deduct $250,000 of gambling losses as an itemized deduction on Schedule A of Form 1040. On my Connecticut income tax return, however, I cannot take the deduction. I must report and pay tax on all $250,000 of gambling winnings, even though I broke even from gambling for the year.

Changing it Up

Traditionally, I’ve entered NCAA bracket pools—for play money only, of course. This year I’m contemplating a bidding pool. Each team is auctioned for play money, and the person with the championship team wins. I’d probably go for play money broke with my alma mater, the University of Michigan. Go Blue!

Brad Polizzano – Guest Contributor

Brad Polizzano – Guest Contributor

Tax Dood

Brad is a tax attorney and accountant in New York City. He represents taxpayers in disputes with the Internal Revenue Service and the New York State Department of Taxation and Finance.

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