The real gamble is not paying taxes on March Madness betting
March Madness’ bracketology is a hotbed of betting with billions of dollars wagered each year. Whether from an office pool, in Vegas or somewhere else, taxpayers who win, big or small, need to report their winnings as income to the IRS. Even winners of noncash pools could have tax consequences, making “bragging rights” the only nontaxable prize this March.
Size of gamble doesn’t matter to the IRS
No matter the amount, gambling winnings are fully taxable. The larger it is, the more likely the winner – and the IRS – will receive a tax form reporting the winnings, like a 1099-MISC or W2-G. The IRS will be able to compare the information on the taxpayer’s return with the tax form reporting gambling winnings. If the winnings are significant enough, they will also be subject to mandatory withholding by the payer.
“Failing to report income, including gambling winnings, can result in costly penalties,” said Nathan Rigney, lead tax research analyst at The Tax Institute at H&R Block. “If you don’t receive a tax form, that does not mean you’re off the hook on reporting it as income. You still have a responsibility to report the income on your tax return.”
And Rigney warns that noncash winnings don’t escape the IRS’ interest, either. Even if it is a trip or just a coffee maker or gift card, winners should include the fair-market value of any noncash winnings in their taxable income.
March Madness prizes are taxed even if they aren’t from gambling
Gambling isn’t the only way to make some money off the NCAA basketball tournament. Giveaways without a cost of entry or related to the outcome of the games could come with tax implications for the winners.
“If you drain a half-court shot at halftime and win $10,000, that’s taxable as well,” Rigney said. “The IRS considers prizes not related to gambling as income, and if the prize is large enough, it could generate tax forms to the IRS and the winner, as well as mandatory withholding.”
Only winners can deduct March Madness losses
Gamblers may deduct their losses, but only by as much as they report in winnings. So if a taxpayer entered two pools – one at the office and one among friends – at $10 each and won $100 from their office pool, they could net the entry fee from the winning pool against the income, reporting $90 in winnings. The entry fee from the losing pool and any other gambling losses would be deducted as an itemized deduction if the taxpayer itemizes deductions, up to a maximum of $90.
Two wrongs don’t make a right: illegal betting and tax evasion
Finally, Rigney warns that gambling illegally, like online gambling in most states, doesn’t make the winnings tax-free. Taxpayers who make illegal wagers and win still need to report the income on their tax return.
“On the bright side, if you itemize, you can still deduct the loss to the extent of gain,” said Rigney.
Although people tend not to think of money won from their friends or co-workers in a pool as income, it is. And because it is income, money won this March Madness needs to be reported on the tax return.
Nathan Rigney, lead tax research analyst, The Tax Institute at H&R Block (runs 0:18)
“Whether you are participating in your office pool or gambling at a casino, if you win money it’s taxable, and the IRS doesn’t care where you won it or how you won it. All income is taxable from whatever source derived, unless it’s specifically excluded by the IRS, and gambling winnings are not excluded.”
Nathan Rigney, lead tax research analyst, The Tax Institute at H&R Block (runs 0:13)
“You have to report all of your income that’s taxable on your tax return, and if you don’t you could be subject to penalties. You also could be subject to audit for all years because it was a fraudulent return – if you knowingly left it off.”
Nathan Rigney, lead tax research analyst, The Tax Institute at H&R Block (runs 0:20)
“Any prize that you win is taxable as income and they base that on the fair market value of the item that you won. So if you won a pizza that’s $25, that’s taxable income. And if you paid anything to enter the drawing then you get to deduct that from the winnings.”
Nathan Rigney, lead tax research analyst, The Tax Institute at H&R Block (runs 0:21)
“If you win more than you lose, you can deduct your gambling losses to the extent of your gambling winnings, but only if you itemize. So if this year, 2018 you win a bunch of money, you can then itemize on your 2018 return and deduct those gambling losses.”
Nathan Rigney, lead tax research analyst, The Tax Institute at H&R Block (runs 0:09)
“As Al Capone discovered, 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, The Tax Institute at H&R Block (runs 0:06)
“Even if you gambled illegally and won money you can still deduct your losses against that income.”