The Kentucky Derby, horse betting and the IRS

May 05, 2017 : Annelise Wiens

Racing and gambling enthusiasts bragging to friends, co-workers and family about their winnings after this weekend’s Kentucky Derby should remember to tell somebody else about their winnings: the IRS. Whether it’s big or small, legal or illegal, live or remote, income from betting is fully taxable.

Some winners – and the IRS – will get a tax form

Taxpayers who win $600 or more may receive a tax form reporting the prize, a W-2G or in some cases a 1099-MISC. The IRS will compare the information on the taxpayer’s return with the tax form reporting gambling winnings. For this reason, failing to report the prize as income is the surest way to get audited.

Just because a taxpayer doesn’t receive a tax form does not make the winnings tax-free. Taxpayers still have a responsibility to report their prize on their tax return as “other income.”

Kentucky Derby winners can deduct 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. For taxpayers who itemize, the entry fee from the losing pool and any other gambling losses would be taken as an itemized deduction, up to a maximum of $90.

Professional gamblers have different benefits and requirements

Taxpayers whose betting is more than a hobby need to file differently. If gambling is their full-time job and how they intend to earn their livelihood, they would need to file as a business with a Schedule C. Filing as a business means they can deduct more expenses, but it also subjects them to self-employment tax and possibly quarterly estimated payments.

Two wrongs don’t make a right: illegal betting and tax evasion

Illegal gambling doesn’t make the winnings tax-free. Taxpayers who make illegal wagers and win still need to report the income on their tax return. If the taxpayer itemizes deductions, they can still deduct the loss to the extent of gain.

Winners this weekend need to keep more than their ticket to claim their prize. They should keep a record of their expenses and income for next April’s tax deadline – or if they’re professional gamblers, their June 15 estimated payment deadline is just about a month away.

Sign Up For The Newsroom Digest

Related Resources

Last-minute tax surprises: crowdfunding’s consequences

Find out how to exactly document any crowdfunding income from this year on a 1099-K form to avoid last-minute penalties.

The unintended tax consequences of generosity

Taxpayers should be careful when considering giving other tax benefits. In some cases, careful tax planning can reduce or eliminate negative tax effects.

The Price of Victory

Athletes who brought home hardware from the Olympics will have to face tax implications. Learn more about these taxes on winning.

The history of income taxes: life’s one certainty creates considerable doubt

H&R Block tax experts are explaining the history of income tax and why they are certain income tax policy will constantly change.

Annelise Wiens

Annelise Wiens

Editor and Producer

As the newsroom editor, Annelise Wiens is interested in more than just tax and industry news, but the stories of H&R Block's 80,000 associates, their communities and H&R Block's world headquarters in Kansas City, Missouri. Wiens joined H&R Block in 2014 from a public relations agency, where she worked with clients in the financial services industry. Before that, she worked as a communicator for a senior member of the United States House of Representatives. She graduated from Biola University in La Mirada, CA with a bachelor's degree in history.

Connect with us