On May 12, 2022, Governor Laura Kelly signed Senate Bill 84. On Sept. 1, 2022, online sports betting officially began on six different online platforms in Kansas. These online platforms include DraftKings, FanDuel, Barstool Sportsbook, BetMGM, PointsBet and Caesar’s Sportsbook. With this new form of potential income, many Kansas residents are curious about how sports betting winnings or losses will be taxed federally and by the state. Online sports betting has been federally legal for several years, so the taxation rules for this income are well established. However, since this is a relatively new income source in Kansas, residents in Kansas may have questions. This article discusses common questions regarding how Kansas currently intends to tax sports betting profits and federal tax implications.

Q: What amount of my gambling winnings/losses will be taxed?

A: Regardless of whether you win $1 or $1,000, all gambling winnings are considered taxable income. When determining how much to report on your income tax return, bettors must add up the total amount of their winnings, which gives you your total gambling winnings. If you have sports betting losses, you are not allowed to net the amount against your winnings to arrive at your taxable gambling winnings. Instead, gambling losses are reported on Schedule A, so you can only deduct these gambling losses if you are able to itemize deductions on your federal tax return. If you can itemize deductions on Schedule A of your tax return, you will only be entitled to deduct gambling losses up to the amount of your gambling winnings. You cannot use gambling losses to reduce your ordinary taxable income from wages, rents, royalties, self-employment, etc. Note: The Tax Cuts and Jobs act largely increased the standard deduction amounts; fewer and fewer taxpayers are able to itemize deductions on their tax returns.

For example, if you had $6,000 in betting losses, but only $3,000 in winnings, you would only be able to deduct up to $3,000 in losses as itemized deductions. As for taxpayers in Kansas, the treatment of gambling losses is even more unfavorable. Since 2014, in Kansas, gambling losses are not deductible, even as an itemized deduction. While there has been legislation trying to reverse this ruling, such as Kansas Senate Bill 111 proposed in February of 2021, gaming site lobbyists have been unsuccessful due to the loss in tax revenue for the state that would result.

Q: Where should I report sports betting winning on my federal income tax return?

A: For 2022, sports betting winnings are reported as Other Income on Schedule 1 (Form 1040) as gambling winning on line 8b. This amount flows to Form 1040, line 8, titled ‘Other Income,’ and is included in your final Adjusted Gross Income (AGI) calculation. If you are using itemized deductions, you can deduct your gambling losses on Schedule A, line 28, as ‘Other Miscellaneous Deductions,’ which flows to Form 1040, line 12a. This is how most sports bettors will report their winnings unless they qualify as professional gamblers.

Q: Will my gambling winnings be reported to me on a form W2-G?

A: This answer depends on the amount of the winnings. The current tax regulations require in-person and online sportsbooks to file a W2-G for any taxpayer who makes over $600 on a bet that has 300:1 odds. To put this in perspective, most money line bets on extreme underdogs are at most 20:1 odds. This means that to receive a W2-G, you would have to hit on an extremely long shot bet, typically by parlaying a series of long shot bets that all win. That said, most recreational gamblers will not hit on any bets that meet this criterion, meaning most bettors will not receive a W2-G. For administrative convenience, some sites may issue a W2-G if the winnings exceed $600. Even if you do not receive a W2-G, you are still expected to report all gambling winnings, meaning you are responsible for keeping track of all your bets. The good news is most on-line platforms will keep track of all of your bets over the calendar year. Any gambling winning not reported that the IRS finds in an audit will be subject to tax, penalties and interest, resulting in a cost far more significant than if the taxpayer just reported the winning correctly the first time.

Q: Will taxes be withheld from gambling winnings?

A: Probably not. To have taxes withheld from your online sports betting winning, the bettor would have to win $5,000 on a 300:1 odds bet. But this is an extreme long shot bet that most bettors will not win. However, if you find yourself lucky enough to hit on a bet like this, the online sportsbook or casino will withhold 24% of the winning to pay federal taxes. Kansas withholdings on gambling winnings is 5% of proceeds paid.

Q: Can I report my gambling income on a Schedule C?

A: While it is possible to file your gambling income on a Schedule C, you must be able to demonstrate that you are in a trade or business of professional gambling, and not just a hobby. While possible, it can be challenging for sports bettors to prove that they are professional gamblers. Many state tax authorities often challenge this designation due to the benefits it presents on the state level.

For example, the average sports bettor cannot report losses to offset gambling income in Kansas. However, if you file as a professional gambler on a Schedule C, you can write these losses off as business expenses and only pay taxes on your net winnings. In addition, professional gamblers can deduct other business expenses related to their gambling, such as computers, subscriptions, travel and more. Due to these significant tax benefits, many state taxing authorities will challenge a bettor’s stance as a professional gambler and often make the taxpayer switch the earnings to ‘other income,’ disallowing the deduction of losses.

To qualify as a professional sports bettor, a taxpayer must pursue gambling activity full-time, in good faith, and regularly seek the occupation to produce income for a livelihood. This means that a taxpayer must win consistently, and those winnings must be enough to sustain a livelihood, which most bettors cannot achieve. This means that most taxpayers will be required to report their winnings on Schedule 1 (Form 1040) as other income and deduct losses on Schedule A if a taxpayer itemizes on the Federal tax return.

Q: What are the tax rates on sports betting income?

A: Gambling income is taxed at the marginal income tax rate of the taxpayer.  It does not have its own specific tax rate, and will be dependent upon the 2022 Federal income tax bracket or Kansas Income tax bracket you are in.

Questions?

The record keeping requirements can be significant for gambling winnings, and sports betting is no exception. Contact an Adams Brown advisor if  you have questions related to taxes on sports betting.