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taxes

Win a Super Bowl bet? It's taxable

But even if you don't get an official form, you're still supposed to report all your gambling winnings to the IRS. In reality, that doesn't happen.

The IRS has no official idea how much tax money it doesn't collect from lucky gamblers. But even if the tax agency ventured a guess, it likely would be low, since there are so many under-the-radar ways for gamblers to play.

Online gambling advances

One of the major gambling venues nowadays is online. And despite efforts to control Internet gambling, U.S. bettors are still frequenting the websites, with many not telling the IRS about their winnings.

Federal lawmakers tried to put a dent in online gambling with enactment in 2006 of the Unlawful Internet Gambling Enforcement Act. The law is designed to restrict U.S. gamblers' access to online, foreign-based websites.

The law, however, hasn't affected players as much as it has payment processors, says Brad Polizzano, a New York tax attorney.

Polizzano points to the U.S. Department of Justice's seizure in April 2011 of the Internet domains of the three biggest offshore online gambling sites operating in the U.S. at the time: Full Tilt Poker, PokerStars and Absolute Poker/UltimateBet.

In addition, several of these sites' principals, as well as individuals processing financial transactions to and from these sites, were indicted for bank fraud, illegal gambling and money laundering, says Polizzano.

While the poker website crackdown sent shockwaves through that gambling community, says Polizzano, there also has been an apparent easing of opposition to online gambling.

On Dec. 23, 2011, the U.S. Department of Justice issued a memorandum opinion taking the position that the Wire Act, the federal law enacted in 1961 prohibiting operation of certain types of betting businesses in the United States, applies only to sports wagering.

"Although the opinion itself addresses only online state lotteries, states now have been shown a green light for intrastate online gaming," says Polizzano.

Nevada gambling regulators quickly approved rules that allow companies in the Silver State to apply for licenses to operate poker websites.

Around 2,500 miles to the east, New Jersey lawmakers also are working to make online gambling legal within that state. After Gov. Chris Christie vetoed an online gambling bill in early 2012, the legislature introduced a revised version that would authorize casinos in Atlantic City to offer a full slate of Internet gambling to state residents. Christie has until Super Bowl Sunday to sign or veto this measure.

And gambling expansion has moved beyond the Internet in the Garden State. On Jan. 17, 2012, Christie signed a bill into law that would allow people older than 21 to place in-person bets on sporting events at designated sites within New Jersey.

But don't make travel plans to New Jersey just yet. Before sports bets are allowed there, the federal Professional and Amateur Sports Protection Act of 1992 must be overturned or a new federal law must be enacted to exempt the state from the federal restriction.

That could take a while, as leaders of the National Football League, National Basketball Association, National Hockey League, Major League Baseball and the National Collegiate Athletic Association are united in a federal court case against the New Jersey sports betting bill.

Tax and gambling misconceptions

If states and Uncle Sam do eventually approve access to online gambling, the accompanying regulations could help the IRS get more winners to comply with tax laws.

Polizzano, who writes about gambling and tax issues at his blog "TaxDood," says there are three tax areas that many gamblers don't understand well.

One is the difference between recreational and professional gambling. Most people fall into the recreational category; they visit a casino or racetrack a couple of times per year and buy lottery tickets.

In these cases, any winnings should be reported to the IRS as "other" income. Recreational gamblers also can reduce the amount of their taxable winnings by itemizing their expenses and counting gambling losses as a deduction in the "other miscellaneous deductions" category of Schedule A.

Professional gamblers, on the other hand, essentially gamble regularly with the intent to profit enough to earn a living. The tax court ruling that set up the standards for professional gambling, says Polizzano, "basically requires people to file one way or the other, professional or recreational."

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