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 tax attorney with Tenenbaum Law P.C. in Melville, New York.

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.

New Jersey lawmakers also waded into online gambling waters. After several years of legislative maneuvering, the Garden State on Nov. 25, 2013, launched online platforms for poker and other games. While online betting action didn't meet promised revenue projections, the state remains confident in the option.

"Internet gaming is still in its early stages of development, and the industry and the regulators continue to learn from each other," David Rebuck, director of New Jersey's Division of Gaming Enforcement, said in a Jan. 2, 2015, letter posted on the division's website. As importantly, he noted that "from a regulatory standpoint, our system is working. There have been no major infractions or meltdowns or any systematic regulatory failures that would make anyone doubt the integrity of operations."

Tax and gambling misconceptions

As more states and possibly Uncle Sam 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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