We’re just a couple of weeks in, and things are not going well for my fantasy football team. If you’re wondering how bad it could be, I had New Orleans Saints running back Alvin Kamara on the bench last week. Yes, that Alvin Kamara—the one who rushed 20 times for 115 yards and scored four touchdowns against the Dallas Cowboys.

Fortunately, in my league, we don’t play for money—just bragging rights. But lots of Americans do participate in sports betting for cash. Nearly 50% of Americans bet on sports at some point—and not all of it is legal. According to the American Gaming Association, annual revenue from the illegal sports betting market in the United States is estimated at more than $700 million.

Background

Not all gambling is illegal, although that wasn’t always the case. That’s especially true when it comes to sports. Beginning in 1992, the Professional and Amateur Sports Protection Act (PASPA) largely barred states from allowing sports gambling. A few exceptions existed—for example, it was legal in Nevada casinos and a handful of states, like Oregon, allowed limited pools or lotteries.

As a nod to Atlantic City, the law granted New Jersey a carve-out to set up a sports-betting scheme in the state’s casinos, provided that it did so within a year. However, New Jersey wasn’t in a rush and it wasn’t until 20 years later that the state decided to opt in. Professional sports leagues and the NCAA balked, claiming that it was too late, and filed suit. New Jersey argued, in response, that PASPA was unconstitutional.

The matter eventually landed in the U.S. Supreme Court, which, in 2018, struck down PASPA, opening the door for states to allow sports gambling. Justice Alito, writing for the majority in Murphy v. National Collegiate Athletic Association, declared, “Congress can regulate sports gambling directly, but if it elects not to do so, each State is free to act on its own.”

Predictably, a clamor to get a piece of the gambling pie followed. Legal sports betting is now legal in some form in most states.

Tax Authorities

The dollars involved in legal gambling are huge—and getting bigger, likely thanks to sports betting. Last year, 30 of 36 states set annual records for commercial gaming revenue—and their coffers are benefiting from those bets. Commercial gaming operations generated $14.67 billion in direct gaming tax revenue paid to state and local governments, not including billions more paid in income, sales or other taxes

It’s not just state tax authorities that have a vested interest in making sure that gambling stays above-board—the federal government is paying attention, too. Between fiscal years 2020 and June 2024, IRS-Criminal Investigation (CI) initiated 151 investigations into illegal gambling activity totaling more than $178.8 million. Those investigations resulted in 71 sentences with an average prison term of over two years.

“Sports betting has grown exponentially in the past five years and is more common than ever. While online gambling is easily accessible, it’s not always legal,” said IRS Criminal Investigation Chief Guy Ficco. “As this year’s football season kicks off, IRS-CI special agents are continuing to monitor trends and using our expertise to root out criminal activity related to illegal gambling like money laundering and tax evasion.”

Millions At Stake

In May 2024, CI and Homeland Security Investigations special agents discovered that Major League Baseball (MLB) player Shohei Ohtani’s former interpreter, Ippei Mizuhara, had been engaging in gambling activity with an illegal bookmaking operation for several years.

According to court documents, on March 8, 2018, Mizuhara accompanied Ohtani to a bank in Phoenix, Arizona, to help him open a bank account to deposit his payroll salary. Importantly, Mizuhara also interpreted for Ohtani when the bank employee provided the login information for the account on the bank’s website. With that information, Mizuhara illegally transferred almost $17 million from Ohtani’s bank account—without Ohtani’s knowledge or permission—to pay off his substantial gambling debts. Mizuhara had accumulated the debts after he started placing sports bets with an illegal bookmaker—and began to lose. According to court documents, even though he owed his bookmaker over one million dollars in losses, the bookmaker continued to increase his betting limits.

At tax time, Mizuhara told a different story. He reported to the IRS that, in 2022, his total taxable income was $136,865. By law, you have to report illegally gotten gains—and he didn’t report $4,100,000 that he stole that year. He also claimed that he was single when he was married. As a result of the false information on the return, Mizuhara owes additional taxes of approximately $1,149,400 for tax year 2022 (before interest and penalties).

Taxes & Gambling

From friendly wagers to jackpots, gambling winnings are reportable for federal income tax purposes. When the numbers are big enough, those winnings are also reported to the IRS using Form W-2G. Form W-2G is issued when gambling winnings other than those from bingo, slot machines, keno, and poker tournaments are $600 or more and at least 300 times the wager amount. Form W-2G will also be issued if winnings are subject to withholding, including backup withholding and regular gambling withholding. Currently, gambling withholding is equal to the cost of backup withholding: a flat 24%.

Even if you don’t get a tax form, if you gamble for fun, you must include your winnings on your tax return. According to the IRS, someone who occasionally wagers is a casual gambler or one “not engaged in the trade or business of gambling.” If you’re wondering about the line between fun and business, the IRS uses a facts and circumstances test, noting, “[l]ike any other taxpayer, a gambler has the burden of proving that his activities rise to the level of a trade or business.”

Here’s why that matters. While all gamblers have to report their winnings, casual gamblers may only deduct losses up to the amount of winnings as an itemized deduction on Schedule A. The deduction for gambling losses has remained in place after the 2017 tax reform. Miscellaneous deductions that exceed 2% of your adjusted gross income (AGI) were eliminated, but miscellaneous expenses not subject to the 2% threshold, like gambling losses, remained deductible. The amount you can deduct, however, cannot exceed what you report in gambling winnings.

(It’s important to note that the increase in the standard deduction, combined with changes to home mortgage interest and state and local tax deductions, make it less likely that taxpayers will itemize. That means that most taxpayers will claim the standard deduction. If you claim the standard deduction instead of itemizing your deductions, then any casual gambling loss is necessarily lost.)

When gambling is your trade or business, gambling-related income and expenses are reported on a Schedule C. The best part? You do not have to itemize to claim your losses. However, the Tax Cuts and Jobs Act (TCJA) modified the definition of “gambling losses” under section 165(d) of the Tax Code to include any deduction otherwise allowable in carrying on any wagering transaction. That means taxpayers whose business is gambling can no longer deduct non-wagering expenses, such as travel to and from a casino, separately from losses. So, for example, a taxpayer with $10,000 in winnings may deduct up to that amount in combined losses and related expenses. This change applies to professional gamblers for the years 2018 through 2025.

(Before the TCJA, professional gamblers could deduct travel and other costs related to gambling without regard to wins and losses, a rule previously confirmed by the Tax Court in Mayo v. Commissioner).

Recordkeeping

But most of us aren’t considered professional gamblers (and, in my case, that’s clearly best). Professional or not, if you plan to gamble, keep excellent records. Your records should include the date and location where you were gambling, as well as the amounts and type of wager. That’s easy when you’re at the Sugarhouse Casino, but a little more difficult when you’re with friends or office workers at your local bar. Consider writing those down in a notebook or capturing them on your cellphone so you can present your tax pro with proof come tax time. Be as detailed as you can. At audit, it will be your responsibility to substantiate your claims—as a taxpayer recently found out in Tax Court.

Remember: Whether you’re cheering on the Red Sox at Fenway or fanning over the Bears in your living room, the gambling and tax rules are the same. Running afoul of those rules can be expensive and in some cases, illegal.

If you’re still not sure about what—or how—to report your winnings and losses, help is available. Check with your tax professional or visit IRS.gov for more information.

IRS-CI

IRS-CI, the sixth-largest law enforcement agency in the U.S., is the criminal investigative arm of the IRS, responsible for conducting financial crime investigations like tax fraud, narcotics trafficking, money laundering, public corruption, healthcare fraud, and identity theft. While other federal agencies also have investigative jurisdiction for money laundering and some bank secrecy act violations, the IRS is the only federal agency that can investigate potential criminal violations of the tax code.

The agency has 20 field offices located across the U.S. and 12 attaché posts abroad.

ForbesIRS Criminal Investigation Counts Down Agency’s Top 10 Cases For 2023By Kelly Phillips Erb
ForbesMeet The IRS Special Agent Earning His Stripes As An NFL RefereeBy Kelly Phillips Erb
ForbesTaxpayer Gambled On A Day In Court, But Could Not Prove All Her LossesBy Kelly Phillips Erb