While March Madness brackets may be virtual, taxes on winnings are still real

Wolters Kluwer looks at the tax implications of March Madness bracket wins and reminds players that sports betting is a taxable activity.

What: March Madness is a popular time to fill out your National Collegiate Athletic Association (NCAA) basketball brackets and hope for a winner. Wolters Kluwer Tax & Accounting points out that, according to the Internal Revenue Service (IRS), betting activities could be considered gambling, a business, or a hobby – all of which are considered taxable income. Even winning the office brackets pool is a taxable event. The handling of expenses and the reporting of that income can be different depending on state law and is another reason to reach out to a tax professional for guidance.

Why: Placing a bet in the NCAA bracket office pool is considered to be gambling, even though participants may claim some skill in selecting their bracket winners. Under the Tax Code, any income earned from gambling is taxable whether the gambling is legal or illegal. Under a US Supreme Court decision in 2018, all states are now permitted to offer sports betting, and many have enacted or are starting to enact enabling legislation. This will make it easier to do legal sports betting and may also help the IRS and state tax authorities track sports betting activity.

Twenty-five states and the District of Columbia have now legalized sports betting (AR, CO, DE, IA, IL, IN, LA, MD, MI, MS, MT, NC, NH, NJ, NM, NV, NY, OR, PA, RI, SD, TN, VA, WA, and WV), some as recently as the November 2020 elections. Most of these states impose an excise tax on the licensed sports betting facility and states with an income tax typically tax gambling winnings, as does the federal government. Legal sports betting operations will be likely to report winnings to the IRS and state tax authorities and may even do tax withholding from larger jackpots.

Under the 2006 Unlawful Internet Gambling Enforcement Act, fantasy sports were determined to be a game of skill rather than gambling. As a game of skill, it is either a hobby or a business depending on the facts involved. Income from a hobby or business is also taxable. If an individual can establish profits from the activity for three of the last five years or if that activity is the primary source of income for the taxpayer on a full-time basis, the individual can be considered to be engaged in a trade or business, which makes it more likely that related expenses are deductible against income.

Who: Tax expert Mark Luscombe, JD, LL.M, CPA, Principal Federal Tax Analyst at Wolters Kluwer Tax & Accounting, can help sort through the various rules, requirements and reporting forms for gamblers, hobbyist or businesses, as well as the different ways in which expenses and losses are handled.

PLEASE NOTE: These materials are designed to provide accurate and authoritative information in regard to the subject matter covered. The information is provided with the understanding that Wolters Kluwer Tax & Accounting is not engaged in rendering legal, accounting, or other professional service.

Contact: To arrange interviews with Mark Luscombe and other federal and state tax experts from Wolters Kluwer Tax & Accounting on this or any other tax-related topics, please contact Bart Lipinski.