If you make bets on the March Madness college basketball tournament, don’t spend all of your winnings right away.
That’s because the Internal Revenue Service considers all money made from gambling to be taxable income, which means that anywhere between 10% and 37% of the winnings will be owed as taxes, depending on your tax bracket. Some states also take a cut of roughly 3% to 10% too.
Of course, if you don’t know this ahead of time, you could spend all the money only to be forced to pay some of it back when you file your 2024 tax return.
And if you’re thinking about not reporting the winnings, the IRS has ways of finding out — even for casual bets between friends.
Here’s a look at how gambling proceeds are taxed, and what you need to know to protect yourself in case of an audit.
You need to track your winnings and losses
Gambling websites and apps will typically send you a W-2G form — a record of your earnings — if you win more than $600. A copy of this form is sent to the IRS too, which means it will have a record of your winning bet.
But companies don’t always send those forms. Even so, you’re still responsible for tracking all of your gambling income, whether you receive a form or not. This includes winnings of less than $600.
Fortunately, gambling sites and apps often have a downloadable record of your transactions. Otherwise, the IRS recommends keeping “an accurate diary or similar record of your gambling winnings and losses,” as well as receipts, tickets, statements or other records to support your claims in case of an IRS audit.
How to report your winnings and losses
Your gambling winnings and losses are reported separately on your tax return. The winnings you claim as income include the cost of gambling, or the original wager or bet, says Romeo Razi, a certified public accountant based in Las Vegas.
Of course, you didn’t “win” your wager, but it’s included as gross winnings because that’s how it’s reported on the W-2G forms, he says.
Winnings are added as “gambling income” on line 8 of your Form 1040, Schedule 1, although these forms are filled out automatically by tax software based on your answers to a questionnaire.
Unfortunately, reporting gambling losses isn’t convenient for most people. Gambling losses can only be deducted as an itemized deduction, and they can’t exceed the winnings you report as income.
The reason for that “is to prevent tax filers from offsetting other income with gambling losses,” says Razi, a former revenue agent at the IRS. However, you can claim initial wagers as a loss.
Instead of itemizing, nine out of 10 people take the standard deduction, since it’s a generous $14,600 for single filers and $29,200 for those married filing jointly for 2024. For most people, itemizing gambling losses won’t save you as much money as simply taking the standard deduction. That means you can’t claim gambling losses.
What happens if you don’t report your gambling winnings
By not reporting all your gambling winnings, you’re violating the law. The IRS can uncover discrepancies by comparing your income with the W-2G forms they receive or by examining your bank deposit activity.
A 20% penalty can be applied if the total underreported amount is more than $5,000 or 10% of your actual tax liability — whichever is greater. For larger sums, you risk jail time.
More casual gambling that doesn’t involve W-2G forms, like fantasy football pools between friends, is less noticed by the IRS. But large cash deposits between friends can still trigger an audit. For that reason, you should report everything.
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