Don't Mess With Taxes

Photo by Ays Be on Unsplash

Congratulations to the Denver Nuggets on winning their first National Basketball Association championship.

Congratulations, too, to all the bettors (like Drake) who pocketed some cash when their sports wagers paid off.

Now all that's left is declaring those winnings as income on 2023 tax returns next year and paying the tax due on the money.

Since sports betting has expanded across much of the United States, the Internal Revenue Service is in a much better position to know about these winnings and collect the associated taxes.

When wagers are placed at legal betting sites, there are tax rules that require the payouts be reported to the winners and the IRS. The amounts that trigger the reporting, done via Form W-2G, vary depending on the type of wagering.

Some members of Congress, however, say it's way past time to revisit at least one of those reporting amounts. They've launched, again, a bipartisan effort to increase the reporting threshold on jackpots poured out by slot machines.

Sports betting tax compliance: Since the 2018 U.S. Supreme Court ruling that let states decide whether to allow sports wagers within their borders, 37 states and Washington, D.C., have authorized such transactions.

This government imprimatur means more people are betting at places that issue W-2Gs. And the data trail means more tax compliance.

"The IRS estimates that tax compliance is approximately 95 percent when there is substantial information reporting, and when there is substantial information reporting combined with tax withholding, tax compliance is estimated to be 99 percent," according to a recent Treasury Inspector General for Tax Administration (TIGTA) report that examined cryptocurrency activity oversight. "However, tax compliance drops to 45 percent when there is little or no information reporting or withholding."

When it comes to bets, gambling establishments must report payouts that meet certain thresholds. The IRS says to send a W-2G when the bettor —

• wins $1,200 or more playing bingo or slots;
• nets $1,500 or more from keno;
• collects $5,000 in winnings from a poker tournament; or
• obtains $600 or more in another gambling endeavor, such as sports betting, and the payout was at least 300 times the amount put on the line.

SLOT act update: Those reporting amounts haven't been changed, in some cases, for decades. A bipartisan group of U.S. House members say it's time to change that, at least when it comes to slot machine jackpots.

Rep. Dina Titus (D-Nevada) and Rep. Guy Reschenthaler (R-Pennsylvania) last month reintroduced their Shifting Limits on Thresholds (SLOT) Act. The legislation would update the nearly 50-year-old reporting threshold for slot machine winnings by raising it from $1,200 to $5,000 and indexing it to inflation.

Titus and Reschenthaler, co-chairs of the bipartisan Congressional Gaming Caucus, argue that while slot jackpots have increased over the years to reflect inflation, the reporting threshold has not increased since 1977.

The current low tax reporting level also is bad for the legal gambling industry, they say.

Every time a slot jackpot hits the current $1,200 threshold, the machine it triggers must be temporarily taken out of service. By creating unnecessary roadblocks in the legal gaming experience, legitimate customers are incentivized to switch to the illegal market, meaning less tax revenue and more violations of the law.

"Updating a [Ronald] Reagan-era gaming regulation is not just a priority for my constituents in Las Vegas, it is a commonsense fix that affects the growth of legal gaming in local and Tribal communities across the country," said Titus, whose district includes the Las Vegas Strip. "This legislation would reduce the paperwork burden on businesses and players while ensuring our tax code reflects economic reality."

While Pennsylvania isn't as famous for gambling as Nevada, Reschenthaler said the dated slot jackpot reporting threshold hurts both the Keystone State's gaming industry and its patrons.

"Because the threshold has not kept up with inflation, it has resulted in a drastic increase in reportable jackpots, which trigger tax burdens for winners and compliance burdens for casinos," said Reschenthaler. "Increasing the threshold will eliminate this onerous red tape, ensuring the gaming industry can continue to support good-paying jobs and foster economic growth in southwestern Pennsylvania and across the country."

Pulling the lever again: Titus first tried to get the Treasury Department to make the reporting threshold change through regulation. When that effort stalled, she and her colleagues introduced a version of the SLOT Act in the last Congressional session, but it failed to come up for a vote.

The current bill, officially H.R. 3125, is pending in the House Ways and Means Committee. In addition to Titus and Reschenthaler, cosponsors are Reps. Jefferson Van Drew (R-New Jersey); Tom Cole (R-Oklahoma); Mark Amodei (R-Nevada); Mike Kelly (R-Pennsylvania); Dusty Johnson (R-South Dakota); Steven Horsford, (D-Nevada); Brian Fitzpatrick (R-Pennsylvania); and Ruben Gallego (D-Arizona).

Beyond Capitol Hill, the proposal has the support of the Indian Gaming Association and the American Gaming Association.

You also might find these items of interest:

• House, Senate bills look to increase 1099-K reporting level
• Congressmen push for crypto reporting regs to close Tax Gap
• March Madness brings busted brackets and taxable gambling winnings
• Reporting Super Bowl and other gambling winnings on IRS Schedule 1

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