When Sports Bettors Win, So Does the IRS

By: George Calhoun

Sports betting and adjacent industries have exploded in the United States.  One area that continues to cause confusion is the taxation of these businesses – both for the companies and the individual players.

For individual bettors, the IRS has clear rules on gambling income that predate the recent explosion of the sports betting industry. In short, the proceeds from a successful sports wager are taxable income and taxed like any other ordinary income.  Losses can be deducted if you file an itemized return, but such deductions cannot exceed winnings.  Unfortunately, each bet is treated separately.  You cannot lump bets together to net your transactions.  That means bettors must keep records of their wins and losses to file an accurate return.[1]

Efforts to evade the nuisance of such taxes may result from ignorance or negligence, but some are the signal of larger crimes. Between 2021 and 2023, the IRS Criminal Investigation unit started over 100 investigations into illegal gambling – resulting in 89 indictments.  “Sports betting is all fun and games until funds are laundered and individuals fail to meet their tax obligations,” said IRS Criminal Investigation Chief Jim Lee in 2023. “As this year’s football season kicks off, CI special agents are leaning on public-private partnerships and paying close attention to data gleaned from a variety of sources such as currency transaction reports and suspicious activity reports to Forms 8300 that indicate criminal activity like money laundering and tax evasion.”

Earlier in September of this year, the IRS issued a release reminding “U.S. taxpayers to wager safely and legally this football season. Illegal gambling activities can result in criminal charges ranging from money laundering to tax evasion.”  In the same release, IRS Criminal Investigation Chief Guy Ficco noted that, “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 … 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.”  This type of investigation is how the recent Shohei Ohtani scandal was discovered.  Ohtani’s former interpreter, Ippei Mizuhara, was discovered by IRS-CI investigators and charged with tax and bank fraud claims.  Ultimately, he pled guilty to tax and bank fraud, not illegal gambling.  The illegal sportsbook that took the approximately 19,000 bets from Ohtani’s interpreter did not get off the hook either; in August bookie Matthew Bowyer pled guilty to operating an unlawful gambling business, money laundering, and related tax charges.

Indeed, while the IRS is paying attention to those individual returns, some companies in the industry also appear to be taking shortcuts.  Those shortcuts may be an effort to gain a competitive advantage by shirking legal gambling license and tax requirements. The IRS and DOJ are taking notice.

For example, in June 2023, several individuals were charged with owning or running illegal gambling businesses in Ohio, along with tax and other offenses such as money laundering. Two of the primary business owners, Christos Karasarides Jr. and Ronald DiPietro, tried to conceal their ownership of the illegal gambling businesses by using nominee owners and sham contracts. Additionally, their businesses made millions of dollars, but they had not reported any of the earnings on their tax returns. Earlier this year, both individuals were convicted of tax, gambling and money laundering charges. Karasarides was sentenced to over 20 years in prison and DiPeitro to nearly 10.

For individuals and businesses alike, proper record-keeping, legal gameplay, and the payment of all license fees and taxes are the best ways to protect against unwelcome visits from federal investigators.  In today’s digital age, it is not a matter of “if” efforts to escape taxation will be discovered but “when.”

[1] Gambling establishments, including digital operations such as online sportsbooks, usually provide you and the IRS with a record of your taxable winnings in the form of W-2G, which includes an overview of your gambling winnings, along with any withholding you elected when you gave the establishment your tax information.  Many online platforms, especially sweepstakes-oriented platforms, provide customers with a form 1099-MISC if they claim more than $600 from the platform.