Gambling Winnings are Taxable Income

Uncle Sam taking money out of your wallet
Uncle Sam taking money out of your wallet

Many bets are just friendly wagers -- a dollar in the office pool or a good-natured bet with that neighbor who's always wearing a Steelers' jersey.

But other NFL fans take the game more seriously and hand over big bucks to bookmakers, both legal and not-so-legal.

Last year, about $92 million was bet legally on the big game in Nevada, the only state where gambling on sporting events is legal. Sports book operators in the state predict (or perhaps hope) that even with the country's current economic woes, they will rake in $100 million from bettors this year.

And that's just a drop in the bucket. Nevada's legal sports wagering represents less than 1 percent of all sports betting nationwide. And wager watchers say when it comes to the Super Bowl, globally more than $8 billion is expected to be placed on the sport's biggest game, both legally and otherwise.

All these Super Bowl wagers spotlight a persistent Internal Revenue Service problem: tracking and taxing gambling winnings. It's a challenge the agency faces daily, because many people don't realize that gambling winnings, even the illegal payouts, are taxable. Of those who do, a good portion simply choose to ignore the tax law.

Admittedly, the IRS is playing catch-up here. While the U.S. income tax is a 19th century creation, gambling has been around at least since man was able to record his activities. Dice almost identical to those used on today's gaming tables have been recovered from Egyptian tombs, and the Chinese, Japanese, Greeks and Romans all were known to play games of chance as early as 2300 B.C.

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Nowadays, in addition to the well-publicized offerings of Las Vegas, Reno and Atlantic City, betting is commonplace throughout the United States. The choices range from off-track betting parlors to tribal bingo games to riverboat casinos to state-operated lotteries.

Online gambling down, but not out
Then there's online gambling. A decade ago, The Washington Post reported "at least 140 Web sites now offer some form of wagering to online users -- an expansion in recent years that has alarmed opponents and put increased focus on the laws that govern Internet gambling." By 2005, research firm Christiansen Capital Advisors estimated that nearly 23 million people gambled on the Internet, with approximately 8 million of those gamblers from the United States.

It's easy to see why the numbers have grown so much. Type "online gambling" into any Internet search engine and within seconds you'll have a list of hundreds of thousands of potential gambling sites. This is in spite of the Unlawful Internet Gambling Enforcement Act, which was passed without much fanfare and signed into law in late 2006 in an effort to restrict U.S. gamblers' access to these typically foreign-based Web sites. It is now a federal crime for U.S. banks and credit card companies to process Internet-bet payments.

Some companies have curtailed their U.S. betting operations, but in reality the law has had little effect. And in the global arena, America is coming up short. The World Trade Organization has ruled against the United States in a dispute over Internet gambling operations based in Antigua.

Read More...What States Allow Gambling?