Updated for tax year 2017
The break room at work is abuzz with talk about basketball tournaments, teams, and players. It seems everyone is anxiously awaiting the chance to be crowned tournament bracket champion. But, while you’re busy streaming the games and focused on which team is advancing, remember someone else wants to share in your earnings should you win big. That person is Uncle Sam.
That’s right – the Internal Revenue Service (IRS) expects you to report all winnings from any bracket challenge on your income tax return.
Here’s what you need to know about gambling winnings and your taxes.
“Gambling winnings” versus hobby income
When is gambling not really gambling? Typically the IRS doesn’t consider income earned through participating in a bracket challenge gambling money. That’s because bracket challenges are deemed to involve skill and knowledge in order to win. Therefore, you should count bracket game winnings as hobby income rather than gambling income.
However, despite the difference in definition, both types of income affect your tax return in the same way. If you win cash or prizes from bracket gambling, you have to pay tax on it, regardless of whether it’s gambling or hobby income. And, while you must claim the entire amount of your winnings, you can also claim any expenses – like entry fees – as miscellaneous itemized deductions.
With hobby income, all related expenses claimed as miscellaneous deductions are subject to the 2 percent rule. That means you can only deduct total miscellaneous deductions to the extent they exceed 2 percent of your adjusted gross income.
Unless you have a substantial amount of other miscellaneous deductions, your hobby expenses probably won’t positively impact your tax return. Additionally, you can only deduct hobby expenses up to the amount of your hobby income.
On the flip side, gambling expenses claimed as itemized deductions are not subject to the two percent rule.
In either case, if you don’t itemize your deductions, you can’t deduct your expenses.
Will the IRS know if you win during March?
Whether the IRS is aware of your earnings depends on how you entered the game and how much you won.
If you enter a casual office pool, chances are no one will report the winnings to the IRS.
But, if you play through an online site or other organization and win more than $600, you should receive Form 1099-MISC in the mail. That form reports any cash or prize winnings. The IRS will also receive a copy.