12/30/2015 10:23AM

Fornatale: Tax issues for horseplayers


The late Mike Mayo, who served as chairman of the NTRA Players’ Committee, was an expert on tax issues for horseplayers. Back in 2014, I spoke with him for an article on this subject. With the new year here, this is a good time to revisit tax issues, armed with Mayo’s old e-mails and some advice from accountant James Templin.

Let’s start with the basics. As a horseplayer, how should you file your taxes? The most common solution is to file on Schedule A, where the player reports all of his winnings and can use his documented losses to offset those. “Documented” is a key word here: Scrambling to collect losing tickets after a big hit isn’t going to fool the IRS if you’re facing an audit.

Mayo provided an example of how Schedule A works in our 2014 interview: “$100,000 in winnings can take up to $100,000 in losses, for a net effect of zero. This also includes contest winnings. A player filing on Schedule A can deduct contest entry fees only, no other expenses, against the winnings. Any amount of winnings greater than losses is taxed as ordinary income.”

This can be painful, especially if you’ve just won a big event like the National Handicapping Championship. “If you win $750,000 at the NHC, that’s going to probably put you in the highest bracket, 39 percent,” Mayo said. “It’s brutal, but you’d have no choice.”

Templin said that if you’re going to use Schedule A to deduct gambling losses, you’ll have to forego the standard deduction.

The other option is to file on Schedule C, which treats one’s horseplaying as a separate business. By declaring yourself a professional horseplayer and filing a Schedule C for your racing activities, you are able to write off business expenses. This could be a much better option. Travel, data, and office expenses become write-offs, and with a tax professional’s help, you might even set up a 401(k) related to your racing activities.

Your ability to file Schedule C without issue depends on how much you play. A player who focuses on only a few tournaments a year probably isn’t going to have much luck convincing the IRS that he is anything more than a hobbyist. Unfortunately, there is no specific threshold to establish oneself as a pro – it’s a gray area.

The biggest mistake horseplayers make when it comes to their taxes is that they wait until after a big score to worry about the tax implications. Mayo said, “Most people get into trouble with this. The IRS is wise to this and can usually spot it pretty quickly on a tax return. It will trigger an audit. You need to already be established as a professional gambler before you have the score.”

That’s why the start of the year is the perfect time to start thinking about your taxes. One of the best things you can do is keep complete records. This isn’t as hard as it might seem.

“All you need to do is keep track of how much money you put through the windows in a year and what are your winnings,” said Mayo. “You have to treat it like any other business. If I win $6,000 and there’s no paper trail, I still report that income as part of my business. That’s what you’re supposed to do under the law. Claim everything, not just the signers. Guys want to have their cake and eat it, too. That’s where the IRS gets you. You have to be all in as a separate business or be all out. You can’t be halfway.”

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Players who use advance-deposit wagering accounts might have a leg up with this since they’ll have detailed records of their bets. Players who bet ontrack or via simulcast facilities will have to keep records manually, stapling and filing losing tickets as well as recording the amounts.

Templin makes an additional suggestion. “I would recommend besides Mike’s recommendations that one establish a separate bank account to fund their horse-racing activities,” he said. “The separate bank account shows one’s intentions and provides for easy documentation of wagering and contest activity.”

Another question facing contest players is, what is taxable? In Templin’s opinion, NHC entries are not taxable. “The issue is the value of the entry,” Templin said. “The IRS definition of the value of an item is, ‘What would an independent buyer pay for the entry from an independent seller of the entry?’ Since there are no buy-ins for the NHC and no transfers, there is no way to establish the value of an NHC entry.”

Breeders’ Cup Betting Challenge entries are another matter. “Because the entry has a value and can be transferred in an arm’s-length transaction, in my opinion, the $10,000 is a taxable event to be offset by any losses incurred in the actual betting,” Templin said.

What about travel allowances associated with the NHC and other contests? “Travel allowances are taxable events,” Templin said. “Actual expenses may be deducted as to the extent that they exceed 2 percent of adjusted gross income as unreimbursed business expenses.”

When I first wrote about this subject, a commenter said that the horseplayers he knows use so-called “10 percenters” to sign for their wagers that trigger IRS involvement. I responded that not only is this less relevant in the ADW era, it’s also highly illegal. You should avoid this practice.

There is also the issue of state taxes. Amazingly, there are still some states that don’t allow you to deduct losses from winnings, even on Schedule A. If you live in such a state, consider moving! And no matter where you live, I think it’s a good idea to consult a tax professional with experience dealing with these issues before you make any decisions about your taxes.

Cliff Amyotte More than 1 year ago
In Canada a couple of guys won a jackpot at Woodbine moved to Quebec and started betting Pro Line the Ontario Government run sports betting lottery (which has terrible odds) and managed to make big profits. When they were taken to court over tax issues the court ruled gambling is all luck and is not taxable as are lottery winnings. Makes perfect sense to me.
Robert Fabbricatore More than 1 year ago
It would take special circumstances for the Schedule C to be a good option unless one is using all the extra business expenses to zero out the winnings. This is because any profit on Schedule C kicks in the Self Employment Tax (Social Security) which is 15.30%. Ouch, especially if one is retired and collecting Social Security and the contribution will not increase the benefit.
James Templin More than 1 year ago
He is correct as far as he goes. It is true that on form SE the tax is calculated at 15.3% of your net profit; however half of the tax is taken as a deduction on line 27of the 1040 to arrive at your Adjusted Gross Income. The net result is you are only paying the same amount as you would pay if your sole source of income came as an employee of XYZ corporation. The benefit to those individuals who qualify to use Schedule C is the ability to deduct the cost of subscriptions such as DRF and/or HTR, the ability to deduct travel expenses and the ability to preserve the standard deduction (individuals $6,300, Joint $12,600) if they do not itemize. Aside from those who desire to preserve the standard deduction, the Schedule C are those contest players who are trying to win the Tour by traveling to the various brick and mortar contest sites. Actually the contribution will increase the benefit. One needs to contact their Social Security office