At midnight on May 1, the switch flipped and sports betting went live across Colorado. Some companies like DraftKings launched apps and others announced plans to do the same. But the new opportunities also bring questions for businesses and gamers alike, especially when it comes to taxes. Who exactly is taxed for sports betting and where do those tax dollars go? Let’s take a look.
Am I Taxed For Sports Betting In Colorado?
First off, individual gamblers in Colorado are not taxed by the state on their winnings. You place your bet and it doesn’t matter, win or lose. The federal government is another story. According to the Internal Revenue Service, all winnings from sports betting is considered income and must be listed on your tax return under “other income.” When you win, most companies even online will generate what’s called a Form W-2G and give it to you. Hold on to that, because you won’t get another one.
A copy of that is also sent to the IRS and if their records don’t match your tax form, there will be penalties. Sports betting and all other gambling winnings are taxed at 25 percent. However, if you don’t report it and the IRS finds out, that number climbs to 28 percent. You also can’t give a “net” amount of winnings on tax returns by deducting your losses or the original bet. It has to be simple and clear. If you won $1,300 on DraftKings, then you have to declare that $1,300 on your tax return.
That’s not to say your losses don’t matter. In fact, they can actually be a benefit. You can report gaming losses on your tax return, under the itemized deductions. Specifically, this will be on your 1040 form, line 16, under “other itemized deductions.” There is a catch, however. The IRS rules state your gaming losses can’t be more than your gaming wins. Let’s say you won $4,300 on DraftKings betting on Chinese Taipei baseball but then lost $5,000 on the same app betting on Russian table tennis. It doesn’t matter that the loss was higher. The two at best can only balance each other out.
How Are Companies Taxed?
So if bettors aren’t taxed by Colorado, how does the state get revenue? Under Proposition DD, which was passed in November 2019, gaming companies have to pay out from the vig. For example, let’s say once baseball starts back up, you see a line like this for an MLB game:
- Boston -3.5 -110
- Colorado +3.5 -110
That -110 line means you have to put down $1.10 for every $1 you want to win. That extra portion is the gaming company’s cut. If you win $100, you’ll collect $95, the federal government takes 25 cents as part of a 0.25 percent excise tax and then the casino collects $4.75. It’s that $4.75 the state taxes, so in this case, they would get 47.5 cents.
“They return 95 percent [of the win] to the bettor,” said Dan Hanson, Director of Gaming for Colorado’s Department of Revenue. “From the 5 percent [companies] withhold, they have to pay 10 percent of it to us.”
Under regular circumstances, studies estimated sports betting could generate $29 million annually in tax revenue for Colorado, but with casinos currently shut down, that number will be dramatically smaller next year.
Where Do The Taxes Go?
So once gaming companies pay the tax, where is that money spent? The answer is a variety of places. First, $130,000 is set aside by the state to pay for gambling addiction services, including a gambling crisis hotline and gambling addiction counselors. Second, six percent of the sports betting tax (or up to a maximum of $1.7 million) is put into a hold harmless fund to protect traditional forms of gambling. We’ll come back to this in a minute. And finally, all remaining revenue from the tax is put into a fund for projects that address Colorado’s water needs and water-related obligations. This includes work on agriculture, water storage, conservation, land use and water education courses.
Circling back to the hold harmless fund: In Colorado, traditional gambling companies pay their own tax into what’s called the Limited Gaming Fund. Money from this fund is given to Colorado Tourism and Travel; to the Colorado Office of Film, Television and Media; to the Innovative High Education Research Fund and to a fund for local cities and counties. Now under the deal struck to approve Proposition DD, if the Limited Gaming Fund starts losing money due to sports betting, then any of the groups listed above can file a complaint and request to be paid from the hold harmless fund.
“They can come back and say because of sports betting, our take of the limited gaming fund has gone down 5 percent or whatever it is,” Hanson said. “Then they can make an application for part of that hold harmless fund if they can make that argument.”
Making The Case For Sports Betting
But that last part is key. The group requesting money would have to prove sports betting caused their take to shrink, rather than a bad tourism season, weather or say a statewide pandemic.
“They would apply to the commission and then we would have to decide if sports betting had cannibalized limited gaming to the point where it was affecting what distributions were constitutionally made out of that fund,” Hanson said. It’s going to be a complex issue, because next year there’s going to be a lot that impacts limited gaming. We’re going through things right now. So does that mean just because they’re down it’s because of sports betting? No.”