Do I Pay Tax On Spread Betting

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Do I Pay Tax On Spread Betting
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I know that the spread betting companies say that it is a tax free product because it is classed as betting rather than trading, but do you have any knowledge of the tax mans view on spread betting for a living as a sole source of income? I won’t be using the leveraged side of spread betting, it’s just the tax free part that sounds good to me. I like the idea of not having to pay tax, but it just seems too easy.
I think that it is pretty clear that someone who pays tax on another income source will never have a problem if they make money via spread betting. The crux of the matter really relates to an individual who makes their sole income through spread betting.
‘To be taxable, the spread betting wins must come not merely from an opportunity presented by a trade, they must arise from the carrying on of that trade. Whether or not a particular spread bet is taxable will depend on the terms of the contract and the economic substance of what is done.’
The way I understand it is that there is no tax on spread betting winnings. That means no tax on gains, but also means you cannot offset your spreadbetting losses, unlike ‘normal’ share/bond trading or CFDs.
Of course, the Inland Revenue (HMRC) has the power to look at tax payers’ circumstances at an individual level if they are of the opinion that someone’s circumstances are unique or rare. In this respect I have little doubt that HMRC could deem a very successful spreadbetter as being ‘rare’ if it thought that it would help their case.
Having said that, I’m confident that the case of any possible Inland Revenue investigation against the ‘professional gambler’ would rest largely on the ethical principle; that persons conducting themselves in such a way by which they gain an income which they make a living on and should thereby be obliged to pay income tax on that money. This in practice means that some tax inspectors might provide advice which is 100% mechanical in nature where another may well introduce an element of ‘ethical principle’ (i.e. is it fair that someone might earn (win) £100k and not pay a penny in tax)?
Let’s assume that you earned £50, at the weekend, stacking shelves in Tesco but, traded 12 hours a day during the normal working week. Your profits, from trading, amounted to approximately £5,000 per week and you made 10 trades each day; what would HMRC consider to be your primary occupation and income source?
The shelf stacking in Tesco’s? Unlikely, I think…
“Try giving HMRC a call and see whether you ever get a clear-cut reply. I mean, you’re hardly likely to get a nice honest person at the IR saying all perky down the phone ‘yes sir that’s correct, go and make as much money as you can and you wont owe us a penny! Good luck sir!!!'”
Although I can understand both facets of the argument I’m not sure that the ethical standard could be used in a case which went as far as court. So long as the person in question could show that he / she was following the law then they wouldn’t have a case to answer. As far as I know there is nothing in law which states that someone must ‘pay’ income tax – instead the law requires that someone is ‘assessed’ for income tax – an assessment doesn’t mean that liability is always found.
You see there’s an absolute exemption from CGT and Stamp duty, but it is a potentially grey area where income is concerned. If spread betting profits constitute subsistence income, then it could be an issue. No clear cut answer. HMRC contains the same number of unambitious clock watchers as any other government department (that is when they are not on the sick) and most tax offices will be unable to give a sensible answer. You would probably need to be subject to an investigation before your status could be sensibly considered.
Having seen part of the rules regarding spread betting posted in a discussion board and they are cryptic, very cryptic. They are open to interpretation, deliberately so in my opinion. In my own experience government departments (DVLA, Inland Revenue etc) tend to overstate their powers and also make up their own ‘rules’ as they go along. It is up to the tax inspector to interpret these regulations and make a ruling on your tax position.I’m sure that many people wilt under pressure and just play ball but sometimes it is good to challenge them. The problem is that the only way to do that is to refuse to pay any tax! You can see the problem – it would be good if there were a couple of high profile cases which went to court.
Anyway, it seems the consensus seems to be that spread betting gains are tax free and in most cases you won’t ever be confronted by the Inland Revenue about not declaring it and frankly if you are confronted you probably stand a good chance of winning due to a little thing called ‘law’. Secondly, if the Inland Revenue were to starting considering gamblers for taxation via Income Tax then they’d have no option but to offer relief on losses. Since there is nothing to stop people having more than one business or trade anyone who gambled would thus be able to deduct losses (from gambling) from their taxable income. This would cost the Inland Revenue a fortune.
Having said that apparently no one has ever been convicted of not paying tax from spread betting earnings. Big companies such as IG Index pay huge amounts of corporation tax which may help to explain why this is the case. In Las Vegas (complete aside I know) they pay just 8% tax total as all the big casinos pay Federal and State taxes hence it’s the fastest growing state in the USA! Apart from anything else, as the majority of spreadbetters lose, HMRC will find raking in tax from the providers much more worthwhile (and easier) than chasing around after the few people who actually manage to make a sizeable profit.
In any case my advice is to stay under the radar and don’t say anything unless the Inland Revenue presses you. Which means it is a good practice to keep all paperwork in case you’re ever challenged by them. And maybe speak to a recommended tax adviser in the meantime to put the full stop on it.
Is it a requirement to mention spread betting on the tax returns even if it tax free?
There is no requirement to show spread betting ‘earnings’ on a return. Such a return would be incorrect. I have never come across a return which clearly shown spread betting earnings, but if one was received it would probably be processed normally since the term would probably mean little to those who do the processing, hence it is unlikely that it would be picked up for formal inquiry on this reason alone. The fact that a return has been processed does not imply any agreement on HMRC’s part.
You can present the full facts to HMRC in a letter and receive a written ruling by which they would be bound, if you have particular concerns. Or you could pay your ‘accountant/tax consultant who specialises in these things’ to do this on your behalf.
In any case if you are serious about this, seek advice from a competent and qualified professional.
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Unless you hate money, your primary goal when wagering on sports is to turn a profit. In a sense, your objective is no different than that of the athletes you’re betting on: You want to win more than you lose.
But what if we told you that any profit you realize through your sports betting activities might not be the profit you think it is? That’s right: Uncle Sam will demand a slice of your sports betting winnings if you win too much. And, depending on the state(s) in which you wager, Aunt Samantha will expect a slice, too.
The reality is the federal government and most state governments view gambling winnings the same way they do your biweekly paycheck: It’s income. And when income reaches a certain level, it becomes taxable.
The tax hit varies based on multiple factors, but the bottom line is if you win a decent amount of money betting on sports, be prepared to redirect some of that dough to the taxman.
By now, you understand the answer to this question is—unfortunately—“Yes.” That said, not all taxes and fees are created equal.
In some cases, all sports bettors are required to pay the same rate, whether they’re casual bettors who wager/win modest amounts or professionals who earn their living gambling on sports. In other cases, the taxes and fees associated with sports betting fluctuate based on everything from how much you bet and how much you win to where you place your bets and even how much you lose.
Let’s examine three primary sources for the fees and taxes charged to sports bettors.
Almost every time you place a bet at a sportsbook, you’re being charged a fee (and you might not even realize it). This fee is known by many names in sports betting lexicon, the most common terms being “vigorish,” “vig” and “juice.”
For simplicity’s sake, think of the vig as the money a sportsbook charges for accepting your bet.
Wait—I have to pay a fee to risk my money? That’s crazy!
We certainly understand the sentiment, but as they say, them’s the rules. And really, it’s no different than a brokerage firm charging a fee to manage your stock investments/portfolio.
So how does the vig present itself? It depends on the type of bet.
When betting point spreads —which is when bettors either “give” or “receive” a certain number of points that are applied to the final result of a game/event—the vigorish comes in the form of odds. In point spread betting, these odds are most often displayed as -110.
When betting the moneyline —which is nothing more than choosing which side will win a game/event, regardless of victory margin—it’s all about the odds. And these odds can vary greatly depending on the matchup or event you’re betting on.
For this exercise, let’s stick with -110 odds and explain what that means:
For every $10 you want to win, you have to wager (risk) $11; for every $100 you want to win, you have to wager $110; for every $1,000 you want to win, you have to risk $1,100; and so on.
This 0.91% fee—calculated by dividing 10 by 11 (or 100 by 110)—is the juice.
Now the good news is, if you win your point spread bet, the vig is returned to you along with your winnings. (So if you make an $11 bet at -110 odds and win, you will get back $21.) The bad news? If your bet loses, that extra $1 stays with the sportsbook.
As the size of your wagers increases—be they point spread bets or moneyline bets—so does the vig amount you pay. So while that 0.91% fee may not seem like much, it adds up quickly over time. Think of it this way:
Every time bettors lose a $1,100 bet, they lose $1,100. But every time sportsbooks lose a $1,100 bet, they only lose $1,000.
So if a bettor makes 10 wagers of $1,100 each and goes 5-5 on those wagers, the sportsbook turns a profit of $500, and the bettor is $500 in the hole. And there’s your cost of doing business.
Enough with theoretical negative outcomes for sports bettors. Let’s discuss what happens when you end up on the right side of the bettors vs. books battle.
It’s undoubtedly a thrill whenever you walk into a brick-and-mortar sportsbook, hand over your winning ticket and receive a thick stack of cash. Or whenever you log into your betting app and notice your balance is substantially higher than it was yesterday.
Alas, here’s a little-known, not-so-fun fact about those winnings: They must be reported as income on your federal tax return. And they might be taxable.
According to the IRS , winnings from sports betting—or any form of gambling, including horse racing and lotteries—must be listed as “other income” on your tax return. (At this point, you’re likely asking, “So if I win $10 from a bet, I have to report it as income?” Answer: Technically, yes.)
Now, reporting this extra income does not necessarily mean you have to pay taxes on it. A federal tax hit only comes into play if your gambling winnings reach $600 or more. Also, the rate at which you’re taxed varies based on how much you win. However, if you pocket $5,000 or more in winnings, you might have to pay Uncle Sam 28% of the total amount.
Also affecting the federal tax rate on gambling winnings: your overall individual (or, if married, household) income.
The one (possible) silver lining on this topic: Gambling winnings can be written off against gambling losses, up to the total amount of the winnings. For instance, if you win $10,000 betting on sports but lose $12,000, it’s possible you can avoid paying any gambling-related income taxes (since you lost more than you won). Or if you won $10,000 and lost $6,000, your taxable income from gambling could be reduced to $4,000.
Consider consulting an accountant or tax attorney on gambling-related taxable income and potential deductions. But the main point is this:
If you even have a modestly successful year betting on sports, be prepared to earmark some of that cash for the federal government. And depending on the state where you win your loot, you might have to sock away a little more.
As if the federal government dipping into your piggy bank wasn’t painful enough, it’s possible state officials might stick their fingers in there, too. And it doesn’t necessarily have to be the state where you reside.
Gambling winnings usually are subject to state taxes only in the jurisdictions where the winnings were earned. That’s important to understand since state income tax rules and rates vary in all 50 states.
So if, for instance, you live in California and win money betting sports in Nevada, you wouldn’t have to pay state taxes on those winnings. Why? Because even though California collects state income taxes, Nevada doesn’t not.
Conversely, if you live in Nevada, take a vacation to New York and hit a couple of big bets while there, you could receive a tax bill. The reason: Like California and most other states, New York charges state income taxes.
So is it better for your bottom line to wager in states like Nevada, Washington, South Dakota and Wyoming—four places where sports betting is legal and there are no state income taxes? Sure. Is it practical? Not really.
A final word about state taxes related to gambling winnings: While state income tax structures differ from state to state, the percentage of the tax hit is much less than what the federal government charges.
Still, if your sports betting winnings reach a certain threshold and were earned in a place where state income taxes are on the books, you’ll owe something to that state (on top of whatever the IRS charges).
As one of the most prominent sportsbooks in the U.S., DraftKings charges customers “juice” on virtually every bet—it’s how all sportsbooks maximize profitability. And bettors who win money at DraftKings are subject to the same federal tax laws as they would be at any other sportsbook across the country.
State taxes, as we’ve already noted, are a bit different—again, whether or not you might owe state taxes depends on the state where you earned your winnings. Just know that state and federal tax laws aren’t sportsbook-specific.
Like DraftKings, FanDuel is a massive player in the sports betting market, with sportsbooks operating in multiple states. And, like DraftKings, FanDuel customers are subject to the same federal and state tax rules and regulations as any other sportsbook.
Put it this way: If you won an equal amount of money at DraftKings and FanDuel (or any of its competitors), your winnings would be reported and taxed the same.
At this point, you’re probably saying, “If my winnings are subject to federal and state taxes, what about the sportsbooks?” Don’t worry, they’re required to pay their fair share, too.
Tax revenue has been the primary motivator for the mass expansion of sports betting across the United States. Since a U.S. Supreme Court ruling in May 2018 permitted states to legalize sports betting, dozens of states have jumped into the game.
While these states have passed legislation with their own specific rules, regulations and taxation requirements, the basic message has crossed all borders: “We’ll allow sports betting here, but if you want to operate a sportsbook in our state, it’s going to cost you.”
This cost comes in the form of licensing fees (sportsbooks apply for a limited number of licenses, and those selected have to cut a check to the state), as well as taxes on earned revenue.
Like bettors and state taxes, sportsbooks are subject to different licensing fees and tax percentages depending on the state. This explains why sportsbooks fight hard to set up shop in some states (where the fees and taxes are deemed reasonable) and not others (because the cost/benefit ratio is out of whack).
Regarding taxes on sportsbook operators, it’s important to note this distinction: Only revenue is taxable. So if a sportsbook takes in $500 million in sports bets but pays out $470 million in winnings to bettors, only the remaining $30 million is taxed.
Also, many states allow sportsbooks to deduct money from online betting promotions—that is, free bets offered to online customers. This can shrink a sportsbook’s overall revenue numbers and, thus, its corresponding tax bill.
The answer to this question depends on the state.
Some jurisdictions earmark most (if not all) sports betting-related tax dollars for just one purpose—for instance, to support public education or boost funding for law enforcement. In other states, the revenue collected from sportsbook operators is spread across multiple fronts. This often includes mental health and responsible gaming initiatives.
Because no one state brings in the same revenue from taxes and licensing fees, the amount of money redirected to public programs differs. An example:
Nevada charges a flat 6.75% tax on all gambling-related revenue, while Colorado, Virginia and Washington, D.C. charge a 10% flat rate. But in New York—which brings in more sports betting revenue than any other state—sportsbook operators must pay 8.5% on all revenue earned at retail establishments and 13% on all profits from online wagering.
One thing that is uniform across the board: All U.S.-based legal sportsbooks must pay the states where they operate a certain percentage of tax on their revenue. That’s not the case with offshore sportsbooks, which don’t pay U.S. taxes (nor are they subject to any U.S. regulations).
It depends on how much you win. By law, you must report any sports betting winnings as income on your federal tax return. But that gambling-related income is only taxed at certain thresholds. And even then, it’s taxed at certain rates (often based on how much you won betting and your overall annual income).
It doesn’t matter if you wager exclusively online or in-person (or a mixture of both). All state and federal tax laws apply equally to both forms of sports betting.
When it comes to the IRS, any sports betting profits of $600 or greater are subject to being taxed. State taxation rules concerning sports betting/gambling vary by state.
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