How Is Tax on Horse Race Winnings Calculated?

Winnings from betting on horse races are considered taxable income by the Internal Revenue Service (IRS). This means you are required to report these winnings on your annual tax return, just like wages from a job or earnings from an investment. The tax implications depend on the amount you win, the records you keep, and how you report both your winnings and any associated losses.

Determining Your Taxable Winnings

All winnings from horse racing are considered taxable income and must be reported to the IRS, regardless of the amount. The primary distinction lies in whether the payer, such as the racetrack, is required to report your winnings to the IRS on your behalf.

A payer must provide you with a Form W-2G, “Certain Gambling Winnings,” if you receive $600 or more and the payout is at least 300 times the amount of your original wager. For example, a $2 bet that results in a $600 payout meets both criteria, triggering the reporting requirement. This is a reporting threshold for the payer, not a threshold for your personal tax liability.

Your gross winnings from a wager is the total amount you receive from the payer before any taxes are taken out. Even if you do not receive a Form W-2G because your win did not meet the 300-times-the-wager rule, you are still legally obligated to report the income on your tax return. For parimutuel bets, which are common in horse racing, multiple wagers on a single ticket can be combined to determine if the 300-times-the-wager threshold is met.

Required Tax Forms and Record Keeping

When your winnings meet the reporting thresholds, you will receive an IRS Form W-2G, “Certain Gambling Winnings,” from the payer. Box 1 of the form will show your “Gross winnings,” and if any taxes were withheld from your payout, that amount will be listed in Box 4, “Federal income tax withheld.” This form documents the transaction for both you and the IRS.

Beyond any W-2G forms you receive, the IRS expects taxpayers to maintain detailed records to substantiate all gambling winnings and losses. A contemporaneous log or diary of your gambling activity is highly recommended. For each horse racing wager, you should record:

• The date and type of bet placed
• The name and address of the racetrack or betting facility
• The specific horses you bet on
• The amounts you won or lost

To support your written log, you should also keep physical proof of your gambling activities. This includes:

• Wagering tickets or stubs
• Payment slips from the track
• Receipts for your wagers
• Canceled checks or credit card statements that show your betting transactions

How to Report Winnings and Pay the Tax

Once you have gathered your Form W-2G and personal records, you must report your total gambling winnings on your federal income tax return. This income is reported on Schedule 1 of Form 1040 as “Other Income.” You should sum up all your winnings for the year, including amounts reported on W-2G forms and any other smaller wins, and enter the total on the designated line.

If federal income tax was withheld from your winnings, as shown in Box 4 of your Form W-2G, you report this amount on your Form 1040 in the “Federal income tax withheld” section. This withheld amount is treated as a tax payment you have already made. For horse race winnings, withholding is required if the payout exceeds $5,000 and is at least 300 times the wager. When this occurs, the payer withholds tax at a 24% rate on the amount of the winnings minus the amount of the wager.

If you refuse to provide your Social Security number to the payer, they may be required to withhold 24% as backup withholding. For substantial winnings where no tax was withheld, you may need to make estimated tax payments to avoid an underpayment penalty. You can pay estimated taxes quarterly using Form 1040-ES, or adjust your withholding with your employer by filing a new Form W-4.

The winnings are added to your other sources of income, such as wages and interest, to determine your adjusted gross income (AGI). Your final tax liability is then calculated based on your AGI and applicable tax bracket.

Deducting Gambling Losses

The tax code allows you to deduct gambling losses, but there is a limitation: you can only deduct losses up to the amount of your winnings. For example, if you have $4,000 in winnings from horse races but $6,000 in losing tickets, you can only deduct $4,000 of your losses. The remaining $2,000 in losses cannot be carried forward to future years or used to offset other types of income.

To claim a deduction for gambling losses, you must itemize your deductions on Schedule A of Form 1040. If you choose to take the standard deduction, you cannot deduct any of your gambling losses. This means you must weigh whether the total of all your itemized deductions exceeds the standard deduction amount for your filing status.

Winnings and losses are reported separately on your tax return. You report your total winnings as “Other Income” on Schedule 1, while your deductible losses are reported on Schedule A. You cannot simply subtract your losses from your winnings and report the net amount.

The rules also permit you to use losses from one type of gambling to offset winnings from another. For instance, if you won money at the racetrack but lost money playing the lottery, you can use those lottery losses to offset your horse racing winnings, provided you have maintained detailed records.

State Tax Considerations

In addition to federal income tax, winnings from horse racing may also be subject to state and local income taxes. The majority of states with an income tax consider gambling winnings to be taxable income, which means you may have a separate tax obligation at the state level. A small number of states do not have a personal income tax, and in those locations, you would not have a state tax liability on your winnings.

The rules for taxing and reporting gambling income vary significantly from one state to another. Tax rates can differ, and some states have their own specific thresholds for when payers must withhold state tax from winnings.

Because state laws vary, you should consult the department of revenue or taxation for the specific state in which you reside or won the money. Their official websites are the best source for accurate information on tax rates, reporting forms, and withholding requirements.