If Adopted, Many Exotic Wagers Will Avoid Burdensome Withholding Requirements

(This post is an update from an earlier article, found here: “I won big on a horse racing bet…”)

On December 30, 2016, the Internal Revenue Service (“IRS”) proposed rules that mark a striking change for tax withholding and reporting for a variety of gaming activities.[1]  Among other procedural changes, the proposals attempt to ease the administrative burden for those engaged in pari-mutuel bets and, if adopted, will substantially reduce the amount of winning bets subject to mandatory tax withholding.  Commentators have pushed for adoption of these rules before the running of the 2017 Triple Crown.

Currently, a gaming facility was required to withhold taxes on a wagering transaction in a pari-mutuel pool if the proceeds exceed $5,000 and are at least 300 times the amount wagered.  While this may not seem to impact many bets, the IRS has interpreted the “300 times” language to cover the specific, individual bet that is paying out.  If a ticket includes multiple bets and a single bet won (e.g., an exotic bet such as a Trifecta, Superfecta, etc.), withholding could be required even if the overall ticket pays out substantially less than 300:1.  The calculation of the amount withheld under existing tax rules does not include all bets placed on a ticket.  Therefore, if a ticket includes hundreds of specific bets, the withholding could be greatly in excess of the tax actually due on the winnings – the tax that the withholding rules was designed to capture.

When the tax withholding rules were adopted, a majority of pari-mutuel betting involving straight wagers (e.g., win, place, or show); however, over the past thirty years, there has been a dramatic shift in betting patterns.  Now, a vast majority of wagering in the pari-mutuel context involves exotic wagers, not straight wagers.  As a result, many bettors are unwittingly subjected to 25% withholding when they cash out their tickets.

The new proposed regulation addresses these concerns and others.  Under Prop. Treas. Reg. § 31.3402(q)-1(c)(ii), the IRS would include all wagers placed in a pari-mutuel pool and represented on a single ticket as the amount of the wager.  Specifically, the language provides:

In the case of a wagering transaction with respect to horse races, dog races, or jai alai, all wagers placed in a single parimutuel pool and represented on a single ticket are aggregated and treated as a single wager for purposes of determining the amount of the wager.  A ticket in the case of horse races, dog races, or jai alai is a written or electronic record that the payee must present to collect proceeds from a wager or wagers.

As a result, unless the total ticket price (i.e., all bets) is less than 1/300th of the payout, tax withholdings will no longer be applied to such winnings.  This will eliminate tax withholding requirements for substantially all pari-mutuel bettors.  It should be noted that these regulations will not change the taxation of gambling winnings generally.  Bettors should continue to report all winnings on their tax returns and should retain documentation of bets placed (and losses) in order to complete their tax returns and substantiate losses upon audit.  See “Gambling Winnings: When Are They Taxable?”  Furthermore, taxpayers should remain informed about the status of this proposed regulation and any comments until the regulations take their final form.

If you have questions about the effect of these proposed regulations, reporting gambling winnings, have received a notice of adjustment or audit from the IRS, or are currently under civil examination or criminal investigation, you should contact competent counsel.  For a free consultation, please contact Brandon N. Mourges at bmourges@rosenbergmartin.com or 410.951.1149.

[1] See Internal Revenue Service, “Withholding on Payments of Certain Gambling Winnings,” at: https://www.federalregister.gov/documents/2016/12/30/2016-31579/withholding-on-payments-of-certain-gambling-winnings.