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The safest bet in town: the IRS wants a cut of your winnings

race ticket with cash
By Nathan Vinson
Attorney, English, Lucas, Priest & Owsley, LLP

Ah, spring in Kentucky. If you automatically think of horse racing when you read that statement, you’re not alone – lots of folks do. It’s a great pastime particularly beloved in the Bluegrass State.

This year, we’ve watched the rise of American Pharaoh as the horse that won the Kentucky Derby and Preakness. Next up is the Belmont Stakes, set for June 6 in Belmont Park, Elmont, New York. If American Pharaoh takes the Belmont Stakes, he will be the first Triple Crown winner since Affirmed in 1978. The allure of picking a Triple Crown winner often draws a lot of interest from long-time gamblers and novices alike, so we thought we’d review with you what happens if you do, indeed, win big at the track.

If you are clutching that winning ticket as your pony crosses the finish line, it’s a safe bet that the government wants a cut of those winnings.

There are two ways to win at the track: (1) bet on a horse or (2) own a horse. The government is only interested in knowing about your win as a gambler if you win $600 or more, and if your winnings are at least 300 times your wager (e.g. winning $600 on a $2 bet). Of course, all winnings, no matter what the amount, are taxable.

For winnings of $5,000 or more, tracks automatically subtract out 25% (the “withholding”) and submit it straight to the government. Also, for those winnings of $600 to $5,000, 28% will be withheld and submitted to the government if you choose not to provide your social security number when filling out the tax paperwork (so it is in your best interest to provide it when asked). Such paperwork includes completing an IRS Form W-2G (yes, the “G” stands for “gambling”). The track will give you a copy of the completed form for your records and for you to properly complete your tax return at tax time. Just like withholdings from your wages, you may be entitled to a refund of all or part of your gambling withholdings, depending on other income and deductions you report on your tax return.

Horse owners face a bit more complexity when reporting their taxable purse winnings and deductible operating expenses. Owning a horse is a business, and aside from the specialized expertise needed to be successful in the industry, the business of owning and racing a horse is taxable like any other business. Male race horses who enjoy a successful racing career go on to become “stud” horses, and are stallion-kept specifically for breeding. The persons paying for their horses to breed with the stud are hopeful their mares will produce winning racehorses. This facet of the business invokes an entirely different set of industry skills, along with entirely different sources of taxable revenue and deductible expenses.

Many horse owners will tell you there’s not a lot of money in horse racing. It is indeed an expensive hobby, and something most people do because they enjoy it. Having a stake in the outcome of a race that goes beyond placing a bet is fun, thrilling, and exciting (horse owners often tell us), which is why they really do it.

If you’re lucky enough to have a winning horse, the Kentucky Derby offers a $2 million purse to the horse owner. And yes, they’ll be taxed on that. The same goes for the Preakness winner and the winner of the Belmont Stakes, and there is also a purse for the Triple Crown winner.

It’s a nice problem to have, some might say, to have to figure out taxes on your Triple Crown winnings. But, as always, we would advise anyone who had a great day at the track to ensure they set aside funds for taxes. A tax attorney can help you figure out your next move.

And, of course, good luck!

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