Looking to ensure your online gaming sessions remain 100% aboveboard?
The popularity of sports betting across the US has exploded. After 38 states have now made sports betting legal, more punters are betting on sports than ever before. But one huge issue is that most punters have no idea of the legal considerations that are involved with sports betting.
Here’s the deal…
Educating yourself about the legality of betting not only ensures that you don’t get into trouble, but it also protects you, your winnings, and helps you make wiser bets. If you’re a serious punter that’s keen to improve your bets, as well as stay on the right side of the law, the Zcode System can help you to make data-driven decisions informed by industry-leading insights and help keep you on the right side of responsible online gaming.
What you’ll learn:
- Learn Your State’s Sports Betting Laws
- Tax Obligations You Shouldn’t Ignore
- Only Use Licensed Operators
- Common Legal Mistakes Bettors Make
Know Your State’s Sports Betting Laws
The biggest legal mistake? Thinking that sports betting laws are the same across the US.
They’re not. The legality of sports betting changes from state to state and sometimes even county to county. While 38 states have legalized betting on sports, only 31 permit mobile wagers in all areas of the state. A handful of states, such as Mississippi and Montana, only permit online betting when physically at a licensed casino. Others, like Vermont, only allow mobile wagering and have no retail options at all.
Putting a bet down in a state where it is illegal can lead to criminal prosecution. Betting in one state on an offshore site while living in a legal state is a federal offense. The FBI and IRS actively investigate illegal gambling rackets and have opened over 30 such cases each year.
Before you wager a dime, be sure to check your state’s specific laws. Check if mobile wagers are permitted, what the age requirements are, and who the licensed operators in your jurisdiction are.
Tax Obligations You Can’t Ignore
Hang on to your seats…
All gambling winnings are taxable income. Yep, you read that right. All of them. Whether you bet $10 or $10,000, the IRS expects you to report 100% of your winnings.
In 2024 alone, Americans bet a total of nearly $148 billion on sports betting. That’s a ton of potential tax liability that many gamblers completely ignore.
The IRS requires ALL gambling winnings to be reported on your taxes. Wagers of $5,000+ or 300x your initial bet amount will have 24% withheld automatically, and the sportsbook will issue you a W-2G form. However, you must report even modest wins under this threshold.
State taxes are another added complexity. Many states like North Carolina tax your return at 4.5% without allowing loss deductions.
New Tax Law Changes
Beginning in 2026, deductions for gambling losses will be further curtailed. You’ll only be able to deduct 90% of your losses instead of 100%. This means if you win $20,000 and lose $20,000, you’ll still owe taxes on $2,000 of your income.
Maintain detailed records of every bet placed, every win collected, every loss incurred, and the date and location of each wager. Without documentation, you have no proof of your losses when tax time comes.
Only Use Licensed Operators
Do you know the easiest way to remain legal? Use licensed sportsbooks only.
Licensed bookies are regulated by state gaming commissions and must adhere to rules regarding fair odds and pay-outs, responsible gambling policies, data security, age checks, and providing gambling resources for problem gamblers.
Stay well away from offshore gambling sites.
Offshore platforms frequently operate in legal gray areas. They rarely follow Know Your Customer protocols. Because of this, they’re very attractive to money launderers and other criminals. If you play on these sites, you run the risk of losing all your money with zero legal recourse, criminal charges for participating in illegal gambling enterprises, ID theft and fraud, and IRS investigation and penalties.
IRS Criminal Investigation has a conviction rate of 92% for illegal gambling cases over the past five years. Average prison sentences have ranged from 5 to 33 months.
Is it worth saving a few bucks on better odds to go to federal prison? Probably not.
Common Legal Mistakes to Avoid
The biggest legal mistakes that sports bettors make…
Mistake #1: Betting for other people
Do not ever place bets for another person. This can make you a co-conspirator in money laundering. In one recent case, 10 men accepted $2 billion in wagers through an offshore operation and now collectively owe more than $19.7 million in restitution.
Mistake #2: Crypto gambling sites
Offshore crypto casinos have attracted users by avoiding KYC processes. They look convenient, but many are the subject of active law enforcement investigations. These casinos are set up offshore specifically to avoid US regulations.
Mistake #3: Failing to report small wins
Some gamblers believe they only need to report large wins. False. The IRS requires reporting of all gambling income, no matter how little. Failing to report even small amounts can lead to penalties and interest.
Mistake #4: Combining personal and betting funds
Keep your betting bankroll separate from your personal finances. This makes it much easier to track both wins and losses and have clear documentation for tax purposes.
Mistake #5: Not using self-exclusion programs
If you have a gambling addiction, most states have self-exclusion programs. These are legal programs that ban you from gambling websites. Using these programs is a responsible move if you have a problem and can help protect you from financial disaster.
Record Keeping Best Practices
Gamblers are notorious for keeping poor records. Don’t be one of them.
Good record keeping protects you in many ways. It helps you track your true performance, proves your losses if you need to take a deduction, and shows compliance if you’re ever audited.
Create a simple spreadsheet that tracks the date of bet, sportsbook used, type of bet, amount wagered, odds, win/loss outcome, and net profit/loss. Take screenshots of your betting slips and monthly statements. Keep everything organized by year.
It takes five minutes after each betting session but will save you hours of time during tax season. Most licensed sportsbooks will provide a year-end tax summary, so download this as soon as it’s available.
The Future of Betting Regulation
Sports betting regulation is changing at a rapid pace.
Federal legislation like the proposed SAFE Bet Act could create national standards for affordability checks, advertising restrictions, and AI use in betting. States raked in $2.6 billion in taxes from sports betting in 2024 – an increase of 29% from 2023.
With this much tax revenue at stake, expect more states to introduce sports betting and states that already have it to increase oversight. Keep a close eye on new state launches, tax law updates, regulatory changes in your state, and proposed federal legislation.
The Bottom Line
Legal sports betting is a source of entertainment and can offer profits. But only if you play within the rules.
Knowing your state’s laws, fulfilling your tax obligations, using licensed operators, and maintaining detailed records are not optional – they’re vital. The US sports betting industry generated over $13.7 billion in revenue in 2024 with over 95% of bets placed online.
Take the time to understand your obligations. Bet on licensed platforms. Keep great records. And most importantly, always bet responsibly.
The line between legal sports betting and illegal gambling is not just about following rules – it’s about protecting your finances, your freedom, and your future.
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