Wagers and W-2GS

By: Bridget Kenny, Staff Member

The 141st running of the Kentucky Derby is upon us. Although most taxpayers have filed their 2014 returns with the IRS, cashing a winning ticket on May 2nd could come with a price. Racetrack winnings, like other gambling income, are subject to federal income tax.[1] Currently, the Internal Revenue Service permits taxpayers to deduct gambling losses against winnings.[2] The tax-code’s treatment of racetrack gambling proceeds has not changed much over the years, but many handicappers were relieved to see that the exemption escaped the new limits on itemized deductions that Congress enacted in 2013. [3]

The Kentucky Supreme Court recently ruled that the Department of Revenue could not tax “instant racing” wagers or bets on historical horse racing. [4] In Appalachian Racing, LLC v. Family Trust Found. of Ky., the Court held that, “the Kentucky Department of Revenue exceeded its statutory authority when it amended 103 Ky. Admin. Regs. 3:050 to provide for the collection of a tax on the money wagered on historical horse racing devices.” [5] Currently, Kentucky collects taxes from bets on live horse races at certain tracks.[6] With hopes that amending the current regulation would apply the tax to bets on historical horse racing, the Department argued that the historical racing wagers were still bets on “live” horse races, because the gambler does not know the outcome of the race until his bet has been placed.[7] The Court disagreed and recognized instead that the common use and understanding of the term “live” does not include recorded events.[8] For now, it is safe to bet that Kentucky can only tax wagers on live races under 103 Ky. Admin. Regs. 3:050. [9]


[1] Internal Revenue Service, Instructions for Forms W-2G and 5754, http://www.irs.gov/instructions/iw2g/ar02.html. 

[2] Id.

[3] Steven Crist, Horseplayers avoid fiscal cliff but still face tax abyss, Daily Racing Form, (Jan. 4, 2014), http://www.drf.com/news/steven-crist-horseplayers-avoid-fiscal-cliff-still-face-tax-abyss.html

[4]Kentucky Not Authorized to Tax Betting on Historical Horse Racing, (Feb. 25, 2014), http://www.ttrus.com/Kentucky-Not-Authorized-to-Tax-Betting-on-Historical-Horse-Racing-i377.html

[5] Appalachian Racing, LLC v. Family Trust Found. of Ky., Inc., 423 S.W.3d 726 (Ky. 2014).

[6] Id.

[7] Kentucky Not Authorized to Tax Betting, http://www.ttrus.com/Kentucky-Not-Authorized-to-Tax-Betting-on-Historical-Horse-Racing-i377.html

[8] Id.

[9] Appalachian Racing, LLC v. Family Trust Found. of Ky., Inc., 423 S.W.3d 726 (Ky. 2014).