Kentucky Sports Betting & Gambling Tax Rates: KY Tax Laws 2023

Legal sports betting in Kentucky provides an exciting opportunity for sports enthusiasts to engage with their favorite games. However, it's crucial to understand the tax implications that come with this activity. Now that mobile sports betting will be launching in Kentucky this September, there’s never been a better time to get informed about gambling tax laws in Kentucky. For more information on the mobile betting launch, visit the main Kentucky online sportsbooks page. Otherwise, read on to find out more about gambling winnings in Kentucky below.

Understanding Sports Gambling Taxes in Kentucky 

In Kentucky, as in many other states, gambling winnings are considered taxable income. This classification includes winnings from various forms of legal gambling such as horse racing, the Kentucky Lottery, and sports betting. It is essential to comprehend your tax obligations to fulfill your legal responsibilities. Moreover, it's worth noting that you can deduct losses from your tax returns, but this process can be quite complicated. Remember, any gambling winnings you realize in Kentucky are considered income by every relevant taxing authority in the state (and the United States), and you are bound by law to report your gambling winnings and pay taxes on them much as you do any other income​​.

Kentucky Sports Betting Tax Rate

The Kentucky sports betting tax rate is set at 9.75% for retail sportsbooks and 14.25% for online sportsbooks​​. Even a win of a single dollar is subject to taxation, with the total amount of your winnings in a given year being what matters for tax purposes​​.

Federal Tax Considerations

When it comes to federal tax obligations related to gambling winnings, the IRS is interested in the aggregate amount you win from gambling during a calendar year. Gambling providers in Kentucky are required by law to withhold 24% of your winnings as an advance payment to the IRS for any individual wins that equal or exceed $5,000, and they will also issue a Form W-2G as a record of both the win and the amount withheld. You may also receive a Form W-2G if you win more than $1,200 on a historical horse racing machine or win more than $600 on other types of gambling where the winnings are more than 300 times the amount wagered​.

Potential Tax Implications for Future Sportsbooks in Kentucky

The sports betting landscape in Kentucky could potentially see the entry of notable sportsbooks such as BetMGM, Caesars, and DraftKings. These companies, once they set up their online operations in the state, will be subject to Kentucky's sports betting tax rate of 14.25% for online sportsbooks.

For a more concrete understanding, let's consider hypothetical scenarios for these three sportsbooks:

• BetMGM: Assume that after BetMGM launches its online platform in Kentucky, it pulls in $20 million in revenue from online bets during its first year. Under the current tax rate, BetMGM would owe $2.85 million in taxes to the state of Kentucky.
• Caesars: Suppose Caesars begins its online sportsbook operations in the state and generates $15 million in its initial year. Applying the 14.25% tax rate, Caesars would be liable to pay $2.1375 million in taxes to the state.
• DraftKings: Imagine DraftKings enters the Kentucky market and sees revenues of $25 million in its first year from online sports betting. Based on the state's sports betting tax rate, DraftKings would need to pay $3.5625 million in taxes.

The tax revenues collected from these operations would significantly contribute to the state's coffers, supporting various public services, such as education, infrastructure, and other state needs. The specific allocation of these funds would depend on the state's priorities at any given time.

However, it's crucial to remember that sportsbooks like BetMGM, Caesars, and DraftKings face substantial operating costs, which include licensing fees, technological expenses, payroll, and more. Federal taxes also apply, adding to the overall costs borne by these sportsbooks.

These scenarios underscore the potential revenue that sports betting taxes can bring to Kentucky, while also highlighting the expenses these sportsbooks must manage. The burgeoning popularity of sports betting in the state could significantly increase these tax revenues, providing a notable boost to the state's finances.

City Taxes

The specifics of local city taxes on gambling winnings in major Kentucky cities remain unclear. Bettors should contact a local tax professional or the city's tax office for the most accurate information.

The information on gambling taxes in Kentucky is subject to change, and it's essential to stay informed about the most recent laws and regulations. Always consider consulting with a tax professional to ensure you're meeting your tax obligations

Do I Always Have to Pay Taxes on Kentucky Gambling Winnings?

In Kentucky, gambling winnings are considered taxable income. Any winnings realized from gambling activities, such as betting on horses, playing the lottery, or sports betting, are subject to both state and federal taxes. There is no grace amount or minimum threshold for this rule, even winnings as small as a single dollar should technically be reported and taxed​​.

Kentucky Lottery Taxes

Lottery winnings in Kentucky, like any other form of gambling winnings, are subject to both federal and state taxes. When reporting your lottery winnings on your tax returns, you are required to fill out a Schedule 1 form, which is used to report income you earned outside of your regular employment. The amount of your gambling winnings should be entered on line 8b. This form will then need to be attached to your IRS Form 1040. The total from your Schedule 1 is entered onto Line 8 of the 1040, making your gambling winnings eligible to be taxed as part of your annual income​​.

When you have a significant win of $5,000 or more, the gambling provider is required by law to withhold 24% of your winnings as a prepayment to the IRS. They will also issue you a Form W-2G, which records the win and the amount withheld. To claim a win of this size, you will need to provide two forms of identification and your Social Security number to the gambling provider​​.

Group Lottery Wins

The tax implications for group lottery wins in Kentucky follow the same rules as individual wins. Every member of the group has a tax obligation. 

Paying Tax on Horse Racing Bets

As with other types of gambling winnings, those from horse racing in Kentucky are subject to both federal and state taxes. For certain types of gambling, including horse racing, you may receive a Form W-2G if you win more than a specific amount. For example, you will receive a Form W-2G if you win more than $1,200 on a historical horse racing machine​​.

How Kentucky Gambling Taxes are Collected

Gambling taxes in Kentucky are collected as part of your annual income tax filing. After reporting your gambling winnings on your federal income tax return, you can begin your Kentucky state tax return. Kentucky's state tax forms begin with your federal taxable income total, which should already include your gambling winnings. There's no need to separate your gambling winnings or pay extra on your state income tax​​.

Consequences of Not Paying Taxes on Gambling

Failing to report and pay taxes on gambling winnings can have serious consequences, including potential fees, interest, and penalties. Moreover, for significant wins, the IRS will receive a copy of Form W-2G, so they will know about your winnings even if you do not report them. High-profit gamblers should also be aware that large gambling winnings can push them into higher tax brackets, resulting in larger tax bills​.

Reporting Tax on Gambling Winnings in Kentucky

Gambling winnings are considered taxable income in Kentucky. Therefore, you are obligated by law to report your gambling winnings and pay taxes on them just like any other income. There is no minimum amount for taxation, even a win of a single dollar is subject to taxation.

In the case of sports betting, the Kentucky sports betting tax rate is 9.75% for retail sportsbooks and 14.25% for online sportsbooks. Any gambling winnings you receive in Kentucky are considered income by every relevant taxing authority in the state and the United States​​.

For federal taxes, you need to fill out a Schedule 1 (Additional Income and Adjustments to Income), where you report your gambling winnings (Item 8b). You should enter the amount of your gambling winnings, rounded to the nearest dollar, along with any other sources of income. Once you've completed the Schedule 1, you will need to attach it to your IRS Form 1040, where the gambling winnings are now eligible to be taxed as part of your annual income​​.

Filing Federal Taxes with Form W-2G

If you've had a big gambling win (equal or exceed $5,000), the provider will withhold 24% of your winnings as an advance payment to the IRS and issue a Form W-2G. The form is a record of both the win and the amount withheld. You'll have to show two forms of identification and give your Social Security number to the gambling provider. You may also receive a Form W-2G if you win more than $1,200 on a historical horse racing machine or more than $600 on other types of gambling where the winnings are more than 300 times the amount wagered. In these cases, you are strongly encouraged to report your winnings on your taxes​.

Filing Kentucky State Taxes

For state taxes in Kentucky, you begin your Kentucky return with your federal taxable income total. That amount should already reflect your gambling winnings. You don’t have to separate your gambling winnings or pay anything extra on your state income tax. As long as you faithfully included your gambling winnings as part of your federal taxable income, you should be good to go​.

Kentucky Non-Residents State Tax Form for Filing Gambling Winnings

Out of state winners should check with a tax professional or the Kentucky Department of Revenue for the most accurate and up-to-date information about paying state taxes on winnings.

What to Do if You Don’t Get a W-2G Form Sent to You

If you don't receive a Form W-2G, you can call or visit the place you gambled as they should have their own copy on file. You can also call the IRS, though this may be less appealing due to the volume of forms the agency has to process. Even without the form, you're still obligated to report the win​​.

Deducting Kentucky Tax on Gambling Losses

You can deduct your losses on your federal tax return against your taxable income. However, you have to have an accurate record of all the times that you went gambling throughout the year. You should fill out IRS Form Schedule A, which is the form for listing itemized deductions. You can only deduct up to the same amount as you claim for gambling winnings. The best thing you can do is make your taxes on gambling zero. You cannot use gambling losses as a way to reduce your regular taxable income. Only the losses and costs you incurred directly from your gambling are eligible for deductions

Reporting Non-Cash Gambling Winnings

Non-cash prizes such as holidays, cars, or other physical goods won through gambling are typically considered taxable income. This means they must be reported on your federal and state taxes. The value of the non-cash prize is typically based on the fair market value of the item.

Typically, you would report this income on IRS Form 1099 for miscellaneous income, and then include this in your total income reported on Form 1040. The potential tax implications for large non-cash prizes can be significant, as these prizes can substantially increase your taxable income for the year.

Kentucky Betting Tax Revenue Year-on-Year

The Kentucky sports betting tax rate is 9.75% for retail sportsbooks and 14.25% for online sportsbooks​​. Gambling winnings are considered taxable income in Kentucky, and you are bound by law to report your gambling winnings and pay taxes on them, much like any other income​​.

Allocation of Federal Tax Revenue

Generally, tax revenue from gambling is often used to fund public programs and spur economic development.

Additional Information on Kentucky Online Gambling

Kentucky has a variety of legal gambling options, including horse race wagering, the Kentucky Lottery, and sports betting. As always, it's important to be aware of the laws and obligations, including tax obligations, associated with online gambling in your state.