Sports betting is more popular than ever here in the United States, with roughly 75 percent of states in the union voting to legalize the pastime in some fashion over the past five years. With the deluge of advertisements and promotions that the average consumer sees on a daily basis, the promise of winning big with a couple taps on your phone is a tantalizing prospect.
Of course, it’s not ever as simple as it sounds, and it’s important to gamble responsibly, both so that you don’t risk more money than you can afford to lose, and so that you don’t end up suffering from a gambling addiction.
They say that the house always wins, but that doesn’t happen by accident. Here’s a look at the financial side of sports betting, including how the sportsbooks manage to win big in record numbers with each passing year.
Revenue Models in Sports Betting
Gambling always comes with inherent risk. You’re making money because of the uncertainty of the outcome, and if something is a slam dunk to happen you aren’t going to get as big of a payout.
Sportsbooks know that and can embrace that risk to maximize their profit thanks to nifty financial loopholes, for example, the availability of promo offerings during key seasons like sports events or new states in the US going legal to the public.
A prime example of this is the way folks are flocking to sports betting promotions when a state gets in on the action. Take Ohio and Massachusetts this year, for instance – they’ve been drawing in many customers with their promos. And, looking ahead, it’s got people excited about North Carolina Sportsbooks’ promos coming up in January 2024; keep in mind that the launch date could change given the process of regulation in the state. But it’s pretty clear that these promotions get people hyped!
The promotions you’ll see plastered all over billboards, TV commercials and the internet typically take a couple of different forms.
One example is deposit matches, where sportsbooks will match the first deposit you make — often up to a value of $1000 — giving you a chance to dive into the action with extra free bets. Another example is second chance bets, where you’ll have the opportunity to bet the same amount free of charge if your first wager falls through.
If you lose both bets, the house wins because they get to keep your money.
If you win, the house does too. That’s because they’re able to write off the promotional stake as a business loss, claiming it as such on their tax returns and reducing their taxable income, gaining a potential returning customer through this loophole at relatively no cost.
We’ve already touched on this topic a bit, but let’s make sure we pay adequate respect to everyone’s favorite American… the tax man.
On the federal level, the money you win by gambling is taxed at a 24 percent rate. State taxes, on the other hand, can very quite a bit. The state of New York taxes the sportsbooks at a 51 percent rate, while other states levy a much lower penalty.
When it comes to your own personal taxes at the state level, the percentage varies based on how much you earn each year.
Gambling income is included as part of your total income, so the tax rate hinges on your income bracket… which can shift up or down depending on if you win big or if you have to claim a bunch of losses.
Some states are looking into changing the way that sportsbooks are able to claim losses so that they can’t profit wildly off of the promotions they offer. Again, though, that legislation is in an early phase, still getting debated on, and would likely vary from state to state unless a federal bill is put on the table.
Once again, there’s no definitive answer on profit margins for sports gambling. You might think that states like New York, with that aforementioned 51 percent tax rate, might see a lower profit margin than other states with more lenient tax laws.
Surprisingly, you would be wrong in thinking that. The state of New York set a record for yearly betting handle in their first year of operating, bringing in more than $1 billion in the total value of bets placed, even outpacing states that have been operating for years and have established betting platforms.
The state of Ohio thought about increasing their tax rate after seeing the wild success that New York enjoyed, but ultimately decided not to, fearing that it would dissuade other betting platforms from wanting to operate in the buckeye state.
When it comes down to it, the betting industry is incredibly profitable for both the state and federal governments who levy the taxes, and for the sportsbooks who field the wagers.
The industry has plenty of opportunity for the regular person, but there is also a good deal of risk to keep in mind.