In stock arbitrage, an investor buys stocks in one market, then sells in another where the price is higher. Arbitrage betting applies the same idea to sports. You search online for gambling establishments backing different teams in the same game. Then, you bet on both teams — one bet with each bookie. In theory, crunching the numbers lets you come out ahead, whichever team wins. It's still gambling, though, so your winnings are taxable.
Gambling Income
It doesn't matter whether you're playing poker or arbitraging a football game — gambling winnings are taxable income. You do get to subtract the stakes: if you put down $300 in an arbitrage bet and win back $400, you report $100 as Other Income on your Form 1040. You do not subtract losses from your income. If you make $12,000 on arbitrage bets this year and suffer $5,000 in poker losses, your Other Income is still $12,000.
Claiming Losses
The IRS does allow you to write off gambling losses. Instead of subtracting it from your gambling income, you have to claim losses as an itemized deduction on Schedule A. If you take the standard deduction instead of itemizing, you can't claim any losses. You can only deduct as much red ink as you claimed in gambling income. If you lose $1,000 in arbitrage this year and win $400 at slots, $400 is all you can write off.
Figuring Income
If you report arbitrage income or losses, the IRS expects you to document them. Your records should include the date, the location, who you bet the money with, the type of game and how much you won or lost. Fortunately you don't have to track the outcome of every single bet. The final outcome at the end of a single gambling session is all the IRS cares about. What constitutes a single session of arbitrage — or any gambling — is a subjective standard.
Paperwork
You need more documentation than just your diary. Lottery tickets, canceled checks, credit-card receipts and payment slips from gambling establishments all constitute proof of how much you won or lost. If you win a large enough amount, the casino or bookkeeper will send you a Form W-2G, reporting the total of your winnings for the tax year. The exact amount that triggers the form depends on which type of gambling you were engaged in.
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Writer Bio
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.