Since the May 2018 U.S. Supreme Court ruling legalized sports betting, companies like DraftKings, FanDuel, and BetMGM have built a national presence along with some states’ online casinos. However, many are still unsure how to report winnings and/or losses. Whether it is traditional or online gambling, or sports betting, the IRS treats it all the same.
You must report 100% of your gambling winnings as taxable income. The value of complimentary goodies ("comps") provided by gambling establishments must also be included in taxable income as winnings.
Gambling income includes, but is not limited to, winnings from lotteries, raffles, horse races and casinos, as well as the fair market value of prizes such as cars, houses, trips or other noncash prizes.
In simple terms, if you win, you have taxable income, and it should be reported when you file your tax return that year. Based on your personal income tax and tax bracket that year, taxes are due on the winnings earned.
Generally, if you receive $5,000 or more in gambling winnings, the payer may be required to withhold 28% in federal income taxes at the time your winnings are received. If a Social Security number is not provided at the time of distribution, the withholding rate increases to 31%.
For winnings less than $5,000, taxes would be paid when your tax return is filed.
Like other taxable income, if gambling income is not reported, penalties and interest could apply.
Form W-2G reports gambling winnings to the IRS. The form tells the IRS your personal contact information, amount won, date of earnings, type of wager made, and taxes withheld.
This form is submitted by casinos, racetracks and other gaming organizations in the following situations:
When wagering, there is the chance of incurring losses. For tax purposes, gambling losses are tax deductible if you itemize your deductions and can provide detailed records of your winnings and losses. Detailed records could be a diary of receipts, tickets or other records that show accurate amounts of bets made. Many casinos can provide a detailed history of betting transactions tied to an individual’s player’s card.
Unfortunately, gambling losses are not allowed to exceed gambling winnings received each year. For example, if you have $7,000 in winnings, only $7,000 of losses can be deducted on Schedule A. Any excess losses would not be deductible and cannot be carried forward for future tax years.
Nonresident aliens can only deduct items effectively connected with the conduct of a trade or business within the U.S. As a result, gambling losses are not deductible by a nonresident alien (see more on this matter in the next section).
To claim a deduction for gambling losses, you must adequately document them, including:
You can document income and losses from gambling on table games by recording the number of the table you played and keeping statements showing casino credit issued to you. For lotteries, you can use winning statements and unredeemed tickets as documentation.
This is where the tax rules get complicated. Nonresident aliens pay U.S. tax on their “fixed or determinable annual or periodical gains, profits and income” from U.S. sources. That phrase is hard to decipher, but it includes gambling winnings.
The flip side is that nonresident aliens can only deduct items effectively connected with the conduct of a trade or business within the U.S. As a result, gambling losses are not deductible by a nonresident alien. Taxing winnings but not allowing related losses doesn’t seem very balanced.
Though in all fairness, even domestic gamblers have had to fight with the IRS about how to offset their wins and losses. In 2008, the IRS ruled that U.S. citizens could measure their gains on a per-session basis. In effect, you don’t have to compute each wager separately to determine if you won or lost and by how much. Just tally your total at the end of your gambling session.
The Tax Court reached the same conclusion in Shollenberger v. Commissioner, T.C. Memo 2009-306. As a result, now U.S. citizens (and resident aliens) can measure their gambling wins and losses on a per-session basis and don’t have to compute their losses/income bet by bet.
But should this treatment apply to nonresident aliens who come to the U.S. to gamble? The IRS said no, aliens should pay tax on all gains, period.
But then came Mr. Park, a nonresident alien, who periodically came to the U.S. to gamble. Although he had net gambling losses, the IRS determined that he had both taxable gambling gains and non-deductible gambling losses, because it treated each bet separately. The IRS said he couldn’t offset them.
The IRS claimed that his wins were “effectively connected” to the U.S., but not his losses! What's worse is the U.S. Tax Court agreed (see 136 TC No. 28). Mr. Park appealed, and the D.C. Circuit Court of Appeals reversed. It held that the per-session rule applies to residents and nonresidents alike. See 12-1058 – US Court of Appeals - DC Circuit.
The Appeals Court said there was nothing in the law to vary the tax rules on gamblers depending on whether they were U.S. citizens. The court pointed out that the IRS itself had said that offsetting wins and losses per session made sense — for citizens. To the court, the IRS opened the door.
If the rule made sense for U.S. citizens, it made sense for nonresidents too. The per-session approach avoids the administrative and practical difficulties of having to track every single win and loss. There is nothing in the law to make this rule any less sensible for nonresidents.
Trying to follow this line of reasoning is dreadfully confusing. In fact, it might be easier to beat the odds on a Friday night in Vegas. That being said, whether you are a U.S. citizen, a permanent U.S. resident or a nonresident alien, high-stakes gambling can certainly have an impact on your tax bill. Understanding how this impact works is the tricky part.
Remember that large winnings can push you into a higher tax bracket and cause you to pay a higher rate than you originally thought applicable. Should you have excessive gambling gains, or losses, you should speak to your tax advisor about these occurrences.
For questions or assistance, contact our experts.
