Gambling Income and Taxes
Any money you win gambling (and the fair market value of any item you win) is considered taxable income by the IRS. But certain special rules apply about this special type of income.
Gambling Income Tax Requirements for Players
By law, gambling winners must report all of their winnings on their federal income tax returns. This rule applies regardless of the amount won and regardless of whether the winner receives a Form W-2G or any other reporting form.
Your gambling winnings may be subject to a standard 25% tax if they total more than $5,000, minus the value of any original wager (depending on the game) and your gambling losses.
If you win a non-cash prize, such as a car or a trip, you will be responsible for the taxes on the fair market value of the item or items (if the value exceeds $5,000).
Though you may be required to pay tax on gambling winnings, you may deduct gambling losses as an itemized deduction. You may not, however, deduct more than your reported winnings. You must report your winnings and losses separately. It is not acceptable to simply deduct your losses from your winnings and report the difference.
Be sure to keep detailed records of your gambling winnings and losses, and to keep any related receipts, tickets, statements, or other paperwork. You must be able to prove both your winnings and losses if you wish to deduct your losses.
What income is taxable and what is not?
Gambling Income Tax Requirements for Sponsors
Since 2008, casinos and other sponsors of poker tournaments have been required to report most winnings to winners and to the Internal Revenue Service.
The requirement, which went into effect on March 4, 2008, was contained in guidance released Sept. 4, 2008, by the Treasury Department and the IRS. The guidance was designed to clear up confusion about the tax reporting rules that apply to poker tournaments, but it applies to all forms of gambling. In recent years, some casinos and players have been confused over whether poker tournament sponsors who hold the money for participants are required to report the winnings to the IRS and withhold tax on the winnings.
The IRS requires all casinos and other sponsors to report poker tournament winnings of more than $5,000, keno winnings of more than $1,500 (minus the cost of the winning wager), bingo or slot machine winnings of more than $1,200, and winnings of more than $600 from any other form of gambling (if the payout is at least 300 times the amount of the wager). Other forms of gambling which may produce reportable income include, but are not limited to: lotteries, raffles, sports betting pools, horse racing, dog racing, jai alai, and roulette and any other casino games.
Tournament sponsors who comply with this reporting requirement will not need to withhold federal income tax at the end of a tournament. If any tournament sponsor does not report the tournament winnings, the IRS will enforce the reporting requirement and also require the sponsor to pay any tax that should have been withheld from the winner if the withholding requirement had been asserted. The withholding amount is normally 25 percent of the amount that should have been reported.
So that tournament sponsors can comply with this requirement, tournament winners must provide their taxpayer identification number, usually a Social Security number, to the tournament sponsor. If a winner fails to provide this identification number, the tournament sponsor must withhold federal income tax at the rate of 28 percent.
Gambling Income Tax Requirements for Foreign Nationals
U.S. Nonresidents can usually report income that is "effectively connected" with a U.S. business on Form 1040NR-EZ. Gambling winnings, however, are considered to be "not effectively connected" and so must generally be reported on Form 1040NR. Such income is not subject to deductions and is generally taxed at a flat rate of 30%. Because gambling income is "not effectively connected" to a U.S. business, citizens of foreign nations are generally expected to pay the IRS taxes on any gambling winnings, without deducting their gambling losses.
If you are a Canadian visitor, however, you may be interested to know that a tax treaty exists between Canada and the U.S. which generally allows Canadian citizens to deduct their gambling losses from their reported gambling winnings. If you choose to do this, of course, you may need to provide records of both.
Learn about excluding foreign income and the Foreign Income Tax Credit.