Taxes on Gambling Winnings and Deducting Gambling Losses
In gambling, there are winners and losers... But even the winners can be losers if they don't pay their taxes! Any money you win gambling or wagering is considered taxable income by the IRS. So is the fair market value of any item you win. Gambling income isn't just cardgames and casinos; it includes winnings from racetracks, gameshows, lotteries, and even Bingo.
Certain special rules apply to gambling income, and there are strict recordkeeping requirements. However, you may be able to deduct gambling losses.
Is Gambling Income Taxable?
Gambling income is almost always taxable income. This includes cash and the fair market value of any item you win. By law, gambling winners must report all of their winnings on their federal income tax returns.
Depending on the amount of your winnings, you may receive one or more Forms W-2G, which reports the amount of your winnings, as well as the amount of tax that was withheld, if any. You will need these forms to prepare your tax return. Remember that, even if you do not get a W-2G, you must report all gambling winnings.
What Are Considered Gambling Winnings?
Gambling winnings include, but are not limited to, money or prizes earned from:
- Casino games
- Slot machines
- Poker tournaments
- Betting pools
- Horse or dog races
- Off-track betting
How Much Tax Do I Pay on Gambling Winnings?
Your gambling winnings are generally subject to a flat 25% tax. However, for the following sources listed below, gambling winnings over $5,000 are subject to income tax withholding:
- Any sweepstakes, wagering pool (including payments made to winnners of poker tournaments), or lottery.
- Any other wager (if the proceeds are at least 300 times the amount of the bet).
If you win a non-cash prize, such as a car or a trip, you will be responsible for paying taxes on the fair market value of each prize.
Is Tax Withheld from My Gambling Winnings?
Depending upon the amount of your winnings and the type of gambling, the establishment or payer may be required to withhold income taxes. In general, 25% of the amount is required to be withheld. In some cases, a "backup" withholding of 28% is required instead.
If tax is withheld from your gambling winnings, you will be sent a Form W2-G from the payer.
Can I Deduct My Gambling Losses?
You may deduct gambling losses if you itemize your deductions. You can deduct your losses only up to the amount of your total gambling winnings. You must generally report your winnings and losses separately, rather than reporting a net amount.
Gambling losses are deducted on Schedule A as a miscellaneous deduction and are not subject to a 2% limit. This means that you can deduct all losses up to the amount of your winnings, not just the amount over 2% of your adjusted gross income.
What Kinds of Gambling Records Do I Need to Keep?
The IRS requires you to keep detailed records of your gambling winnings and losses, and to keep any related documents, including receipts, tickets, payment slips, statements, Form W-2G, and Form 5754. You must be able to prove both your winnings and losses if you wish to deduct your losses. The IRS suggests that you keep a gambling log or diary.
The IRS requires you to keep the following information about each gambling win and loss:
- Type of gambling activity
- Name and address of the establishment or event
- Names of other people there at the time of the activity
- Amounts of winnings and losses
If you efile your tax return, you do not have to send any W-2Gs or other documents to the IRS (but you must keep them for your records in case of audit).
What If I Am a Professional Gambler?
The rules described on this page are for the majority of people with gambling income, those who are not professional gamblers. If gambling is your actual profession, then your gambling income is generally considered regular earned income and is taxed at your normal effective income tax rate.
As a self-employed individual, you will need to report your income and expenses on Schedule C. You can deduct gambling losses as job expenses using Schedule C, not Schedule A.
Gambling Income Tax Requirements for Nonresidents
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 generally taxed at a flat rate of 30%. Nonresident aliens generally cannot deduct gambling losses.
However, there is a tax treaty between the United States and Canada that generally allows Canadian citizens to deduct their gambling losses, up to the amount of their gambling winnings.
What Forms Do I Use to Report Gambling Winnings and Losses?
If you have gambling winnings, you must report them on Line 21 of Form 1040. You won't be able to use Form 1040EZ or 1040A. But you can use efile.com to prepare and efile your tax return with ease. The software walks you through the tax preparation process, helps you fill out the right forms, and checks for errors.
If you have gambling losses to deduct, then you will need to use Schedule A to itemize your deductions. Gambling losses are entered on Line 28. You can do this on efile.com, as well.