There is an old saying: “Money won is twice as sweet as money earned.” That’s so true for so many gamblers after they have a big win. However, that feeling of joy might quickly diminish for the poor souls who suddenly realize they might have to pay taxes on their winnings.
In Great Britain and many parts of Europe, gambling earnings are generally free of tax obligations. That’s even true for the lucky lottery players who hit the big seven-figure jackpots. Where income taxes on winnings can be a problem is in the old U.S.A.
How Taxes on Gambling Winnings in the U.S. are Determined
American gamblers are required by law to report their annual gambling winnings on their federal tax returns. The same requirement might exist at the state level for gamblers in certain states. For this writing, the focus will be the tax burden created by gambling winnings at the federal level.
Quite literally, U.S. gamblers are required by law to report any and all gambling winnings on their federal tax returns on an annual basis. Realistically, that only happens with the most honest of U.S. gamblers. In practice, U.S. gamblers will only report gambling winnings if they exceed certain thresholds and get reported by a gambling facilitator.
The list of gambling facilitators includes
- Horse and dog race tracks
- Retail casinos and sportsbooks
- Online casinos and sportsbooks
- Bingo halls
- Poker Rooms
- Daily Fantasy sports sites
To be clear, gambling facilitators are not in the business of tracking the winnings and losses of their customers. However, they are required by law to issue the appropriate tax forms to customers who hit big over certain thresholds.
Since the Internal Revenue Service (IRS) and federal legislature seem to go out of their way to create complicated tax laws, it’s necessary to define the thresholds by type of gambling winnings. Here is the appropriate list of tax implications:
Horse and dog race betting – payouts of 300-1 or more on $2+ wagers or 600-1 on $1 wagers
Casino table games (retail/online) – payouts of 300-1 or more on a single event. Casinos might choose to report net table game winnings that exceed $5,000 at the cashout window.
Casino slots and video poker (retail/online) – payouts that exceed $1,200 on the single spin of a wheel or turn of cards.
Sports bets – payouts of 300-1 or more on $2+ wagers of 600-1 on $1 wagers. Large aggregate daily winnings might be subject to reporting with some sportsbooks.
Bingo (retail/online) – payouts that exceed $1,200 on a single game
Keno (retail/online) – payouts that exceed $1,500 on a single game
Poker (online/retail) – poker winnings are not tracked except during tournament play where a prize fund has been established. The reporting threshold for a poker tournament is $5,000 per event.
How to Decrease Your Reported Gambling Winnings
The IRS does make allowances for the fact that gamblers place bets that lead to winnings and losses. Based on that knowledge, they have written the rules so that gamblers are permitted to offset their gross reported gambling winnings by the amount of their gross gambling losses. The final number would be net winnings, which would then be subject to federal taxes.
If a winning gambler wants to offset their reported winnings, they may do so under three (3) circumstances. First, they must use Schedule A to claim their gross losses. Second, they can only claim gross losses up to the extent of their gross winnings. In other words, they cannot claim a “net loss” on their tax returns. Finally, proof of all reported gross losses must be documented.
Other Details of Note Related to Gambling Winnings
To better understand these tax requirements, it would seem prudent to offer the following additional information:
- Gambling facilitators are required to report winnings over threshold via IRS form W-2G (copy given to IRS and gambler)
- Gambling facilitators might be required to automatically withhold 25% of gross winnings in certain situations (funds forwarded to IRS)
- Gambling facilitators are required to mail customer W-2Gs by no later than January 31 for the previous year
- At a minimum, gamblers must report what gets reported on them via W-2Gs
Failure to report gambling winnings could result in penalties and interest. Before gambling facilitators issue threshold winnings, they are required to request proper identification and the appropriate Tax Payer ID number (social security number). If a customer refuses to provide said documentation, gambling facilitators are required to withhold all winnings until the issue is resolved.
For taxpayers, gross gambling income can be reported under “other income” on IRS forms 1040 and Schedule 1.