According to data covered by Market Watch, US citizens suffered a total gambling loss of $107 million in the 2018 financial year.
At the same time, bettor James Adducci garnered a staggering stake of $1.2 million thanks to wagering on Tiger Wood’s success at the Masters.
Guess what these two events have in common?
Disclosure to the IRS.
Gambling gains in the eyes of the taxman are viewed as income and need to be reported as such. So if you are in luck and are realizing some gambling wins, you need to report this income to the IRS. On the other hand, you may also be able to claim a portion of any losses you experienced.
To disclose these figures accurately, you need to know how to go about reporting your gambling income and losses, and how to keep track of these events in such a way as to limit the chances of an IRS audit.
Because nobody wants to attract an audit, fortunately, we are going to outline everything you need to know to report your gambling earnings flawlessly.
Read on to become gambling tax savvy.
You Need to Declare All of Your Gambling Income to the IRS
By law, all gambling earnings are considered to fall under personal income, and any wins or money you receive from gambling needs to be reported when you fill out your returns.
And when Uncle Sam says all, he means all. It does not matter whether your winnings take place at a casino in Vegas, in a random round of poker, or at your kid’s school raffle – it all counts as gambling income. Online gambling is no exception to this, and gambling sites are required by law to report payouts to the government.
Non-cash wins are also deemed as income and as such need to be reported in your return at their market value at the time of you receiving them. These kinds of prizes could be things like cars, cruises, vacations, or even appliances.
There are many consequences to unpaid tax debt, so do not be tempted into failing to disclose your lucky wins. Otherwise, you may suffer the unlucky event of being overhauled and fined by Big Brother.
You Can Also Deduct a Portion of Your Losses
Although even the new kitchen gadget you won at a raffle might land you with a new tax disclosure responsibility – and you may have to fork over to the IRS for the all-inclusive cruise that you won – there is some good news. And that is you can deduct your gambling losses from your gross income.
But, there is a limit to this. You can only deduct losses to the value of what you have won and not more. For example, if you won $2 000, you can claim back gambling losses up to the amount of $2 000 and not over.
So essentially you can offset the taxation on gambling income with any gambling losses, but you cannot offset other income with gambling losses.
You May up Your Tax Liability Even If You Didn’t Break Even with Your Winnings
Unfortunately, while you can ‘cancel out’ any gambling earnings with losses, you may still end up paying more tax. Here’s why.
Gambling earnings are reported as part of your gross income, or more correctly, your ‘modified adjusted gross income’ (MAGI) as per the IRS. Your gross income amount determines things like tax credits, deductions on IRA contributions, the amount of tax you pay on social security benefits, and the cost of Medicare plans.
The higher your gross income, the less tax relief you will receive. Which means everybody wants to keep their gross income, or MAGI, down as far as possible.
The bad news comes in where although gambling income is included in your MAGI, gambling losses are not. Gambling losses fall under ‘Other Itemized Deductions’ that come into play after the calculation of gross income.
This means that even if you don’t have to pay tax on your winnings – because your losses canceled them out – you could still end up paying more tax because you fell into a higher bracket of gross income thanks to your gambling ‘gains’.
This is kind of a bummer if over the year you didn’t effectively ‘gain’ any money from gambling because you broke even. Or if you actually lost money overall and now inadvertently qualify for increased tax rates!
How to Keep Records of Your Gambling Income and Losses
The IRS stipulates that to be fully tax compliant; you need to not only report your gambling winnings but also keep a log of them and compile a collection of documentation to support this.
How to Log Your Gambling Wins and Losses
The IRS recommends that you keep a diary or logbook of all your gambling wins and losses. You do not need to itemize the individual transactions between you and other players in a game like poker. But you need to record each overall win and each overall loss.
Along with the amounts won or lost, you will also need to record:
- The date of the transaction
- The type of betting or wagering activity (bingo, blackjack, etc.)
- The name and physical address at which it was realized
- The names of the people with whom you placed the bet
Besides this diary, you must also collect and file proof of these transactions. This could include:
- Form W-2G
- Form 5754
- A statement by the person(s) receiving gambling winnings (this may prove your claimable loss)
- Wagering tickets
- Canceled checks
- Substitute checks
- Credit records
- Bank withdrawals
- Statements of actual winnings
- Payment slips
Besides these general forms of proof, the IRS also stipulates specific forms of proof that you will need to keep, depending on which type of betting you are taking part in.
When playing keno, you will need to keep copies of the tickets that you purchased (they need to be validated by the establishment), a copy of any casino credit records you might have as well as copies of check cashing records from your casino.
2. Slot Machines
If you are playing slots, to be IRS compliant, you will need to create a record of the machine number on which you are playing. You also need to note the date and time of all the winnings that you accrue while on the machine.
With bingo what you need to keep are the receipts showing the cost of tickets purchased. You will also need to record the amount of winnings collected on winning tickets and the number of games played. To supplement this documentary evidence, you can also save things like miscellaneous receipts from the casino or parlor.
4. Table Games
Games such as blackjack, poker, craps, baccarat, and roulette fall under table games. For these, you will need to record the number of the table you were playing at and keep a copy of credit card data which indicates whether credits were incurred at the table or with the cashier.
When playing the lottery you are advised to keep a record of the tickets you bought and on which dates, as well as any winnings. Back up documentation for this can be things like unredeemed tickets, winnings statements, and payment slips.
If you are betting on any kind of racing you also need to keep a record of the dates, amounts wagered and winnings and losses. To provide proof of this, you must keep things like payment records from the race track and unredeemed tickets.
One of the best ways to avoid a tax audit when claiming your gambling losses against your gains is to keep accurate gambling records and make sure that you save all the documents that support these records.
Now we come to the yearly task of deducting your gambling income and losses. If you have kept accurate records of all of your gambling, then this step shouldn’t be too hard.
Filling out the Forms
If you are not a professional gambler, then any gambling income you receive needs to be reported on IRS Form 1040 under ‘other income.’
The amount will be a total of all your winnings for the year. Don’t forget to include market value amounts for any non-cash winnings.
The next step is to deduct your gambling losses. This you will do as miscellaneous itemized deductions under Section A of your return. You cannot enter the total loss for the year. Instead, you will need to enter each amount as an itemized loss.
Remember that according to tax law, you may only claim losses up to the amount of income that you have earned in the year from gambling – and no more.
Watch out for Withholding Taxes
If you win larger amounts during the tax year, you may have some withholding tax hanging around with the IRS. To claim this, make sure that you keep track of any withholding tax that you have paid during the year on wins.
The IRS stipulates that for winnings over a certain threshold, it is mandatory that a withholding tax of 25% is deducted from your winnings. This is paid over on your behalf by the casino as withholding tax along with the submitted Form W-2 of which you will also receive a copy.
Be sure to keep any W-2 forms that you receive along with your other gambling-related documents to have ready at tax time.
Casinos are required to apply withholding tax and issue a W-2 form if your winnings minus the wager is over $5 000 for certain types of gambling. These include:
- Wagering pools
- Other types of betting if the winnings are 300 x the amount wagered
Besides these mandatory instances, casinos will often issue a W-2 form for the following betting situations as well:
- Slot machines and bingo: where winnings are over $1 200
- Keno: where winnings are over $1 500
- Poker: where winnings are more than $5 000
By rights, casinos are not the only ones required to apply withholding tax and issue W-2 forms. Even friends and other individuals with whom you have won a bet should do this if the bet falls over one of the thresholds. However, it is unlikely that you will get a W-2 form from a friend or betting partner.
If you, on the other hand, are involved in these high stakes bets and wish to fulfill this IRS requirement next time you have to pay out a large bet to somebody, then check out our guide on getting hold of W-2 forms online for free.
What to Do If You Are a Professional Gambler
The odds are that you are not a professional gambler. According to a report covered by the New York Times, only 0.5% of gamblers bet professionally.
To be a professional gambler, it should be your full-time pursuit, and you need to earn your main income from gambling.
If this is you, then you need to file your gains and losses as self-employed income under Schedule C.
What If You Are a Non-Resident?
If you are a non-resident of the US, you still need to report and pay tax on any income earned from gambling within the US to the IRS. You can do so by filling out and submitting Form 104NR. Income stated on this form is usually taxed at a rate of 30%.
As a non-resident, you are not allowed to offset any gambling related losses against your wins. Canadians, however, have it better, thanks to a tax treaty between Canada and the US which allows Canadians within the US to claim back their gambling losses up to the value of their wins.
If you are out and about burning up the strip in Vegas or winning a prize at your local fundraiser -chances are that the last person you are thinking of is the taxman.
But it turns out that if you want to report your gambling wins and losses accurately and be able to provide proof of them, then you need to be on the ready with a pen, paper, and a document organizer.
If you are diligent and keep good track of your gambling income and losses, then reported them come tax time will be relatively easy.
If you were not aware of these tax requirements around gambling, and are nervous about your taxes, feel free to check out our tax consulting services for personal advice and assistance.
And if you have already submitted your taxes, and are in the midst of an audit thanks to your gambling wins – don’t stress. Because we also do audit defenses.