Disclaimer: This article provides insight into U.S gambling tax issues, but is not to be used as a legal or tax advice resource. This is important because this discussion is limited in scope and does not address any other factors that U.S citizens may need to consider when making decisions related to U.S taxes.
The Federal tax implications of transactions or matters referred on this page may change over time.
If you are a U.S citizen and are generating income from gambling activities, you are liable to pay taxes in accordance with U.S law.
As part of the U.S tax system, the Internal Revenue Service (IRS) collects payments from people who make money through various gambling activities.
The amount of tax U.S citizens must pay for their gambling winnings is often determined by the information they provide to the IRS when filing their return. This includes details on the type of gambling activity, profits made and where applicable, losses associated with the activity.
It is important to review U.S regulations carefully to ensure compliance and avoid unwanted penalties or interest charges that may be applied if taxes owed have not been paid.
Gambling income refers to what you earn from a game of chance and luck. It covers earnings from lotteries, raffles, casinos, betting pools, horse racing, slots, keno, and bingo games among others.
There are two courses of action when a player wins a casino game. In one instance, the casino will withhold 24 percent of the winnings and send a W-2 form to the player. If you don't have a social security number, casinos can keep up to 31% of your winnings. Players are also required to send the W-2 form along with their annual tax returns to the IRS.
Casinos will withhold percentage when the earnings are as follows:
So, what happens when the earnings are lower than the aforementioned figures? Players will not receive a W-2 form from the casino, but they must report it on their individual tax returns.
According to the IRS, gambling income is not limited to cash amounts. It also covers the market value of non-cash prizes like cars, holiday offers, and animals.
Shortly after PASPA was overturned, US states legalized sports betting. Furthermore, these states imposed different tax rates on sportsbooks operating within their borders. As of 2022, some of the existing tax rates included:
|13% of first $150 million in revenue, then 20% after the threshold
|10% of gambling profits
|50% of gambling profits
|15% of gambling profits
|9.5% of gambling profits
|6.75% of gambling profits
|8.4% of gambling profits
|12% of gambling profits
|Lottery collects revenue minus expenses
|6.75% of gambling profits
|51% and 50% of retail gaming, respectively.
|8.5% of land-based revenue; 13% of online revenue
|8.5% and 12% for retail and online revenue, respectively.
|34% of gambling profit
|51% of gambling profit
|20% of gambling profit
|10 % of gambling profit
|10% of gambling profit
The rules are different for players who use gambling as their source of income. For full-time or part-time gamblers, the IRS may consider the winnings as personal income. In addition, professional gamblers can deduct the cost of expenses incurred during gambling activities from their gambling winnings. In most cases, professional gamblers will pay less tax.
You must report a gambling loss on your annual tax return, provided the loss is less than the winnings. Players have the opportunity to get tax deductions by including their losses in a tax return document.
According to the IRS, gambling losses include the cost of the lost wager and expenses incurred during the gambling activity. This may include the cost of transportation to and from a gambling establishment.
Consider the following before reporting your gambling losses:
Note: You can check the IRS’s information/document on itemizing gambling losses.
So, here's an explanation. If you reported $4,000 in gambling winnings and $6,000 in losses, the IRS will deduct $4,000 as tax write-off. The remaining $2,000 cannot be written off.
Yes. The IRS also taxes income from online gambling. Online casinos will fill out a W-2 form on your behalf when you win over $600. In addition, you will also receive the form when you cash out 300 times your initial wager. Take note that the IRS also taxes income from offshore and illegal websites.
Spoiler alert: The IRS does not care about the source of income as long as it is taxed. Per Section 61(a) of the U.S. Tax Code, “all income from whatever source derived” is defined as gross income. And all gross income is taxable. Crime kingpins are often arrested for tax evasion and not for the source of their income.
Not all taxes for online gambling winnings are the same. For example, online casino players who win more than the threshold amount will get a W-2 form. On the other hand, online sports bettors will get an IRS Form 1099 when they win over $600. Players withdrawing via PayPal must send a 1099-K form.
Irrespective of the type of tax form, you can file taxes using these general steps:
Include a W-2, 1099, or 1099-K form, depending on the type of gambling income. If you didn't qualify for these tax forms, put your gambling winnings on the Form 1040 under the "Other Income section."
Also provide these documents:
Besides your gambling income, list other sources of income or compensation, like unemployment benefits. In addition, include income receipts from your business, real estate, rentals, royalties, and trusts.
The IRS recommends using an affiliated service to e-file your taxes. Through the Free File Program, the IRS worked with tax preparation companies to help people file their taxes for free. This was done to give people more information. Note that the program is only accessible to those earning less than $73,000. Taxpayers earning more than this amount may use the free fillable forms.
Once the IRS approves your tax filing, you may receive a notification from the tax preparation company
Yes. Thankfully, the IRS allows taxpayers to request tax deductions on gambling losses. Players who lost more than their gambling income may not have to pay tax on their winnings. So, here’s how you can claim it:
Use an offline or online notepad to take note of all gambling losses and wins. This habit will help you accurately file your tax report at year’s end. The following information should be included in your note:
Taking note of the wins and losses is not enough; you must keep receipts of all transactions. The receipts may include wagering tickets, credit/debit card transactions, and even miscellaneous expenses. From the gas fill-up in your car to the public bus tickets to the casino, account for all expenses.
Depending on the type of gambling, fill out the appropriate IRS form. Casinos will fill out a W-2G form when your payout is higher than the threshold. Sportsbooks will also send a 1099 IRS form for wins above $600. If you are not eligible for a W-2G form, you may use Form 1040.
Fill out all gambling-related expenses and losses on Form 1040. You can also use the form to claim non-gambling expenses such as medical and dental bills and sales taxes. Next, send the completed form to the IRS via a tax preparation company.
According to the IRS, your gambling loss deductions cannot exceed your reported earnings. This means if you have $10,000 in winnings and $15,000 in losses, the IRS will only deduct $10,000. So, you are stuck with $5,000, which you may transfer to the following year.
Yes. Under Publication 519 (2021), U.S. Tax Guide for Aliens, non-resident aliens are taxed for gambling at US-based online gambling sites. This means non-resident aliens are exempt from paying tax on gambling income earned from offshore sites.
Nevertheless, the rule does not apply to non-resident aliens from Canada. Those in this category will be taxed as naturalized citizens or resident aliens. They can also apply for tax deductions.
Also, non-resident aliens who are residents of Puerto Rico and American Samoa are taxed as resident aliens. However, they are unable to claim tax deductions on gambling income. This rule also prevents those in this category from paying joint income tax with other non-resident aliens.
Non-resident aliens go through the same tax filing process as residents and naturalized citizens. The only difference is that you need to file a different tax form. Non-residents can file Form 1040-NR and the Schedule OI section on Page 5 to pay taxes on gambling income. The IRS requires non-resident aliens to fill out the latter form. Note that you may not need the Schedule 1 to 3 Form under these conditions:
The IRS takes a flat rate of 24 percent on gambling winnings. The player or the casino owner may have to take out the tax from gambling earnings. Federal law says that casinos must take out the tax rate when the winnings are more than a certain amount.
The tax rate is higher for non-resident aliens. The IRS takes a 30 percent tax on gambling winnings from non-residents.
Some U.S. states also charge taxes on all income earned within the state. These tax rates apply to all licensed operators within the state. For example, Nevada charges a 6.75 percent tax on all accrued revenue from gambling-related activities. States like Rhode Island charge as much as 51 percent on all gambling revenues.
Yes. Under the tax code, all income is taxable. It doesn’t matter if you earned it within or outside the country. So, how does the IRS detect winnings from offshore gambling? The IRS periodically performs tax audits on your account. It will detect unaccounted money that is subsequently traced to offshore gambling casinos. McClanahan v. United States, 292 F.2d 630, 631-632 (5th Cir. 1961), is an example of this situation.
Note: The IRS will perform an audit 26 months after the date it was filed, or after the due date of the tax return.
You may face serious penalties if found guilty of tax evasion after an audit. Under Section 7201 of the tax code, you may pay fines up to $100,000. In addition, the IRS may jail offenders for up to five years for tax evasion.
Yes. U.S. casinos must report winnings over a certain threshold. For example, it reports winnings over $1,200 from slot machines and bingo games and over $1,500 from keno games. However, the thresholds for sweepstakes, lotteries, and wagering pools are higher. The casino will report winnings over $5,000 from these game categories.
For some reason, games of skill, including table casino games, have a lower threshold. This means the casino will report table game winnings over $600 to the IRS. If the earnings are below the threshold, include them in your annual tax report.
Note: Gamblers can also check the IRS document on all gambling categories and the thresholds for taxation.
The IRS taxes all gambling winnings via these steps:
The same tax rate also applies to users without a W-2 form.
All gambling income is taxable. However, you can avoid paying taxes to the casino if the winnings are less than:
If you lose more money gambling than you win, you may be able to claim a tax deduction. As part of the process, you will need to itemize all the losses on Schedule A (Form 1040). Claim your losses by writing them down in the “Other Itemized Deductions” section of your Form 1040.
Note that the IRS will deduct the losses from your gambling income. Furthermore, the deduction will not be higher than your gambling income for the year.
Taxes on prize winnings cannot be avoided. However, winners may adopt several approaches to reduce the amount payable.
Lottery winners have two options. One option is to receive a lump sum payment. On the other hand, they may choose the annuity option, which spreads the full amount over a number of years. The second choice is better because it lowers the total amount of tax on the winnings. Tax rates for lump sum payments are often as high as 50 percent of the total amount.
Note: Lump sum payments are not all bad. You may choose this option if the tax rates increase over the years.
You can reduce the tax rate by donating part of the winnings to charity. The IRS enables taxpayers to claim deductions for donating to charities. However, there is a limit to what you can receive from these donations. In most cases, for charitable donations, you are eligible to claim a 60 percent deduction from your gross annual income. You can get a higher deduction if the donation is a real estate property.
List out your gambling losses to offset the overall tax rate on prize winnings. Ensure to keep evidence of these losses when claiming a tax deduction. These pieces of evidence may include receipts, credit card bills, bank transactions, and e-wallet transactions.
Don’t forget to hire a tax professional to help increase your chances. These professionals will help you understand the consequences of each choice and how to avoid tax penalties.
The IRS doesn't always perform audits, but it has the right and power to do so. Tax audits are random and often affect only one percent of taxpayers. There are many instances of gamblers not reporting earnings below the threshold.
The IRS will notify you of an audit via email. Next, the agency will request personal information via mail or in an in-person interview. The interview may take place at their local office, an accountant’s office, or the taxpayer’s home. Remember that the IRS will not initiate this process via a phone call.
The IRS will send a notice or a letter if you fail to file or pay taxes on gambling winnings. Keep in mind that there are different penalties for these situations:
If you fail to declare your gambling income, the IRS will send you a notice ten business days after the due date. In addition, the agency will add a one percent increase to the amount owed. Keep in mind that the interest rate will compound until you complete the payment. You can talk about the different penalties a gambler might incur from the IRS.
For the second situation, you will pay 0.5 percent of unpaid taxes every month. Also, the interest will compound until you complete the payment. However, the interest rate will not exceed 25 percent of the unpaid taxes.
Yes. A casino win-loss statement is important for filing gambling income. The statement contains the full list of all wagers, wins, and losses accumulated in a year. You can request for it from all online or in-person casinos you used within the year. Upon receiving your request, the casino will send the statement by mail, email, or fax.