In other countries, taxes apply only to the operator providing the gambling service. However, you may be surprised to learn that your winnings from any form of gambling activity are actually subject to taxes. This is because the states deem earnings from betting a profitable income, and therefore, a taxable income. Taxes on gambling profits are paid to the Internal Revenue Service (IRS), a bureau of the Department of the Treasury.
It is a gambler’s responsibility to declare their gambling income, whether it derives from as little as a lottery ticket or a scratch card to slot machines, casino gambling, and even online gambling. In the US, it does not matter whether you are a professional player or just gamble for fun – you still have to pay those taxes. Even non-cash prizes such as cars or trips are considered taxable income to be taxed based on their fair market value.
While this may seem like a bit of a downer, it is not all bad. When declaring gambling income in the US, you can also deduct your losses from your wins and reduce your overall tax. That is why it is important to know how to declare your gambling income and use your losses to your advantage.
The Internal Revenue Code
Gambling winnings are taxed under the US Internal Revenue Code (IRC), which is organized topically into subtitles and sections that cover income, payroll, estate, and excise taxes in subtitles A, B, C, and D of the IRC. The IRC can be found under title 26 from the official version of the United States Code and is governed and enforced by the IRS that was founded back in 1862. Included in their tasks of implementing the IRC, the IRS is charged with collecting taxes as well as issuing fines and punishments for violations of the code.
The current version of the code is the Internal Revenue Code of 1986, more commonly referred to as just the US Internal Revenue Code. Throughout the history of the IRC, there have been 3 major amendments: the 1939 code, the 1954 code, and the final enactment, the 1986 code. Prior to the 1939 code, federal tax laws were individual Revenue Acts.
There have been some bills recently that have launched campaigns to abolish the IRC. The Tax Cuts and Jobs Act (TCJA) from 2017 managed to enact serious changes to previous laws, but the two more recent bills – the House of Representative Bill H.R. 29 that was filed to abolish the code by 2021 and Bill S.18, the Fair Tax Act of 2017 which also aimed to disband the IRS by 2021.
However, neither made much progress in their mission to abolish the IRS and the IRC. The passage of the TCJA made significant changes in the current tax system but reaffirmed the basic structure, making the future of the Fair Tax Act from uncertain to quite unlikely.
The Process of Reporting Gambling Winnings for Recreational Players
Now that we have established the importance of declaring gambling income in the US, it is time to look at the process of doing so for casual gamblers. A piece of advice from us, if you gamble occasionally for recreational purposes, you should keep a detailed account of all your gambling activities. This should include winnings, losses, and receipts, pay slips, tickets, statements, or other records to account for them. This will help you better organize and correctly conduct the process.
By law, you must report all of their income from gambling on your federal income tax returns. Gambling winnings include, but are not limited to, money or prizes earned from keno, bingo, raffles, lotteries, betting pools, sweepstakes, game shows, horse or dog racing, off-track betting, poker tournaments, casinos, and slot machines.
Issuance of Form W-2G
The payer (the gambling operator that has paid out winnings) is obliged to provide a Form W-2G to those whose winnings exceed a certain amount. Your Form W-2G will include the amount won and the tax withheld. If your winnings are reported by this method, the fixed tax rate is 24%. Winnings are calculated and taxed on a per-session basis. Even if you do not receive a Form W-2G, you will still have to report your tax winnings on your tax return.
On the W-2G form will be the player’s personal details, including name, address, and the player’s federal identification number. There will also be an account of reportable winnings, the date they were won, the type of wager, and the federal income tax withheld from the winnings.
Winning Thresholds for Issuance of Form W-2G
The threshold for issuance of Form W-2G depends on the type of gambling activity. If your winnings amount to more than $1,200 from slots or bingo, you will be issued a Form W-2G. The threshold for keno is $1,500 and $5,000 for poker tournaments. For other types of gambling, the threshold is $600 or more or 300x the stake. Players will receive an additional copy of the Form W-2G when filling out their state income tax returns and must send another copy of it to the IRS.
You must withhold federal income tax from the winnings if the winnings minus the wager exceed $5,000 and the winnings are at least 300x the bet. The flat rate for this is 24% and is considered regular withholding. Backup withholding may be required if the winner of reportable gambling winnings does not provide a TIN. Backup withholding is identical to regular withholding but only if the winnings are at least $600 and do not exceed $5,000, and are at least 300x the bet.
Issuance of Form 5754
If the winnings are split among several players or the person collecting them is not the actual winner, the gambling operator will issue a Form 5754. Whoever is the person collecting the winnings must provide required by this form to the payer.
This form will contain details such as the date won, type of winnings, and the game/machine/race number. There will also be the details of the person receiving the winnings, including name, address, tax identification number (TIN), the amount received, and the federal tax income withheld. In the second part of the form will be listed the names of everyone who has a piece of the winnings, their TINs, addresses, part of the winnings, and tax withheld from their share.
Filing Form 1040 or 1040-SR
US taxpaying citizens must complete either a Form 1040 or a 1040-SR to declare any additional income they have throughout the year. The Form 1040-SR is intended for individuals aged 65 and over.
Gambling income would be listed under “other income”. Here you will list all of your winnings throughout the year, including those from gambling activities that are not on the Form W-2G. The tax rate for other income is set at 10%.
Deducting your Gambling Losses
Under section 165 (D) of the IRC, gamblers are permitted to deduct their losses from their winnings before submitting the final sum for tax evaluation. To report your gambling losses, you must itemize your deductions on Schedule A (a form attached to either your Form 1040 or 1040-SR). Gambling winnings are deducted as “other itemized deductions”.
Our advice is that you keep a detailed diary recording every win and loss during even the littlest of gambling activities, such as lottery or bingo, so as you can do this. It is also advisable that you make a record of the location, venue, date, any people that may have been there with you, and exact sums of wins and losses.
It is important to note that if your losses are greater than your winnings, you can not deduct more than your total sum of gambling winnings. Say, for instance, your winnings were $6,000, but your losses were $9,000. You would only be able to deduct $6,000 as you can not deduct more than your winnings to save for deduction from future winnings.
Professional gamblers and recreational gamblers are treated differently when it comes to tax. This is because professional gamblers are viewed as being involved in the trade or business of gambling rather than gambling just for the fun of it.
Whether or not someone is a professional gambler depends on circumstances and facts. The Supreme Court established a standard for professional gamblers. One who’s gambling activity is pursued full-time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby, it is a trade or business.
Because of this, a professional gambler must report their winnings and losses under Schedule C, Profit or Loss from Business. The standard tax for professional gamblers is 25%.
Penalties for Failure to Declare Gambling Income
Failure to declare gambling income correctly and then pay the taxes owed can lead to serious penalties, which can lead to monetary fines. That is why it is important to know what types of penalties one could receive for different failings in declaring gambling income.
If you fail to file your tax return by the end of the due date or extended due date, this is classed as a violation of the IRC §6651 (A)(1). This will result in a minimum fine of $435. The sum is calculated as 5% of unpaid tax, reduced by the “failure to pay” penalty amount for any month that both penalties apply, charged by each month, or part of a month, up to 5 months. Even if you are not late by a full month, each incomplete month will be calculated as a full month.
Failure to pay tax reported on return will result in a fine calculated as 0.5% of the tax not paid by the due date for each incomplete or full month that is past the due date. If the taxpayer is an individual and filed an installment agreement on time, the 0.5% becomes 0.25%, but 1% if tax is not paid within 10 days of a notice of intent to levy.
If you fail to pay a tax that was not reported on the original return and not paid in full within 21 days of the date of the notice of demand, this will result in a fine of 0.5% tax not paid by the due date for each month that it is not paid by the due date. This will be 0.25% if it is during the approved period of an installment plan and 1% if the tax is not paid within 10 days of a notice of intent to levy.
The Tax Contribution of Casinos of the State Coffers
The total GGR from commercial casinos in 2018 amounted to around $41.6 billion, which means that 2019 saw a $2 billion increase with a GGR of $43.6 billion. In 2018, the total tax contribution of casinos in the US amounted to $9.7 billion, which is less than the $10.2 billion in 2019. We managed to gather the tax contributions in 2018 by state and have put together our findings to put a bit of perspective on the state income generated by gambling.
Pennsylvania is at the top of the list with $1.8 billion in tax revenues, closely followed by New York with $1.1 billion. Nevada takes third place with $850.6 million, followed by Maryland with $710 million. Ohio comes fourth with $662.6 million, with Louisiana behind with $607.6 million. Sixth place is taken by Indiana, with just shy of $600 million, followed by Illinois in 7th with $462.1 million. Missouri is next with $446.5, followed by Michigan who gathered $349.6 million. IOWA made 10th place with $339.2 million in tax revenue, while Rhode Island missed the top 10 with $322 million.
West Virginia gathered just short of $290 million in tax revenues while New Jersey $276.5 million in tax. Mississippi contributed $257.6 million to the tax pool, while Delaware threw in $207.8 million. Florida came next with $199.1 million, then Colorado with £125.5 million. Kansas gathered $110.3 million, and Massachusetts contributed $109.5 million. New Mexico gathered $108.9 million in taxes, followed by Oklahoma with $63 million. Maine contributed $57.9 million, while in the last place came South Dakota with only $14.7 million.
Now, of course, the size of the state and the development of the gambling industry plays a huge role in these tax revenues amassed by the different areas of the US. Just take Pennsylvania, for example. This state holds 12.8 million people, whereas South Dakota only has a population of 884,659.