Gambling Winnings Tax: What You Need to Pay
Taxes aren’t what you normally think about on your way to a sportsbook, casino, or track. However, everyone who places a bet should understand the tax basics as taxes apply to money won from gambling, too.
The fact is that gambling winnings are fully taxable, while you may deduct your gambling losses as long as you use Schedule A, Form 1040 and itemize your deductions.
This article will cover gambling winnings tax and all you should know about it. Although cryptocurrencies are currently only partially regulated in the US, most of these regulations apply for winnings from crypto casinos as well, with some considerations we’ll cover separately.
The Relationship Between Taxes and Gambling Winnings
Are gambling wins taxable? Considering how long gambling has been an important part of US history, it’s only expected that all winnings from gambling have tax implications. This includes noncash and cash winnings. Cash gambling winnings typically include any cash inflow from casino games, slot machines, lottery wins, bingo, raffle draws, sweepstakes, poker games and keno.
On the other hand, noncash gambling winnings include wins that do not involve cash settlements but rather physical items like an all-expenses-paid vacation or a car. In cases like these, the winner must disclose the item’s fair market value (FMV) when stating their income.
One important thing to note about taxes on gambling winnings is that the amount of money won matters. Each amount has its requirements for reporting.
For example, according to regulations in the US, you must report winnings of $600 or more to the Internal Revenue Service (IRS). Following up on this, let’s cover income reporting by amounts.
Reporting the Winnings on Your Taxes to the IRS: Form W-2G
If you make any winnings from gambling activity, the payer is mandated by tax regulations to give you a W-2G Form. This is the Certain Gambling Winnings form, and it contains taxpayers’ information needed for filing taxes in the fiscal year.
The W-2G form has specific requirements to be met when deciding to report or withhold. These requirements include the amount won from the gambling activity, the type of activity it was, when and where you won, and the ratio of your win to how much was wagered. It also includes how much has been withheld in federal and state income tax.
If a gambling facility issues a W-2G form and your winnings are not reported, you will be issued a follow-up IRS notice, CP2000 – Notice of Underreported Income. It typically contains all the information on your withheld income and what you need to do to rectify this discrepancy. Otherwise, you could be breaking the law.
Even when you are not issued a W-2G form, you are still mandated to report your winnings as other income. This is why it’s important that you safely document all your payment and wager statements when you gamble. They help ensure that you do not make any mistakes.
More than one payer may issue you a W-2G form, so you have to treat each form individually by reporting the exact amount you got from each facility in each form.
Gambling winnings are usually reported as “Other Income” in the Individual Income Tax Return. The amount of taxes on gambling winnings you must pay varies, and we’ll touch on that next.
Reporting Gambling Winnings
You should know which winning amounts require your payer to report to the IRS and issue you a W-2G form. You must report the following winning thresholds:
- If you win $600 or more at the horse track
- If your winnings total $1,200 or more at any bingo game or slot machine
- If your gambling winnings total $1,500 or more from keno games (this amount excludes any money you wagered)
- If you win $5,000 or more in a poker tournament (the winnings are minus your betting or buy-in price)
These gambling income tax requirements oblige you to provide your Social Security number to the gambling facility, after which you will fill out the Certain Gambling Winnings form and report your winnings.
Do casinos report your winnings to the IRS? Not all of them, as some casino games are exempt from this rule. For instance, W-2G forms will not be issued when you make winnings from games like craps, roulette, craps, and blackjack, no matter how much you win. However, this doesn’t mean you don’t need to report to the IRS or pay taxes on these winnings.
Instead, you don’t have to fill out a W-2G form for these winnings. The standing rule is to report all gambling winnings to the IRS.
With regards to tax withholding, that occurs in two situations:
- When the winnings from wagering pools, lotteries, and sweepstakes exceed $5,000 (excluding the betting amount)
- When the winnings are at least 300 times the wagered amount
In case of withholding, you’ll be issued a W-2G form indicating your total winnings and the withheld tax amount. As with tax winnings, you’re still held responsible for including your withholdings in your tax return, even if you don’t receive the form.
Reporting Your Smaller Winnings
Tax law as it relates to gambling stipulates that you must report all your winnings to the IRS, even when it’s only lower amounts. Even if you won as little as $10 from gambling, you are legally bound to report it.
Your total income on your tax returns is the sum of all cash inflows to your name. In a nutshell, that would mean your regular work income plus your gambling wins. The good aspect is that you don’t have to pay taxes on your winnings.
Reporting Gambling Loss on Taxes
You can reduce your tax bill in the event of a loss when you itemize your deductions. You deduct yearly gambling losses on Schedule A, Form 1040. This is limited, as deductions are only allowed for the amount reported as gambling winnings. To make this seamless, ensure to:
- Document all of your gambling activity
- Record your winnings and losses from gambling activity
For you to deduct any losses, there have to be winnings. You can’t deduct losses if you struck out on winnings for an entire year.
Reporting losses on taxes for Professional Gamblers goes a little differently. Professional gamblers can deduct losses without itemizing them by classifying them as ordinary and business expenses. They also use a Schedule C instead of A.
However, to qualify as a professional gambler, you must be involved in the activity regularly, and your primary objective must be to reap profits. Casual gambling does not make you a professional.
Local and State Taxes
So far, we’ve been talking from a federal taxes standpoint, but if you look at the W-2G form, you’ll see there’s an allocation for state and local taxes. Besides the federal tax obligations, you also have to pay local or state taxes. Each state has its rules, with some charging a flat percentage basis and others on the amount won.
You may even be lucky to live in a state that doesn’t levy tax on gambling winnings. South Dakota, we’re looking at you.
What happens if you live in a state that imposes taxes on winnings and places a bet in another state that does the same? While the state you gamble at may withhold tax from your winnings, you will not be double-taxed. Your home state will likely offer you a tax credit for the taxes collected by the other state.
How Much Is Taxed on Gambling Winnings?
Generally, when you win a sizeable amount of money, a standard 24% flat rate is deducted as a tax on total winnings and a W-2G form is issued as proof of the dealings. This gambling winnings tax rate is deducted and sent to the IRS.
You should note that it’s not set in stone, and there are instances where you may receive some of the deducted amounts back or need to pay more. Use this gambling winnings tax calculator to get a clear idea of how much your tax payments might be by state.
On lottery winnings, the IRS is already owed about 25 percent of your winnings for income taxes, long before you get a buck of that money. You could be subject to up to another 13 percent tax withholdings when local and state taxes are also taken into account.
What Happens if You Do Not Report Your Winnings?
Are there penalties for not reporting gambling winnings? The answer depends on how much you won and whether the casino reports your winnings. For the large winnings, there’s almost no chance it won’t be reported for the large winnings, so you might as well follow the law.
Smaller winnings are a little more relaxed. Casinos are less likely to report them, and they could go unnoticed for quite some time, usually until there’s an audit for something else or if an informant highlights the discrepancies (the IRS offers a reward for information on persons who dodge casino winnings tax).
Once the IRS finds out, you could be fined or even imprisoned for tax evasion.
Now that we’ve discussed the intricacies of taxes on casino winnings, here is a recap of the major points and some tips to remember:
- All gambling winnings must be reported on your tax return
- You should be issued a W-2G Form after winning by the gambling facility
- Tax withholding may be necessary for some situations
- You may be able to deduct your losses
- All winnings and losses should be reported to the IRS separately
- Ensure that you keep accurate records of all your activity to avoid audit issues and comply with IRS gambling taxes
- Local and state taxes may be levied on your winnings depending on your location
Do casinos report gambling winnings to the IRS?
Yes, they do. All casinos are required by law to report any gambling winnings to the IRS. This includes cash and prizes won in games of chance, such as slots, blackjack, roulette, etc.
Are gambling losses deductible?
You can deduct gambling losses as long as you itemize your deductions on Schedule A of your tax return. This means that you’ll need to keep track of all your gambling wins and losses throughout the year; most casinos will provide players with a win/loss statement at the end of the year for tax purposes.
What percentage of gambling winnings should be reported?
Depending on the amount you won, you may be required to pay taxes on your gambling winnings. The IRS levies a 25 percent gambling winnings tax on more than $5,000 in winnings from slots, keno, and lottery games.