The gambling industry seems to prevail even in times of rising inflation and uncertain global economics. The American Gaming Association reports year-to-date
revenue reaching $44.48 billion (an increase of 14.7% compared to same
period in 2021), signaling gaming's strongest year ever. Here are some key tax
points to keep in mind if you have gambling-related winnings.
All Winnings Are Taxable, and the IRS Knows What You Won
Gambling winnings can come from a variety of games and events. Think slots, bingo, poker tournaments, sports betting, online gaming, and more. Depending on the type of winnings and the amount you win, the payer will issue you an information statement—typically a Form 1099-MISC:
Miscellaneous Income, or a Form W-2-G: Certain Gambling Winnings. If you
receive your winnings through an app such as PayPal or Venmo, you may receive a Form 1099-K: Payment Card and Third-Party Network Transactions.
When you receive an information statement indicating the
amount won, so does the IRS. If you fail to report this income on your Form
1040, the IRS will easily know you are underreporting your income, which can
trigger a notice or even an audit. If you receive an information statement
indicating your winnings, you must report all winnings as "other
income" on your Form 1040.
Withholdings and Estimated Taxes
If your winning payout is $5,000 or more, first, congratulations! Be aware that most gambling
institutions will withhold federal income taxes at a flat 24% rate from your winnings. This means the winnings payout is immediately reduced by the taxes withheld, similar to how employee wages are immediately reduced by payroll tax
withholding. Check out IRS
Publication 505: Tax Withholding and Estimated Tax for more guidance on gambling winnings and the withholding process.
Withholding at a flat rate of 24% often helps you pay the
appropriate amount of taxes and avoid tax bill surprises when you file your annual
tax return. However, you may want to consider making quarterly estimated tax
payments to cover any potential shortfalls.
Keep Good Records
Gambling losses can be deducted if they meet certain criteria. Gambling losses include the actual cost of the wagers plus expenses you incur in connection with the gambling activity, such as travel to and from a casino. There is a limit on the loss deduction; you cannot deduct more losses
than the amount of your gaming winnings. If you don't have any winnings, then
you can't deduct any related losses and expenses at all.
To deduct gambling losses, you must itemize the deductions on Schedule A of Form 1040. To itemize, you must have more expenses than the standard deduction (for tax year 2022, the minimum is $12,950 for single filers and $25,900 for married couples filing jointly).
You must maintain adequate records that clearly show your winnings and losses. This typically involves an accurate ledger of the gambling winnings and losses, with receipts, tickets, statements, or other records substantiating the amounts you report. The date and time of the specific wager activity, the name and address of the gambling establishment, and the name(s) of the people present at the gambling establishment also should be recorded.
Do not “net” gambling winnings with losses. You must report the full amount of your winnings as income, and claim the losses and expenses
(up to the amount of winnings) as an itemized deduction. Because the IRS can easily match information statement earnings to the “other income” reported on
your return, any “netting” could trigger notices or an audit. IRS Publication 529: Miscellaneous Deductions provides more discussion on gambling deductions.
Professional Gamblers
There are different rules for taxpayers who meet the professional gambler criteria based on facts and circumstances. The US Supreme Court ruled in Commissioner v. Groetzinger that “If one’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.”
If you are a professional gambler, gambling winnings and losses need to be reported on Schedule C: Profit and Loss From Business. Unlike amateur gamblers who can’t net gambling winnings with losses, professional
gamblers computing their business income can net all wagering activity but can’t report an overall loss—a change resulting from the 2017 Tax Cuts and Jobs Act. The taxpayer also may deduct ordinary and necessary expenses incurred in connection to the business.
State Tax Issues
In addition to federal tax issues, there are many state-related tax consequences for gambling. If your home state has an income tax, you should expect to include your winnings in your income on your state
return. And if you win money in another state, it likely will need to be reported in that state—potentially throwing additional filing requirements and rules into the mix.
Some states have additional rules for gamblers and may have promotional credits, revenue share, and withholdings on winnings. The American Gaming Association created an interactive map showing the national and state-by-state impact of the casino industry, as well as key regulatory and statutory requirements in each state.
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Lumin Law can help you navigate the tax consequences of your gaming activity. If these topics are on your horizon, please reach out and connect.