How Are Gambling Winnings Taxed?

You’ve probably heard endless horror stories of innocent gamblers hitting jackpots in Vegas, only for them to go and cash in their winnings and discover a massive chunk has been deducted off it. It’s a bit of a kick in the teeth for anyone, and today we’re going to talk you through something that plagues our working lives, our healthcare systems, and social contributions. That thing… is called taxes.

Only these taxes are what gets slapped onto your gambling winnings every time you hit it big at an online or land-based casino. And surprisingly, not many people even know that this happens until they experience it for themselves – so here’s some detailed information worth noting to make sure you’re within the legal framework next time you win at an online or brick-and-mortar casino.

Taxes for Pro Gamblers

If you’re a self-employed individual with gambling as your main source of income, you will definitely have to pay taxes on any winnings you accumulate throughout the course of the year. This income will be taxed at your normal rate, and usually recorded on Schedule C.

Taxes for Individual States

Not all states require players to claim the winnings in the state they won them from. However, most states tax all income earned in the state whether it’s from gambling or not. If this is the case, and you do need to report your winnings, you will more than likely be offered either a credit or deduction for the taxes you already paid to the non-resident state.

Tax Requirements for Non-Residents

All U.S. residents are required to report their gambling winnings to the IRS and fill out the 1040NR form for it to be calculated correctly. Winnings are usually taxed at a flat rate of 25%, and for non-residents, there are generally no deductions from gambling losses. For those living in Canada, there is a treaty in place with the United States that allows Canadian citizens to deduct their gambling losses up to the sum of their winnings.

Withholding Your Winnings

When you win more than $5,000 in gambling winnings, or 300 times the amount you originally wagered, your winnings are also automatically subject to a federal tax rate of 25%. This is regardless of whether they have come from a sweepstakes, lottery, a betting pool or any other markets where you placed your wager.

Reporting Small Winnings

More bad news –if you happen to hit even a small jackpot, you are legally obliged to report it to the IRS – even if it’s just $10. Any gambling income outside of your day job must be reported, but fortunately that doesn’t mean that you will necessarily have to pay taxes. Instead, providing you’ve itemized your deductions, you should be able to claim your losses up to the total sum of your winnings.

Reporting Losses

This may sound strange, but you are also legally obliged to report gambling losses as well as winnings. The good thing is, this can actually save you money because the IRS will allow you submit gambling losses as miscellaneous deductions on Schedule A. Plus, they won’t be subject to the 2% limit. It’s always advised to file losses and winnings to the IRS separately instead of submitting the net amount.

Sharing Gambling Winnings

In the rare case that two or more people are sharing gambling winnings, the casino will split this among them and report them in two separate 5754 forms, then submit these to the IRS under each person’s name individually.

Illegal Gambling

It might come as a surprise, but even illegal gambling winnings are still taxable. According to the American Gaming Association, the majority of Americans spend close to $150b every year to partake in illegal gambling activities. Sports bets make up the lion’s share of this figure, despite still being illegal in most states except from Delaware, Montana, Oregon and Nevada. More and more states are slowly beginning to rule out sportsbooks, and when that time comes, any winnings are fully tax deductible.

Individual Games Breakdown

The IRS also say that players should take note of the following in games where they may need to report their winnings and losses for certain betting transactions. With online casinos, they should have a system in place that calculates these factors automatically, but for anything won in land-based casinos, players should pay attention to the following:

Slots – For both online and offline slots, players should record the machine’s number, as well as the date and time it was played at the point of winning.

Tables Games (blackjack, baccarat, craps, roulette, etc.) – Similar to slots, any winnings won from table games should see players take note of the table you were playing at, and the casino’s credit card data to show whether the credit was issued at the Cashier or the pit directly. 

Bingo – Note the cost of the tickets purchased and how many games were played. It’s always worth keeping any supplement receipts collected from the parlor or casino.

Keno – Again, always keep a record of any valid tickets you purchased to play keno, as well as casino credit records and copies of your transactions.

Lotteries – Take note of the tickets, the date they were purchased, and any winnings or losses associated with them. Also keep supplement records for unredeemed tickets, winning statements and payment slips.

Horse/Dog Racing – The races you bet on, how many bets you placed and their value, how much you collected on winning tickets, and supplement records including unredeemed tickets, winning statements and payment slips.

Conclusion

We hope that’s given you an overview on how gambling taxation works. Just remember that it doesn’t matter whether you’ve legally or illegally won money through gambling, it is still taxable income and should always be reported. Make sure you keep records of your winnings and losses every time you gamble to help maximize the tax refund that the IRS may end up owing you in the event that you’re due something back.

Larry Cooper

Larry Cooper is a freelance writer and editor. An avid sports and gaming enthusiast, Larry has a love of all things esoteric, strange and seemingly random that influence how luck unfolds.