In the United States, gambling winnings are considered ordinary income and are subject to both federal and state income taxes. However, the rules surrounding gambling taxes can be complex, and many gamblers fail to report their winnings or calculate their taxes correctly. In this guide, we will walk you through everything you need to know about gambling taxes in the US, including how to calculate your gambling taxes, what forms you need to file, common deductions and exemptions, penalties for non-compliance, audit risk factors, and strategies for minimizing your tax liability while remaining compliant.
Editor's Note:
Best Online Casinos in Ontario, Canada - Top ON SitesThis guide is intended to provide accurate information regarding gambling taxes in the United States. However, it is not a replacement for professional tax advice. We strongly recommend that all gamblers consult with a licensed tax professional for personalized guidance on their specific tax situation.
Overview of Gambling Taxes in the US
Federal Gambling Tax Rate
Gambling winnings are taxed at the filer's ordinary income tax rate. For the 2023 tax year, there are seven federal tax brackets ranging from 10% to 37%. The applicable tax bracket depends on the filer's total income, not just their gambling winnings.
State Gambling Taxes
In addition to federal gambling taxes, some states also impose income taxes, and these taxes can range from 0% to over 13%. It is essential to understand the gambling tax laws in your state of residence.
State Chart of Income Tax Rates
*For residents of California, New Mexico, and Pennsylvania, state income tax rates vary based on tax brackets. This chart displays the maximum tax rate for each state within its highest tax bracket.
Source: Tax Foundation
Common Types of Gambling Subject to Tax
The Internal Revenue Service (IRS) considers various forms of gambling as taxable income. These include, but are not limited to:
- Casino gaming (slots, table games, poker)
- Sports betting (in-person and online)
- Horse racing (live tracks and off-track betting)
- Sweepstakes (online and in-person)
- Lottery wins
- Poker tournaments and series
- Social gambling (amongst friends) may also be taxable under certain circumstances
It is crucial to note that even if you do not cash out your entire winnings, any net profits are still subject to taxation. For example, if you deposit $1,000 into an online sportsbook and win $1,500, you are required to pay taxes on the $500 profit, even if you choose to leave the original deposit and winnings in your account balance.
How to Calculate Gambling Winnings
Calculating gambling winnings may seem straightforward, but there are a few key factors to consider to ensure accuracy. Here is a step-by-step process to help you calculate your gambling winnings for tax purposes:
- Determine your total gross gambling winnings. Add up the total amount of winnings from all forms of gambling throughout the year. This includes cash prizes, slot machine jackpots, poker tournament wins, lottery prizes, and any other form of gambling winnings.
- Subtract your total gross gambling losses. Not all gambling activity results in winnings. If you made any bets or wagers that resulted in losses, you may be able to deduct them from your taxable income. There are strict rules around claiming gambling losses, which we will discuss later in this guide. For now, determine your total losses by adding up the amounts of any losing bets or wagers across all forms of gambling.
- Compute your net gambling winnings. To find your net gambling winnings, subtract your total gross gambling losses from your total gross gambling winnings. This will give you your final number for reporting on your tax return. Remember, only the net amount (winnings minus losses) is taxable, not your overall gaming activity.
Example of Calculating Net Gambling Winnings
John enjoys playing slots and poker at both brick-and-mortar casinos and online. He keeps detailed records of his gambling activity throughout the year. Here is a breakdown of John's gross gambling winnings and losses:
- Slot machines (casino): $8,000
- Texas Hold'em Poker Tournament (live): $6,500 WIN
- Blackjack (online): $3,000 LOSS
- Keno (race track): $1,500 WIN
- Daily Fantasy Sports (online): $4,500 WIN
- Video Poker (casino): $500 WIN
- Sports Betting (online): $2,500 LOSS
- Powerball Lottery: $10 LOSS (ticket cost)
Total Gross Gambling Winnings: $18,500
Best Casinos in Birmingham, Alabama - 2023- Sports Betting (online): $3,500 WIN
- Texas Hold'em Cash Game (home game; among friends): $1,000 WIN
- Keno (race track): $1,200 LOSS
- Daily Fantasy Sports (online): $3,500 LOSS
- Video Poker (casino): $500 LOSS
- Texas Hold'em Cash Game (home game; among friends): $2,000 LOSS
- Powerball Lottery: $20 LOSS (two tickets; total cost)
- Blackjack (online): $6,000 LOSS
Total Gross Gambling Losses: $9,300
John's net gambling winnings for the tax year are $9,200. ($18,500 - $9,300)
It is important to note that while John has a net win for the year, he cannot deduct his $3,500 loss from the home cash game against friends from his taxable income. We will explain the rules around claiming gambling losses in the next section.
What Forms Do I Need to File Along With My Tax Return?
If your gross gambling winnings exceed a certain threshold, you may be required to submit additional forms along with your federal tax return. The threshold varies depending on the type of gambling:
- Casinos: If you win more than $1,200 from slot machines or $1500 or more from other gambling sources in a calendar year, the casino is required to provide you with a Form GA, also known as a Form W-2G. This form reports the amount of the winnings and the amount of withholding, if any. You will need to include a copy of the GA form with your tax return.
- Horse Racing and Dog Racing: If your winnings from a single race exceed $600 (after withholding), the payor is required to issue you a Form GA.
- Poker Tournaments: Organizers of live poker tourneys with aggregate entry fees of $5,000 or more are required to issue a GA form to players who win more than $1,200 after withholding. Online poker sites do not issue GA forms, regardless of winnings.
- Lottery Winnings: Lottery winners who receive a lump sum payment or have federal income tax withheld of $600 or more are issued a GA form.
It is crucial to retain any GA forms you receive as you will need to include a copy with your federal tax return. Failing to do so can result in delays in processing your return or even a failure to e-file.
Deductions and Exemptions
While there is a common misconception that gambling losses can be fully deducted from one's taxable income, the truth is much more complicated. The Internal Revenue Code Section 165(d) states that "no loss from any wagering transaction shall be allowed as a deduction."
Most Important Online Casino Software Features in 2023However, there is an exception for "gambling losses that are directly associated with" the filing member's wagering transactions which resulted in their winnings. This means that to claim any portion of their losses as a deduction, the gambler must have documentation to prove that each win was directly connected to the loss they are attempting to write off.
This requirement makes it extremely difficult to claim gambling losses as a deduction, as it would be nearly impossible to provide sufficient evidence linking each specific win to the corresponding loss.
Itemized Deductions - Total Net Loss from Gambling Activities
If your total net losses from gambling activities exceed your net winnings for the year, you may be able to claim those losses as a itemized deduction, provided that your total itemized deductions exceed the standard deduction for your filing status.
To calculate your total net loss from gambling activities, add up your net losses from all forms of gambling. A net loss exists when your gross losses exceed your gross winnings in a particular category (such as casino gaming, horse racing, etc.). Here is an example:
- Slot Machines (casino): $4,000 WIN
- Texas Hold'em Poker Tournament (live): $6,500 WIN
- Blackjack (online): $3,000 LOSS
- Keno (race track): $1,500 WIN
- Daily Fantasy Sports (online): $4,500 WIN
- Video Poker (casino): $500 WIN
- Sports Betting (online): $2,500 LOSS
- Powerball Lottery: $10 LOSS (ticket cost)
Total Gross Gambling Winnings: $15,500
- Sports Betting (online): $3,500 WIN
- Texas Hold'em Cash Game (home game; among friends): $1,000 WIN
- Keno (race track): $1,200 LOSS
- Daily Fantasy Sports (online): $3,500 LOSS
- Video Poker (casino): $500 LOSS
- Texas Hold'em Cash Game (home game; among friends): $2,000 LOSS
- Blackjack (online): $6,000 LOSS
- Powerball Lottery: $20 LOSS (two tickets; total cost)
Total Gross Gambling Losses: $11,300
Net Loss from Gambling Activities: $1,800
online poker legal in arizonaNet Gambling Winnings: $13,700 ($15,500 - $1,800)
In this scenario, John's itemized deductions would include his $11,300 in net gambling losses, provided that they exceed his standard deduction. However, due to the significant Standard Deduction increases under the Tax Cuts and Jobs Act (TCJA), very few taxpayers itemize their deductions, making this provision mostly moot.
Penalties for Non-Compliance
Failure to report gambling winnings can result in significant penalties from the IRS. Not only will you be liable for back taxes on the unreported income, but you may also face interest charges and civil or criminal penalties.
Civil Penalties
The IRS imposes several types of civil penalties for underreporting income:
- Accuracy-Related Penalty (ARP): ARP is calculated as greater of $435 or more than the underpayment of tax attributed to the substantial understatement of income tax. The penalty may reach 20% of the underpaid tax.
- Negligence or Lack of Dilience Penalty: Negligence penalties are $435 or 20% of the underpayment of tax, whichever is less.
- Failure to File Penalty: Taxpayers who fail to file their tax returns by the due date (without an extension) will be charged a minimum late filing penalty equal to $216 or 100% of the tax owed, whichever is smaller.
- Failure to Pay Penalty: Interest is charged on any underpaid tax starting on the due date of the return. After August 1st of the following year, a failure-to-pay penalty of ½ % per month applies until the balance is paid in full.
Criminal Penalties
Deliberate evasion of taxes on gambling winnings may lead to criminal charges, including fines and imprisonment. Willfully failing to report income or claiming false deductions can be considered tax evasion, which is a felony offense.
Audit Risk Factors
The IRS uses several factors to select returns for audit, and high gross gambling winnings can increase your audit risk. Some red flags that may trigger further scrutiny include:
- Failing to report all gambling winnings.
- Claiming inflated gambling losses.
- Consistently reporting large, frequent wins without balanced losses.
- Making numerous cash deposits below $10,000 to avoid Currency Transaction Report (CTR) suspicion, then later reporting a large gross win from a single casino visit.
- Failing to keep adequate gambling records.
Maintaining accurate records and properly reporting your gambling activity can go a long way in reducing your audit risk.
Strategies for Minimizing Tax Liability While Remaining Compliant
There are several legal strategies that can help minimize your gambling tax liability while staying compliant with IRS regulations:
Rollover of Casino Chips
Many commercial casinos allow patrons to redeem cash for gaming chips, and then later exchange those chips back for cash. This process is known as a chip rollover. When executed properly, a chip rollover can convert tax-free bailment tokens into gambling proceeds, resulting in lower tax liability.
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- You take $10,000 in cash to the cage at the casino.
- You redeem the cash for $10,000 worth of gaming chips.
- You play the slots with the chips and end the session with $12,000 in winnings, still in the form of chips.
- You exchange the $12,000 in winnings back to cash, receiving a GA form with $9,000 taxable. The basis of these chips was the $10,000 cash you originally exchanged, so your net win is actually $2,000 ($12,000 - $10,000). However, because the IRS does not permit direct offset of gambling expenses, you are still able to take advantage of the basis of the chips to reduce your ultimately reported and taxed winnings.
By rolling over your casino chips, you were able to reduce your taxable winnings from $12,000 to $9,000, resulting in lower taxes owed.
Bank Statements & Detailed Records
Maintaining detailed bank statements and other financial records can support your claims of large gambling losses, potentially offsetting a portion of your winnings and reducing your tax liability. While directly writing bonuses received back to their respective deposites and wagers is no longer permitted, showing a significant net loss from gambling activities over time can strengthen your argument for a larger deduction.
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Donations to Charity
Donating a portion of your winnings to charity can not only feel rewarding but also offer tax benefits. Qualified charitable organizations allow donors to reduce their taxable income, thereby lowering their tax liability. It is important to ensure that the organization is eligible for tax-deductible contributions and follow proper documentation procedures.
Consult with a Licensed Tax Professional
Navigating the complex world of gambling taxes can be overwhelming, especially considering the ever-evolving legal landscape. Seeking advice from a qualified tax professional, such as a Certified Public Accountant (CPA) or an Attorney with experience in tax law, can provide valuable insights into legal strategies and help you stay compliant while minimizing your tax liability. They can assist in interpreting specific situations and applying relevant laws and case precedent to your unique circumstances. While their services come at a cost, the potential savings from reduced taxes and peace of mind may outweigh the expense.
Additional Resources
The IRS provides comprehensive resources for understanding gambling taxes, including Publication 525, which covers taxes on gambling winnings and publication 17, Your Guide to the 2023 Federal Income Tax. Additionally, the U.S. Government Publishing Office maintains the official version of the Internal Revenue Code (Title 26).
