Gambling is any form of betting, gaming, or participation in a lottery. For a bet to legally qualify money must exchange hands, and activities must be licensed for the behavior to qualify as proper gambling. It takes many forms, from Casinos to Arcades, and just like real life gambling comprises a system of winners and losers.
As a gambling winner you can count yourself lucky, but if you don’t tax pay taxes on winnings you can still lose. The IRS considers money wagered or won as taxable income, a rule which extends to all forms. Special rules apply, and there are strict record-keeping requirements when it comes to gambling taxes. To delve further into this topic, let’s take a look at gambling income.
Is Gambling Income Taxable?
Unless you discover a rare loophole in the legal system, your gambling income will be taxable. Whether that’s the fair market value of your winnings or the cash involved, you’ll be required to pay tax. You’re legally required to report all your winnings on federal income tax returns, particularly using the W-2G form. This is where you can benefit from using an Accountant, who can help record your total winnings alongside the tax withheld. Regardless of whether you have a W-2G form all winnings must be reported.
How Much Tax Do I Pay Gambling Winnings?
Gambling winners are usually subject to a 25% flat rate, but there are additional charges for winnings over $5,000. These are subject to income tax withholding:
- Any sweepstakes, lottery, or wagering pool
- Any other wager
- If you win a non-cash prize
In the latter example, you’re responsible for paying on the fair market value of each prize.
Is Tax Withheld from My Gambling Winnings?
25% is generally withheld, but depending how much you win and the type of gambling involved, the establishment or payer might be required to withhold income taxes. This can cause the ‘backup’ to increase to 28%, where anything withheld is later addressed on the W2-G form.
Can I Deduct My Gambling Losses?
You can deduct losses up to the amount of your total winnings, providing you itemize your deductions. Report winnings and losses separately as opposed to a net amount, and capitalize on gambling losses not being subject to a 2% limit. This means you can deduct all losses, not just those that add up to over 2% of your gross adjusted income.
What Kinds of Records Do I Need to Keep?
The IRS says you need to keep detailed records of winnings and losses, alongside retaining tickets, payment slips, statements, Form 5754, Form W-2G, and anything else relating to your gambling efforts. If you want to deduct your losses you must be able to prove winning, and IRS recommend you keep a diary or gambling log for efficiency. To further enhance the process, you should compile a list with the following information about each win and loss:
- Type of activity
- Winnings and Losses
- Names of others there at the time
Are You a Professional Gambler?
Most information supplied so far in this article has been for casual gamblers, not professionals. If you gamble as a profession, your income is considered in a regular fashion and taxed as normal. You’ll be a self-employed individual required to report income and expenses on Schedule C. You can use this to deduct gambling losses as job expenses.
Gambling Income Tax Requirements for Non-Residents
Gambling winnings are generally ‘not effectively connected’, so can’t be reported as such on Form 1040NR-EZ. They should be generally reported on Form 1040NR, where income is taxed at a flat rate of 30%. This means non-residents can’t deduct gambling losses, unless there is a tax treaty in place. For example, the United States and Canada have a treaty which allow citizens to deduct gambling losses up to the amount of their winnings.
How Do I Report Gambling Winnings and Losses?
These can be reported on your tax return with the help of a Bookkeeping specialist. Usually during your tax interview you’ll be asked about gambling income, and with the right information bookkeepers can make informed decisions to ensure you engage in legally sound practice. You can Find a Tax Preparer by researching online, and they can help you report your winnings and losses accordingly.