Let’s say you walk into a casino, or perhaps you fund your online casino account to try your luck at baccarat, poker, or a quick spin on Gates of Olympus or any of your favorite slots. To your delight, you walk away with a cool $1,000 in winnings. Now, the big question: how much of that do you actually get to keep? Are casino winnings even taxable in the U.S., or can you pocket the entire amount?
In this article, we’ll break down how the U.S. tax system treats casino earnings and how to stay compliant with the IRS. Let’s get right into it!
Are Casino Winnings Taxed in The U.S.?
Simply put, all gambling winnings are taxable in the U.S. This includes:
- Winnings on casino games such as slots, blackjack, roulette, poker, etc.
- Sports betting winnings on football, basketball, horse racing, and other sports.
- Lotteries and raffles, whether cash or non-cash prizes.
- Online gambling and mobile gaming apps.
- Bingo and Keno winnings.
- Sweepstakes, contests, and wagering pools.
The Internal Revenue Service (IRS) considers all gambling winnings a form of income. And so, regardless of the amount, you’re legally required to report all gambling income to the IRS, and the income is subjected to federal and, in some cases, state taxes.
However, the percentage that will be deducted from taxes depends on several factors, including the type of gambling, the amount won, and the taxpayer’s overall income.
How Much Do You Pay in Tax?
Your gambling winnings are generally taxed at your regular income tax rate, which can range from 10% to 37%, depending on your total taxable income for the year. However, for larger winnings, that is, those that meet specific reporting thresholds, a flat federal tax rate of 24% is usually withheld by the casino or gambling operator.
Here’s a quick breakdown of the federal reporting thresholds:
- Bingo or slot machines: $1,200 or more
- Keno: $1,500 or more
- Poker tournaments: $5,000 or more
- Lotteries and sweepstakes: $600 or more (if the amount is more than 300 times your bet)
For example, if you win $5,000, the casino may withhold 24% of federal taxes upfront. That’s $1,200 ( 24 ÷ 100 × 5000) taken out.
State Taxes on Gambling Winnings
In addition to federal taxes, you may also owe state taxes, depending on where you live. Some states, like California, New York, and New Jersey, tax gambling winnings as part of their state income tax system. If you live in such a state, you’ll need to pay both federal and state taxes. Others, like Nevada, Florida, and Texas, don’t have a state income tax, so you won’t owe any state tax on your winnings.
Reporting Your Casino Winnings
No matter where you live or how much you win, reporting all your gambling winnings on your tax return is essential, even if they fall below the reporting threshold. Failing to do so can lead to penalties or audits.
You can report your casino winnings when you file your regular tax return using the IRS-issued Form 1040. This is the standard form U.S. taxpayers use to report their annual income, deductions, and tax credits. Specifically, casino winnings should be listed as “Other Income” on Schedule A of Form 1040.
However, the IRS considers professional gamblers to be self-employed individuals. So, their winnings are reported as self-employment income on Schedule C (Form 1040), just like other independent contractors or business owners.
What Happens When You Win Big?
When you win a substantial amount, that is, winnings that exceed the IRS reporting thresholds, you’ll receive a Form W-2G from the casino. As mentioned earlier, for these large winnings, the casino will not just issue a form; they’ll also withhold 24% of your winnings for federal taxes. In addition to withholding, the casino is required to pay and notify the IRS about your winnings.
Note that even if you receive a Form W-2G for substantial winnings, you must still report those winnings on Form 1040. The IRS uses this information to ensure that the income reported on your tax return matches what the casino reported on the W-2G.
Also, your casino-withheld tax, sent directly to the IRS on your behalf, is like a form of prepayment on your tax bill. When you file your tax return, the withheld amount is credited against the total taxes you owe for the year. In other words, it reduces your tax bill or increases your refund.
For example, if the withheld tax from your substantial winnings is $1,200, and your total tax bill is $2000 at the end of the year, you’ll only have to pay $800 in taxes. Even better, if your total tax bill is now less, say, $1000, you’ll get a $200 refund from the IRS.
Deductions: Claiming Gambling Losses
If you itemize deductions, you can deduct gambling losses when filing your tax return. However, you can only deduct up to the amount of gambling winnings. This means you cannot use gambling losses to create a tax deduction larger than your reported winnings.
For example, if you have $10,000 in gambling winnings for a tax year and $6000 in losses, you can reduce your taxable gambling income to $4,000. However, if your losses exceed your winnings, say $12,000, you can only deduct up to your winnings, which is 10,000.
How to Deduct Gambling Losses on the Form 1040
While filing your tax for the year, you can report your total gambling losses up to the amount of your winnings alongside other itemized deductions such as mortgage interest, charitable contributions, etc. However, you must provide comprehensive documentation backing up your loss claims. This includes:
- Date and type of gambling activity
- Location of the gambling activity.
- Receipts, betting tickets, and printouts that show your wins and losses.
- The amount won and lost during each session.
- Receipts, tickets, and bank statements that document your gambling transactions.
- Bank and credit card statements showing withdrawals and deposits related to gambling activities.
Proper documentation is crucial; without detailed documentation or records to back up loss claims, you may not be able to deduct your losses. For professional gamblers, loss claims are not limited to gambling winnings. Other expenses related to their gambling business can also be deducted. This includes travel expenses, the cost of equipment, fees paid to accountants, lawyers, or other advisors related to their gambling business, entry fees for gambling tournaments, etc.
Conclusion
Casino winnings are taxable in the U.S., and as a gambler, it’s important for you to understand how the tax law works in relation to gambling. The amount you pay in taxes depends on various factors. However, the most important thing to note is that you must report every win and loss if you want to keep your tax bill low. Also, failure to report your winnings will attract unpleasant penalties from the IRS.