In gambling, there are winners and losers, but even the winners will lose if they don’t pay taxes on their winnings. Yes, gambling winnings are completely taxable; you must report the gambling winnings on your tax return.
The winnings you receive from gambling or betting is considered by the IRS to be taxable income. This includes the fair market value of any non-monetary winnings you receive like a vacation or a car. Yes, you must pay taxes on prizes like these.
It may not seem fair, but everyone must do it. And “gambling winnings” isn’t just restricted to card games and casinos; it also including winnings from game shows, Bingo, raffles, and the racetrack.
There are strict reporting requirements for gambling winnings and losses, too. You must keep an accurate diary or another similar record of all winnings and losses including receipts, tickets, statements, and so on. You must have adequate, detailed records to back up your winnings and losings from gambling.
The best news is that you may be able to deduct your gambling losses. You are restricted to the amount that you have won, but it’s still pretty good news for gamblers!
All About Taxes and Gambling Winnings & Losings
Gambling winnings include, but are not limited to, prizes or money earned from the following:
- The lottery
- Betting pools
- Casino games
- Slot machines
- Poker tournaments
- Horse or dog races
- Off-track betting
You must report gambling winnings or losses on your tax return. In general, your winnings are subject to a 25% tax.
For these gambling sources, winning over $5,000 is subject to income tax withholding:
- Wagering pool (including payments made to winners of poker tournaments)
- Any wager where the proceeds are at least 300 times the amount of the bet.
If you win a non-cash prize, you are responsible for paying taxes on the fair market value of the prize.
Many gambling establishments or payers are required to withhold income taxes from winnings. It does depend on the amount of your winnings and the type of gambling. If tax is withheld from your winnings, you will be sent a W-2G Form: Certain Gambling Winnings from the gambling establishment or payer.
If you choose to itemize your deductions on Schedule A, you may deduct gambling losses, but you must keep good records of your gambling winnings and losses. And you are only allowed to deduct the amount of gambling losses that is less than your gambling winnings.
You will claim your gambling losses under “Itemized Deductions.” Gambling losses are deducted on Schedule A as a miscellaneous deduction. Generally, you must report your gambling winnings and losses apart instead of as a net amount.
Reporting Requirements for Gambling Winnings and Losses
You are required to report all gambling winnings as “Other Income” on Form 1040 or Form 1040-SR, including winnings that are not reported on Form W-2G.
When you have gambling winnings, you may be required to pay an estimated tax on the additional “other” income. For more information on tax withholding on gambling winnings, check out Publication 505 (2019): Tax Withholding and Estimated Tax.
For a PDF format of this publication, check out this link. The publication is rather lengthy, they do have a summary document that has the different revisions/versions (PDF, HTML, or eBook) of the 2019 version. They also have recent development, errors, and corrections you may find informative as well as these other useful items:
- Taxpayer Advocate Service
- Links to Useful Forms and Schedules
- Other Current Products
Winnings from gambling are subject to withholding for federal income tax at a rate of 25% if the winnings exceed $5,000 from sweepstakes, betting pools, lotteries, or other wagering activities or in cases where the winnings are at least 300 times the amount wagered.
The gambling event or establishment should report the winnings to the IRS on W-2G forms. As the winner, you should also receive a copy. Even if you do not get the form, you are required to report your gambling winnings.
Use IRS Form 5754 if you are sharing the gambling winnings with another person (or more than one other person). The gambling event or establishment should have separate W-2G forms for each winner.
Taxes and Professional Gambling
Are you a professional gambler? If that is the case, gambling income is generally considered to be regular earned income which means that it is taxed at your normal income tax rate. Since you are a self-employed individual, you will need to report your gambling income and expenses on Schedule C.
Again, if you fall under the category of professional gamblers, you will not report your gambling losses on Schedule A; instead, you report gambling losses as job expenses on Schedule C.
Getting Tax Help
If the reporting procedures for gambling income or winnings/losses seem too complex, you may need the help of a tax professional. Need some tips on how to find the right one for you? Check out this article; these 7 tips will help you find the right tax accountant for you.
Not sure what type of tax professional is right for you? Not sure what a tax consultant even does or why you need one? Check out this article to learn what a tax consultant is and why you need one.
Recording Keeping and Gambling
The IRS has strict record-keeping guidelines for gambling; they want all the details; the more details you record, the better; they require you to keep an all-inclusive diary or similar record of your gambling winnings and losses.
You should have the following as backup material for your records:
- Payment slips
You must also keep all W-2G forms that you receive from events or establishments where you have won (or lost). If you want to deduct your losses, you must have the proof to back up your claims.
It is recommended that you keep a gambling diary, log, or similar record book. The IRS requires you to have the following information recorded for each gambling win and/or loss:
- the date of the transaction
- the amount of winning and/or loss
- the type of gambling activity that you were engaged in
- the name and address of the place (event, home, establishment, etc.)
- the names of other individuals that were there during the gambling activity
So, you will need to keep a pretty detailed log of such information. You could try keeping a small notebook in your pocket or invest in a smartphone application that will record all this information for you.
You could always jot down the pertinent details in your phone to later record in your log or diary at home. Find what method works best for you. What is the most efficient? How will you present the information if you are audited? Be sure to keep all W-2G forms as well.
What You Should Know About Gambling and Nonresident Aliens
Nonresident aliens should report any income that is “effectively connected” with a U.S. business on Form 1040 NR-EZ. However, gambling winnings are to be treated differently. They are to be considered as “not effectively connected” to U.S. businesses.
This means that the nonresident alien must report gambling winnings on form 1040 NR. Gambling winnings are generally taxed at 30% and losses cannot be deducted, unfortunately. For more information, check out Publication 519: the U.S. Tax Guide for Aliens.
However, Canadian citizens can deduct their gambling losses up to the amount of their winnings per a tax treaty between the U.S. and Canada. For more information on this topic, check out Publication 901: U.S. Tax Treaties.
Since gambling winnings are considered to be taxable income, winners must report their income on their federal income tax return. This includes cash and/or any non-monetary item you win. You must also report any winnings you receive from betting, Bingo, raffles, lotteries, sweepstakes, horse racing, and more!
For example, the BMW you won on a game show would count as a winning. You would need to report the fair market value of the vehicle when you do your taxes. It doesn’t seem very fair, huh? Well, everyone must follow these rules, so don’t feel singled out.
Depending on the amount that you have won, you may receive a W-2G Form. This form reports the amount of your winnings as well as any tax that has already been withheld so this is a very important form to hold on to. You will need to use all the W-2G forms you receive when you file your taxes.
Want to learn even more about how to protect yourself when gambling? Are you ready to read more about winnings and the IRS? Check out this article for more valuable information!
Ready to get the right tax representation and to have your taxes prepared the right way? Contact us today at Borshoff Consulting! We can help with more than just your taxes. Ask us about all the services we offer and let us take the tax burden off your shoulders!