Most people know that gambling losses are deductible. But what about wins? Do you have to pay taxes on those too? There are some exceptions.
The Internal Revenue Service says that if you make less than $1,500 per month, you don’t have to report gambling winnings. And if you make more than $2,500 per month, then you’ll have to report the winnings, but you won’t have to pay taxes on them.
If you’re lucky enough to hit the jackpot, though, you could wind up owing Uncle Sam big bucks. You can deduct gambling losses against other sources of income. So if you lose $10,000 playing poker, you can write off $9,000 against other income. You can also use gambling losses to offset gains from other activities, such as real estate investments.
But if you win more than $5,000 during one calendar year, you have to report the win. And if you win more than that amount over five consecutive years, you’ll owe taxes on all of the winnings. So how much do you have to declare? Let’s consider this in detail.
The Way Gambling Winnings Are Taxed
The Internal Revenue Service (IRS) has been cracking down on people who claim gambling losses on their tax returns. In fact, it recently announced a major change to how it handles such claims. For example, if you lose money playing poker online, the IRS won’t let you deduct those losses from your taxes.
Instead, you must report them on Form 1040 Schedule D. This form allows you to write off up to $3,000 in net gambling losses per year. However, there are some exceptions. One exception is if you pick American online casino from the best websites to play slot machines or table games. If you do, the IRS says you can still deduct your losses against ordinary income. But if you play video poker, you cannot use this method.
If you win more than $600 during one calendar year, you must fill out another form called Form W-2G. On this form, you list your total winnings. Then, you subtract what you owe in federal income taxes. Any remaining amount — including prizes from sweepstakes contests — is taxable. And remember, you must pay self-employment tax on these earnings.
Report Gambling Earnings to the IRS
Casino games are big business, especially online. In fact, according to the American Gaming Association, Americans spent nearly $14 billion playing casino games in 2018. But what happens if you win more than $600? Do casinos report gambling earnings to the Internal Revenue Service?
The IRS requires gamblers to file Form W2G, which reports income earned from wagering activities. If you win more than $300 at a slot machine, a roulette table, or a blackjack table, you must fill out Form 1099-R, Miscellaneous Income. This form is used to report gambling winnings to the IRS.
If you win more than $1,200 at a casino, you must complete Form W2I, which includes information about your winnings. You must include the amount of the win and how it was calculated. For example, if you won $1,200 on a slot machine, you must report that you won $1,201.50.
You do not have to report winnings from poker tournaments, card rooms, or sports betting unless you make more than $10,000 during one calendar year. However, if you earn more than $20,000 in such bets, you must complete Form 1099-MISC.
Professional Gamblers Taxes
Gambling is an activity that most people consider to be a leisure activity. However, gambling does have some serious implications for taxpayers. For example, gamblers are required to pay self-employment tax on their net income earned from gambling activities. This includes both wage and salary income and interest, dividends, royalties, rents, etc., received from gambling activities. In addition, gamblers must file Form 1040 Schedule C to report their gambling income.
A taxpayer who engages in gambling as a profession, however, must report his/her gambling income differently. These individuals are considered self-employed and are subject to different rules regarding how much they must pay in federal income taxes and whether they are entitled to deduct expenses related to their gambling activities.
Gambling Income Tax Requirements for Nonresidents
A US citizen who gambles overseas can deduct his/her gambling losses. However, a nonresident alien cannot do so. This is because gambling winnings are treated differently under the tax code than other types of nonbusiness income. In addition, there is an exception if you reside in Canada.
The Internal Revenue Service (IRS) defines a resident as someone who lives in the United States for 183 days out of the year. If you spend less than 183 days in the United States during the year, you are considered a nonresident. You must file a tax return even though you don’t owe taxes.
If you are a nonresident, you generally cannot claim deductions for gambling losses incurred outside of the United States. But there is one exception. If you are a Canadian citizen, you can deduct your gambling losses up to $25,000 per year.
Even if you are a nonresident alien, you might still qualify for certain benefits. For example, if you are married and filing jointly, you could use your spouse’s foreign-earned income exclusion to reduce your taxable income. Also, if you are a non-citizen, you can apply for permanent residence status, which allows you to become eligible for citizenship.
What Are Cash Winnings?
Cash prizes are taxable income. If you receive cash awards for winning fantasy football games, you must report those earnings on your tax return. You’re allowed to deduct some expenses related to entering the contest, such as travel costs and fees paid to enter. But you still owe taxes on what you earn.
Noncash prizes like gift cards, merchandise, and tickets are also taxable income. And while it might seem strange to pay taxes on something you didn’t actually make money off of, remember that you got it for free. So even though you didn’t sell anything, you still owe taxes.
Fantasy sports and pooled winnings aren’t required to file a federal income tax return. This includes prize pools won in daily fantasy sports contests, where players compete against each other to pick the best NFL teams. In addition to paying taxes on the amount of money wagered, you’ll owe taxes on any winnings you collect.
Gifts aren’t considered winnings because you didn’t do anything to earn them. They’re just given to you. So you don’t owe taxes on gifts. However, if you give someone else a gift, you’ll have to include the value of that gift on your tax returns.
Inheritance isn’t taxable unless a person dies during the calendar year. For example, if you inherit $10,000 from your grandmother in December 2016, you’ll owe no taxes on that inheritance. But if she died in January 2017, you’d owe taxes on her estate.
Conclusion
Winning big at casinos is fun. It’s exciting. It’s rewarding. But when it comes time to pay Uncle Sam, there are rules and regulations that apply. You need to know the rules so you can play smart and avoid getting caught by surprise. So, be sure to read our guide to reporting gambling winnings on your taxes.