Gambling: The Government Always Wins

The gambling industry in the United States generates more than $92 billion in revenue. The revenue comes from such activities as commercial casinos operating in 12 states, casinos on Indian tribal lands in 28 states, state lotteries in 42 states, and racetrack casinos operating in 12 states. If you gamble for fun (gambling is not your line of business), be aware of how the government shares in your good fortune and restricts your ability to deduct losses.

Gambling Winnings

Gambling winnings are included in full in gross income and reported on your tax return as “other income.” This includes winning from both legal and illegal gambling activities. Gambling income includes winnings from lotteries, raffles, horse races, poker tournaments, slots, and even office pools on the Super Bowl or March Madness. It includes winnings in person and online.

In addition to cash winnings, gross income includes the fair market value of prizes such as cars and trips. These include prizes won on shows like The Price Is Right or audience gifts received on Oprah.

Investments in the stock market, no matter how risky, are not treated as a gambling activity.

Gambling winnings may be subject to withholding, as explained later. If your winnings are sizable, withholding may not cover your full tax obligations, and you may also have to make quarterly estimated tax payments on gambling winnings to avoid underpayment penalties.

Gambling Losses

Gambling losses are deductible, but only in a limited way. Losses can be deducted to the extent of gambling winnings for the year. The wins and losses do not have to result from the same activity. For example, if you win $500 at bingo during the year, you can deduct your losing lottery tickets up to $500.

Keep a diary or similar record of your gambling winnings and losses, noting the date and amount of your wagers and their results. To deduct losses, you must be able to provide receipts, tickets, statements, or other records that show the amount of both your winnings and losses.

Losses are deductible only as a miscellaneous itemized deduction, so you have to itemize to take any losses. These losses are not reduced by 2% of adjusted gross income. Losses in excess of winnings are not deductible and cannot be carried forward and used in a future year.

Withholding

As a general rule, gambling winnings are subject to withholding at the rate of 25% (special withholding rules apply to winnings payable to a nonresident alien). Withholding applies to the entire amount of wagering proceeds, which are determined by reducing the amount received by the amount of the wager.

Withholding obligations vary, depending on the form of wager or game. Usually, proceeds from a wagering transaction are subject to withholding if the amount of the proceeds exceeds $5,000 and is at least 300 times the amount wagered. This general rule also applies to wagering pools, such as parimutuel pools for horse races, dog races, or jai alai. In the case of sweepstakes, wagering pools, or lotteries other than state-conducted lotteries, withholding is required if the amount of the proceeds is more than $5,000, regardless of the amount of the wager; a similar rule applies to all proceeds from a wager in a state-conducted lottery. For poker tournaments in which the sponsor pays winnings out of a pool comprised of all players’ fees, the sponsor of the tournament must withhold on payments of winnings more than $5,000, reduced by the amount of the entrance fee. If the winnings are subject to withholding, you (and the IRS) will receive Form W-2G report the income and withholding from your winnings.

Withholding is generally not required with respect to winnings from bingo, keno, or slot machines. However, winnings (not reduced by the wager) of $1,200 or more from bingo or slot machines, and winnings (reduced by the wager) of $1,500 or more from keno, are subject to information reporting on Form W-2G, regardless of the odds of the wager.

Looking Ahead

There is a bill in Congress to legalize Internet gambling so Uncle Sam can be sure to get his share of winnings. As mentioned earlier, such winnings are already taxable, but the new law would make payors responsible for withholding and reporting on such winnings to the same extent as they already are for other gambling.