Those new to legalized gambling in 2019 and long accustomed to faithful diligence in filing their tax returns could be in for a rude awakening between now and April 15.
The reason is that IRS regulations, if followed to the letter, don’t favor the average gambler in terms of how wins and losses are treated. It’s more like playing against a card shark dealing from the bottom of the deck, only with the force of law behind him.
In a nutshell, the government treats gambling wins — whether from the sports betting industry’s explosion or old-fashioned slot machines, poker, lotteries or anything else — as taxable to the same extent as wages. It is to be reported as “other income” on line 21 of the 1040.
It’s spelled out right there under Topic 419 Gambling Income and Losses in guidance offered by the IRS to filers:
“Gambling winnings are fully taxable and you must report the income on your tax return. Gambling includes but isn’t limited to winnings from lotteries, raffles, horse races, and casinos. It includes cash winnings and the fair market value of prizes, such as cars and trips.”
IRS is more focused on wins than losses
The catch is that, while many gamblers lose more than they win, the IRS is not interested in seeing that net outcome.
A casual gambler can only report losses to offset winnings by itemizing deductions, and if you do so, you’re supposed to have documentation of those losses.
And you can’t claim losses that surpass your winnings, even if you were far in the hole. In most cases, states also apply income taxes to the winnings reported to the IRS.
It can add up to a big disincentive for honest disclosure. CPAs and other professionals can’t encourage such avoidance, however, even if they’re critical of the provisions devised by Congress and the IRS.
“It’s very unfair, especially with the new tax law with the standard deduction doubled,” observed Marissa Chien, a Las Vegas tax preparation specialist who is co-author of the book, “Tax Help for Gamblers.”
The tax law changes that took effect last year vastly reduced the number of people for whom it’s worthwhile to itemize instead of claim the boosted standard deduction, which has risen to $12,200 for individuals and $24,400 for married couples. There have been estimates that it’s in the interest of fewer than 15% of filers to itemize now.
The truth is that, despite what the government says is required, few people walking out of a casino with a few hundred dollars in blackjack winnings or finishing a Sunday of NFL wagers with a profit will think to make a record of it and report it.
They are in many cases ignorant of requirements. Others, if aware, may not like a system that seems rigged against them.
In most cases, the feds won’t ever know
A Kiplinger article in February offered the example of someone making five $100 bets on the Super Bowl, only one of them successfully.
“If one of those bets came through for a $500 payout, you must report the full $500 as taxable income. You can’t reduce your gambling winnings ($500) by your gambling losses ($400) and only report the difference ($100) as income,” the article noted, with the only recourse being itemization of the losses by the minority for whom doing so is best overall.
The saving grace for scofflaws is the IRS will never know about such winnings, unless certain thresholds are hit that trigger a W-2G to be reported to the government and sent to the taxpayer.
“I couldn’t even hazard a guess,” Chien said, as to how many people fully comply with regulations. “The technical, 100 percent way to report your gambling winnings, with either slots or sports betting, is you literally have to keep track of every single bet. It is extremely impractical, but as a licensed tax professional, I can’t really advocate publicly that people deviate from that.”
The IRS will receive a report from a casino or other payer about the gambling winnings of those lucky enough to be on the receiving end of one of the following:
- $600 or more in winnings worth at least 300 times the wager (such as hitting the lottery, a wildly successful sports parlay or long-shot racetrack trifecta)
- $1,200 or more from slots or bingo
- $1,500 from keno
- $5,000 from a poker tournament
Existence of a W-2G isn’t the point, technically
Most gambling winnings don’t meet one of those criteria, obviously, and therefore the government will receive no report of your success and would have a hard time tracking it.
Those 28 successful moneyline wagers you made on the San Diego State Aztecs to win in basketball this season with your new FanDuel or DraftKings online account? The IRS knows nothing about them (although its auditors could trace them, if they really want).
Technically, that shouldn’t matter, said Henry Grzes, lead manager for tax practice and ethics for the American Institute of Certified Public Accountants.
“It’s just like if you’re providing some sort of service like cutting lawns and someone pays you in cash,” he said. “There’s no trail, but there’s an expectation that you’re going to report that income.
“Taxpayers have an obligation to abide by the law. You win something, you have an obligation to report it.”
Grzes noted the IRS has a right to audit all returns. It does so in fewer than 1% of them, and while gambling-related issues themselves would not ordinarily be the cause of a review, questions surrounding them could come up.
“If you leave income off of your return, is that automatically going to trigger an audit? No. But if you’re audited for something else, maybe if there’s evidence to the effect that you have gambling winnings, you would be asked questions like, ‘Is this all of them?’
“There is the same concern about gambling winnings as any other type of income, no more, no less. They want taxpayers to be compliant, but because of the restricted resources of the IRS, people look at it like ‘I’m going to play the audit lottery.’”
Professionals are in a different category
Things are somewhat different for the small percentage of gamblers who do it as a profession.
They are treated as self-employed, filling out a Schedule C on which they report winnings, losses, and expenses.
They’re to cover all payroll taxes for themselves, including Social Security and Medicare, and to keep a log that records their wagers with information about the types, amounts, and dates. They’re also to retain paper records such as wagering tickets and bank statements and documentation for any expenses they report, such as transportation to tournaments or subscriptions to publications.
Most people, obviously, are not professional gamblers, who are determined to be those doing it regularly as their primary source of income rather than as a hobby or for entertainment.
The advantage for them is their losses are reportable to offset their winnings, and combined with expenses they can add up to the amount of the wins to avoid a tax hit.
Chien said most of her gambling-related clients are professionals, who receive other advantages such as being able to devote some of their income to a 401k.
“When it’s your profession, you take it more seriously,” she said of how those clients treat their taxes. “You’re expected to keep good records about it, just like if you had a tchotchke store or any other business. At the end of the day, the IRS wants to see if you’re making a good-faith effort.”