Tax implications of legal gambling

Article | July 02, 2024

Authored by Weinlander Fitzhugh

Gambling is no longer confined to trips to Las Vegas or local casinos. With the rise of legal sports betting and online gambling platforms, more people are engaging in lawful gambling than ever before. However, it’s crucial to understand that, despite its legality, gambling often comes with IRS reporting requirements. 

The growth of lawful gambling

Lawful gambling has grown significantly in recent years, largely due to legislation and technological advancements. Since the Supreme Court’s 2018 decision to overturn the federal ban on sports betting, 38 states, along with Washington, D.C., and Puerto Rico, have enacted laws permitting sports betting. This expansion means that more than two-thirds of American adults, approximately 164 million people, now reside in areas where sports betting is legal. 

In 2023, the American Gaming Association reported that the commercial gaming industry set a new revenue record for the third consecutive year, with total revenue reaching $66.52 billion. This growth is not only a testament to the rising popularity of gambling but also to the increasing accessibility facilitated by online platforms. Today, nearly all forms of betting can be conducted via smartphones, making participation in gambling activities more convenient than ever before. 

Reporting gambling winnings

The IRS mandates that all gambling winnings are taxable, including winnings from lotteries, raffles, races, and casinos, as well as the fair market value of non-cash prizes like cars and trips. Regardless of the amount, all gambling winnings must be reported as income on your federal tax return. 

Generally, if you receive $600 or more in gambling winnings from one payer, the payer is required to issue a Form W-2G. This form provides details of your winnings and any federal income tax that was withheld. 

For specific types of gambling, different thresholds apply for issuing Form W-2G: 

• For slot machines and bingo, the threshold is $1,200

• For Keno, the threshold is $1,500

• For poker tournaments, the threshold is $5,000

When gambling winnings exceed $5,000, the payer may be required to withhold 24% of the proceeds for federal income tax. However, winnings from bingo, Keno, and slot machines are usually not subject to income tax withholding. 

If you receive gambling winnings not subject to withholding, you may need to pay estimated tax. Failure to pay enough tax, either through withholding or estimated tax, may result in a penalty. 

It is essential to report the full amount of your gambling winnings for the year on line 21 of Form 1040. This includes all winnings, even those not reported on a Form W-2G. Proper reporting ensures compliance with IRS regulations and helps avoid potential penalties. 

Deducting gambling losses 

While all gambling winnings are fully taxable, you can offset these winnings by deducting gambling losses if you itemize your deductions. However, the deduction for gambling losses cannot exceed the amount of your reported gambling winnings. If you itemize deductions on your tax return, you can report your gambling losses on line 27 of Schedule A (Form 1040). 

To claim these losses, it is essential to keep accurate records of your gambling losses (and winnings). Proper documentation, such as receipts, tickets, statements, and other records, is crucial to substantiate your claims and ensure compliance with IRS regulations. 

Special considerations

The tax implications of gambling can vary significantly depending on whether you are a casual gambler or a professional gambler. Professional gamblers who gamble full-time to earn a living are allowed to deduct their gambling-related expenses as business expenses. This includes costs such as travel, meals, and lodging directly associated with their gambling activities. 

In addition to federal tax rules, state-specific regulations can also impact the reporting and taxation of gambling winnings. For example, some states, like New Jersey and Pennsylvania, impose state income tax on gambling winnings and require residents to report these earnings on their state tax returns. Other states, like Illinois and Indiana, require withholding for state taxes on certain gambling winnings. 

Given these variables, it’s crucial to understand and comply with the specific rules and regulations in your state. Staying informed about these requirements helps ensure that you meet all legal obligations and avoid potential penalties. 

Speak with a tax expert for personalized guidance

This article provides a brief overview of the tax rules related to gambling, but it is not a substitute for professional advice. We highly recommend speaking with one of our expert advisors to understand how these rules apply to your specific situation. For personalized guidance and more detailed information, please contact our office.