This pages answer the most basic questions people have about taxation and gambling income. I will also be explaining the basics of betting and taxes more often than you’d think.
The phrase “gambling taxes” is an informal way to refer to taxes paid on money won from betting. It could be real money casino gambling, poker tournament play, racebook bets, or lottery prizes. It doesn’t matter where it comes from, the federal government takes its share. These taxes even apply to game show prizes, with the fair market value for a dinette set or a trip to Tahiti counted as taxable income.
Paying gambling taxes requires following special rules and recordkeeping procedures. The IRS has a special form (Form W-2G) for “Certain Gambling Winnings,” covered in more detail later in this post. I’ll also cover the basics of the taxation of gambling income, the cost of these taxes, the ways they’re paid, alongside some interesting details on hitting a jackpot and paying the government man his due.
What Is the Tax Rate for Gambling Winnings?
The federal government is going to take 24% of your win right off the top. In most jurisdictions, prizes above a certain level have a 24% federal tax built in to your payout. The cut-off is different for different bets. Usually, if you win $5,000 or more, the government’s cut is coming out before you get your hands on it. The cutoff for slot winnings is quite a bit lower in most gambling jurisdictions— 1,200 in the casinos near me, which means an awful lot of big slot jackpots are pre-taxed.
Let’s look at an example to get an idea of how much money we’re talking about. If you win a $10,000 slot machine jackpot, the casino is going to take 24% in taxes right away. That’s $2,400 straight to Uncle Sam.
But we’re not done yet. In many states, you’ll pay additional tax on your earned income from gambling, at a rate that varies from state to state. A quick back-of-the-napkin calculation indicates that most people pay about 10% in state income tax. That’s another grand paid in taxes in the case of your $10,000 slot jackpot. You’re now down $3,400, more than one-third of the amount won.
Are All Gambling Winnings Taxable?
Some gamblers are convinced that there’s a limit of winnings, below which you don’t have to report. This misconception comes from the fact that casinos, lotteries, and other gambling venues won’t generally give you Form W2-G unless you win a certain amount. This doesn’t mean that winnings above those amounts aren’t taxed. They are taxable income and are treated as such.
Casinos will bring you the tax form for winnings of $600 or more on table games, $1,200 or more for slot or video poker games, or $5,000 or more in a poker tournament. These are the limits beyond which casinos will automatically withhold federal taxes, as a favor to the bettor.
It’s easy to keep this straight if you just think of gambling winnings as a form of income. All income is taxed either by the federal government or by both the feds and your state authorities. Technically, if you win a $5 gift card at a church raffle, you’ve got to report that as income.
IRS Gambling Tax Forms
You only need to be familiar with two IRS forms if you’re considering reporting winnings or deducting losses—Form W2-G and Form 5754. Below is a quick guide to each of them.
IRS Form W2-G, Certain Gambling Winnings
This is the key form for gambling tax issues. This form mainly exists to record your reportable winnings, which is your gross winnings minus the amount of any wager or buy-in. Along with these details are important facts about the dates of your gambling, and instructions on how to attach any forms you want to present to the government related to your wins and losses.
IRS Form 5754, Statement by Persons Receiving Gambling Winnings
This form covers a specific type of gambling win, one made on behalf of someone else or a group of people. This is mainly an issue in the world of lottery winnings, in which groups of people sometimes pool their money to buy more tickets for more chances at winning. This form is designed specifically for this and other specific instances when the person who won is not the only person with federal/state tax debt.
For more details and assistance with both of these gambling tax forms, you should consult the IRS’ “General Instructions for Certain Information Returns (2021).”
Fun Facts About Gambling Taxes
Professional gamblers usually pay a much lower rate than the 24% coughed up to the feds by regular gamblers like you and me. If someone’s gambling income is their regular earned income, it is taxed at their effective income tax rate. I’m in the 22% tax bracket, so if I were a professional gambler, I’d save 2% on my winnings.
Professional gamblers with less than $20,000 of reported income only pay 10% on their winnings, a tax savings of 14%. You have to wonder how professional a gambler they could be if they’re only earning $19,000 a year. At that low-income rate, the 14% tax savings only represents about $2,400 in savings.
Nonresidents pay a higher tax rate than American citizens—30% as of the latest tax code. Nonresident aliens who live in Canada can take advantage of a tax treaty that allows them to write off their American gambling losses up to the limit of their winnings, just like US citizens.
The potential penalty for not reporting income is 0.5% of the unpaid tax debt. That rate is assessed each month until the tax is paid, accruing 5% compounded interest on a daily basis. These penalties don’t apply in situations where the IRS thinks you intentionally hid your income. In that case, you’ll pay additional penalties that can climb into the six figures or even face prison time.
Are Gambling Losses Deductible?
The surprising answer here is “yes,” but it’s a conditional yes. You can deduct your casino or poker losses from your taxes, provided you meet a lot of conditions.
According to current IRS rules, all gambling losses are deductible provided they are itemized on the proper forms. You also have to keep what the IRS calls “… an accurate diary or similar record of your gambling winnings and losses,” and you have to provide any receipts, casino tickets, or other financial records to prove all of these wins and losses.
Also note that your losses are only deductible up to the amount offset by your gambling winnings. Again, proper recordkeeping is key to proving that all these conditions have been met.
More on Deducting Gambling Losses
The IRS is nothing if not efficient, and they provide a lot of details about the gambling losses diary required for this deduction.
Every time you record wins and losses, you should record certain specific pieces of information in order to fall in line with current IRS loss deduction requirements. Here’s what to note:
- The date (month, date, and year)
- The type of wager (usually just the name of the game you’re playing)
- The name and address or general location of the gambling establishment
- The names of anyone present with you who can vouch for you
- Amount of wins and losses (you can keep a general W/L count, but you’ll need further proof)
The IRS suggests further documentation for a smooth return. They’d like to see you fill out Form W-2G and Form 5754, then provide copies of bet tickets, bank withdrawal statements, and payment slips provided by the casino or sportsbook where you bet.
The IRS gives specific instructions for deducting slot machine and lottery losses. They suggest slot players should write down the machine’s number and a total of their wins and losses over a particular date and time of play. Lottery players interested in writing off their lottery losses can simply keep their losing tickets as proof, though payment slips or winnings statements from a state lottery system are also acceptable.
Some people are shocked to learn that casino jackpots are taxed.
It isn’t that strange if you think about the fact that scholarship money is taxable, as is any gift worth more than $15,000, all alimony payments, and social security income over a certain threshold. We live in a tax-happy society, and we enjoy a high standard of living as a consequence.
Gambling means risk. Even winning in the casino carries with it the immediate risk of paying the federal government a big chunk of your jackpot in exchange for the privilege of being their citizen.
Understanding the potential tax burden of a big gambling win is important to maintaining a cool head after your slot or video poker play finally pays off, and a casino employee floats your way with a bunch of paperwork.