All You Need to Know about Gambling Profits and Federal Taxes in the US
Gamblers from some jurisdictions like the UK, Canada, and Australia have it easy. Their local authorities do not recognize gambling as a profession or a source of income but rather consider it a form of recreation. Additionally, people are more likely to lose money over the long term rather than make it when gambling. Residents of the above-mentioned countries are, therefore, exempt from paying taxes on their gambling profits.
Unfortunately, this is not the case in the United States where failure to report your gambling winnings can get you into serious troubles with the Internal Revenue Service. The IRS expects all residents to declare their winnings at the end of the year since gambling is a source of income under US legislation.
Not only are monetary prizes taxable but the government also expects winners to report any items they have won, like smartphones or new cars, for instance. Winners have to declare the fair market value of the item they have won, i.e. the sum they would have paid upon purchasing it at a store. Here is all the information you need on how to declare your profits from gambling in the US.
Thresholds on Taxable Gambling Winnings
The good news is US gamblers only have to claim their winnings as taxable income only if their profits exceed certain amounts. The exact threshold depends on how you have obtained the winnings. Poker tournament players must declare their profits if they go over $5,000, while sports bettors must do so for winnings exceeding $600 only according to Sporting Pedia. The thresholds are $1,200 for bingo and slot machines and $1,500 for keno, respectively.
Flat Taxes for Amateur Gamblers
One good thing about US gambling tax legislation is that the tax rates are flat rather than progressive as is the case with income taxes. Whether you win $2,000 on Megabucks or score $2 million in the WSOP is irrelevant from the perspective of US law. Either way, the government will tax you at a 24% flat rate. The casino or poker room will give you a W-2G form so that you can report your earnings to the government.
This is not to say casinos always issue said form or withhold taxes whenever a customer hits it big. Strangely enough, the IRS does not necessarily require this procedure for table games like blackjack, baccarat, or craps. One of the reasons for this is that, unlike slots and keno, house-banked table games like blackjack involve an element of skill rather than relying on pure luck.
When you color up and leave the blackjack table, the casino management cannot determine with absolute certainty how much money you have started your betting session with. Now, this does not mean you are exempt from reporting your blackjack winnings to the IRS. Even if the house skips on giving you a W-2G form, you still have to declare your earnings.
Form 1040 and Form 1040-SR
The difference here is that you have to do it yourself when you file your income at the end of the year rather than at the cashier while redeeming your gambling loot. You must download Form 1040 or Form 1040-SR (for people over 65 years old) from the IRS website for this purpose.
You should list all gambling-related income you have generated throughout the year in the Other Income section of the form. Keep in mind this also applies to winnings from gambling games that do not necessarily require the issuance of form W-2G, like blackjack.
The IRS makes a distinction between professional gamblers and amateurs. Professional gamblers are those for whom gambling is a main source of income or a full-time job. Such people engage in the business of gambling professionally with the expectation of turning a profit.
Progressive Tax Rates for Professional Gamblers
The IRS treats professionals differently than amateurs and taxes them at a progressive rate because it sees their proceeds as a regular income. The rates are income- rather than game-specific in this case. There are several tax brackets (ranging from 10% to 37% in 2021) to reflect the different groups of taxpayers based on their income.
The bottom line is the more successful professional gamblers, the higher the tax rate they face because they would generate greater income. Regardless, professional gamblers as self-employed individuals must report their earnings and expenses on Schedule C (Form 1040) under the Profit or Loss from Business section.
Loss Deduction
Speaking of expenses, US players also have the option to deduct the losses they have suffered while gambling. They have to itemize their deductions on Schedule A of Form 1040 for this purpose. Of course, strictly keeping records of all your session profits and losses is a must here.
Note that a person’s deductible losses cannot exceed the amount they have reported as gambling winnings on their tax return. Loss deduction works to the advantage of professional gamblers because it ultimately enables them to decrease their taxable income. Professionals can partially deduct traveling, meal, and accommodation costs or even their internet expenses if they gamble online.
So there you have it – all you need to know before you embark on your next trip to Sin City. Now you will not have to fear the IRS will knock on your door out of nowhere and confront you about tax evasion.
