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Do You Have to Pay Tax on Gambling Winnings?

I went to my first horse race ever a few weeks ago when I snagged an awesome mystery shopping gig. The mystery shop reimbursable expenses even included three $10 bets that I placed on three different horse races. How neat! I have never placed a bet on anything before, and I was hopeful that I would win something. Unfortunately I walked away without winnings, but not without a wonderful evening paid for by a company. What if I had won? Would I owe tax on gambling winnings?

Do You Have to Pay Tax on Gambling Winnings?

If you’ve ever been successful at winning something such as the lottery, a bet on horses, or a slot machine at casinos, the money or non-cash prizes are considered gambling income by the Internal Revenue Service (IRS). And we all know that anything with “income [1]” in its name is considered taxable. Also, the gambling industry is closely regulated by the government and earnings of above certain thresholds are automatically reported to the government. In other words, you can’t really get around paying the taxes owed on your gambling winnings. The IRS states:

Gambling winnings are fully taxable and must be reported on your tax return.

So let’s take a look at how the IRS handles gambling winnings.

What is Considered Gambling by the IRS?

Just so there is no confusion, the IRS considers the following to be gambling:

  • Bets on horse racing/dog racing
  • Jai Alai (I had to look up what this is; turns out it is a game similar to racquetball [2]) and other wagering transactions
  • Sweepstakes
  • Wagering pools
  • Lotteries
  • Bingo
  • Keno
  • Slot machines
  • Poker tournaments

Two Different Withholdings

There are two different types of withholding that can occur before you are paid your gambling winnings. These are regular gambling withholding and backup withholding, and your winnings are subject to one or the other.

Regular gambling withholding is at the rate of 25%. This is used if the winnings minus the wager are more than $5,000 and are from sweepstakes, wagering pools, lotteries or other wagering transactions (winnings must be at least 300 times the amount wagered). Also, regular gambling withholding is figured on the total amount of gross proceeds (the amount of winnings minus the amount wagered).

Backup withholding is at a rate of 28% of gambling winnings, and can include winnings from bingo, keno, slot machines and poker tournaments. Backup withholding is done if the winner has not furnished a correct taxpayer identification number (TIN), 25% has not been withheld, and the winnings are at least $600, and at least 300 times the wager. The rule of 300 times the wager does not have to be met if the winnings are at least $1,200 from bingo/slot machines, $1,500 from keno, and more than $5,000 from a poker tournament.

Non-cash winnings must be assessed a fair market value (FMV). If the FMV exceeds $5,000 (after the deduction of the price of the wager) the winnings are subject to 25% regular gambling withholding.

Forms Involved

Form W2G [3] (Certain Gambling Winnings) is typically the form you will receive from a casino or the place where you won in gambling. You must complete Form 5754 [4] (Statement by Person(s) Receiving Gambling Winnings) if you receive gambling winnings either for someone else or as a member of a group of two or more people sharing the winnings, such as by sharing the same winning ticket in a lottery. The information you provide on the form enables the payer of the winnings to prepare Form W-2G for each winner to show the winnings taxable to each.

Can You Deduct Expenses and Losses?

When people win from gambling, they had to bet, wager, or buy into the transaction. Chances are good that they have been putting in money over an extended period of time before they see any “return”. Of course most people will never see a return from gambling. But this begs the question of whether or not the IRS allows a deduction for the money that it cost to win the particular wager they are being taxed on, as well as on all the previous “losses” leading up to the big win.

To deduct your losses, you must keep a log of wins and losses during the year in addition to receipts, statements or records showing the wins and losses. You cannot deduct more than the amount of the winnings, and deductions can only be made if you itemize your deductions [5] rather than take the standard deduction [6].

Professional gamblers. For someone like poker players, people who are professional poker players may be allowed to deduct other business expenses for the tournaments in which they play. (Check this article out to see whether or not you can be classified as a business or if it is considered a hobby [7] to the IRS). For more information, check out the IRS website [8].

More on Gambling and Taxes