Taxation of Gambling Income & Losses
As online sports betting has gained popularity and is now legal in 48 states, taxpayers are encountering gambling in new ways. Nevertheless, whether you take a weekend trip to Vegas or betting from your home it is important to understand how winnings are taxed and if losses will be deductible.
The IRS has black and white rules when it comes to how to report gambling income. All proceeds from sports wagers & other forms of gambling are taxable income (just like your paycheck) and whether you can write off your losses depends on if you itemize. Either way, winnings and losses are handled separately on the tax return.
How are winnings reported to taxpayers & the IRS?
Gambling establishments typically provide a W-2G to the IRS and taxpayers to report gross winnings for the tax year. Per the IRS, gambling establishments are required to report payouts made which meet the following thresholds:
Won $1,200 or more playing bingo or slots.
Netted $1,500 or more from keno.
Exceeded $5,000 in winnings from a poker tournament.
Obtained $600 or more in another gambling endeavor, such as sports betting, and the payout was at least 300 times the amount you put on the line.
Form W-2G is required to be mailed by January 31st, however some casinos will give you the form the day you win and collect the payout. Be sure to keep these statements throughout the year to include with your tax return. It is also important to note, that even if your winnings are below the thresholds listed above, it is still your responsibility to include it on your tax return.
Withholding on winnings
In general, if you win more than $5,000 on a wager, and the payout is at least 300 times the amount of your bet, the IRS requires the payer to withhold 24% of your winnings for federal income taxes. (Special withholding rules apply for winnings from bingo, keno, slot machines and poker tournaments.) For state income tax, it can vary from state to state, however in general, winnings are taxable to the resident state AND the state where the bet was placed. So if you win big in OH but live in KY, expect to pay Ohio & Kentucky state income tax. It has been my experience that most casinos will only withhold the state in which they are located and the resident state tax will be paid on the tax return.
Gambling winnings - What is taxable?
Whether it's $5 or $50,000, all gambling winnings must be reported on your tax return as "other income" on Schedule 1 of Form 1040. If you win a non-cash prize, such as a car or a trip, it is still taxable and the fair market value of the item is reported as income. Even if you don’t receive a tax statement, you are still required to include all winnings on your return.
Gambling losses - When and how are they deductible?
A taxpayer can deduct gambling losses, however there are some thresholds you must meet in order to do so. First, a taxpayer can only deduct losses up to the amount of winnings claimed on the return. So if you’re at a loss for the year, don’t expect an extra deduction on your return. Secondly, gambling losses are an "Other Itemized Deductions" on schedule A. So if you use the standard deduction and don’t itemize, no losses can be claimed. For reference, the 2023 tax year, the standard deduction for single filers is $13,850 & $27,770 for married filing jointly. If gambling losses combined with other sch A deductions don't exceed the standard deduction, you can’t write off those bad bets. Thirdly, losses can only be claimed on sch A if you have proper recordkeeping.
Recordkeeping - What is a gambling diary per the IRS?
While gambling establishments will send you records of your winnings, they’re unlikely to break down what you lost (or your cost/initial investment). Per IRS Publication 529, in order to deduct losses, taxpayers must keep a diary or similar record of gambling winnings and losses and be able to provide receipts, tickets, statements, or other records that show the amount of both your winnings and losses. Some casino’s give a statement to those that have a membership/card for gambling. So if you frequent a particular casino, ask about this as it will show any amounts gambled and all wins.
At a minimum, your records should include:
Date and types of specific wagers or gambling activities,
Name and address/location of gambling establishment you visited,
Amount you won or lost, and
Names of other people with you at each gambling site (if applicable).
Some other documentation that can be used as proof include, but not limited to, wagering tickets, canceled checks, credit records, bank withdrawals, and statements of actual winnings or payment slips provided by casinos, sports betting parlors, racetracks, or other gambling establishments.
So what should you provide to your CPA if you have gambling winnings in the tax year? All winnings statements and the diary of winnings & losses. If you aren’t sure if you will itemize, it is still better to provide the information just in case.
Overall schedule A items
For the 2023 tax year, the standard deduction for single filers is $13,850 & $27,770 for married filing jointly
The six categories of itemized deductions are:
Medical Expenses (see separate blog post for more details)
State & Local Taxes (currently capped at 10K, referred to as the SALT Cap)
Mortgage Interest
Charitable Contributions (see separate blog post for more details)
Casualty & Theft Losses (from a Federally declared disaster)
Other Miscellaneous – i.e., Gambling losses
IRS References:
Publication 529, Miscellaneous Deductions