Reporting Gambling Winnings (and Losses) on Tax Returns

Gambling winnings are income, the same as money you make from your job or from renting out half of your two-family house. Gambling winnings are just as much income as other somewhat “speculative” earnings you may have, such as commissions on sales (since that’s not guaranteed but depends on making the sales) or a holiday bonus (which depends on whether and how much your employer wants to give you). As such, it is taxable as any other income.

Income: The IRS has made this very plain: in their online advice under “Tax Topics: Topic 419, Gambling Income and Loses”, the IRS said in no uncertain words that ” Gambling winnings are fully taxable and you must report the income on your tax return.” (The IRS also provides an interactive online 10-minute interview for gamblers; the online assistant takes you through a series of questions and provides answers in claiming winnings (and deducting losses).

Sometimes the payer (the one paying your winnings; e.g., the casino) must issue you a form (Form W-2G) with your winnings and any withholding for your taxes if your winnings reach certain levels, which vary by type of gambling. (The last instruction page of the Form W-2G lists threshold amounts of winnings requiring that the form be issued to you.)  But even if you do not get a form, you do not get a free pass–you still need to legally report winnings topping over $600. As the IRS goes on to say on this subject: “A payer is required to issue you a Form W-2G.pdf, Certain Gambling Winnings, if you receive certain gambling winnings or have any gambling winnings subject to federal income tax withholding. You must report all gambling winnings (including lotteries, raffles) on line 21, Schedule 1, Form 1040 as ‘Other Income’) including winnings that aren’t reported on a Form W-2G.pdf. When you have gambling winnings, you may be required to pay an estimated tax on that additional income. For information on withholding on gambling winnings, refer to Publication 505, Tax Withholding and Estimated Tax.”

Can I Deduct Losses?: You can deduct your gambling losses if you itemize on a Form 1040 Schedule A. You have to track all your losses and winnings and report them comprehensively, and you can only deduct up to the amount of gambling income you report. That is, you can use your gambling losses to offset your winnings for tax purposes, but you can’t do more than offset your gambling income: gambling losses cannot be deducted from or be offset against other forms of income.

Unfortunately, the 2017 Tax Cuts and Jobs Act while enhancing the standard deduction also reduces certain itemized deductions, so the net effect is to make itemizing less attractive for many people—they end up doing better without itemizing. That being the case, whether it is worthwhile to try to itemize and deduct your gambling losses is unclear–but it is clear is that you must report (and pay taxes on!) your winnings.

Professional gamblers

If you are a full-fledged, professional gambler who depends on gambling winnings as a livelihood to pay bills and put bread on the table, you report winnings (and expenses, such as meals, lodging, transportation, food) on Schedule C, Form 1040. The IRS more than likely will ask you to prove that gambling is your full-time, actual occupation, under a 1987 US Supreme Court decision establishing the professional gambler standard.

Income from cryptocurrency

Suppose you “gamble” by trading cyptocurrency–is any profit you make taxable? Yes, but not under the gambling taxation rules discussed above. Instead, trading in cryptocurrency, where you make money (hopefully!) by buying low and selling high (so exchanging, say, dollars for Bitcoins when Bitcoins are worth X, then trading the Bitcoins for dollars later, after the value of Bitcoins has risen and they are now worth X plus) is considered the equivalent of trading in any other commodities, such as gold or oil. The income you make is taxed like the income from any other commodities trading. It’s recommended to use a Bitcoin calculator to keep on top of your crypto finances.

Taxing rules from Fantasy sports

Not a fantasy—whether it is one day or season long, you have to track your winnings and report to Uncle Sam when they top $600 or more. If you receive over $20,000, and are paid through PayPal, you will receive a Form 1099-K.

Season-long fantasy sports is not considered gambling; any income is taxed like income from any other “job” you have. The treatment of daily fantasy sports (DFS) varies by state in terms of whether it is legal or not, and whether it is considered gambling or not. While you should check with your own tax preparer or accountant for how to report DFS income, it is a given that the income will be taxable and you will need to report it and pay taxes on it.

Then there are the State individual taxes

Your state may also want its share of your gambling income. There is no uniformity of how a state taxes gambling winnings (or will allow casual gamblers to deduct associated losses). Some do, some don’t. This is not surprising as states are tussling with what types of games constitute gambling and whether it is a legal activity in the first place.

If you are unsure how to report income accurately, check with your tax accountant or call your state taxing department for help. As with all state income tax issues, this is a question which must be answered state-by-state.

Taxation of gambling businesses

If you happen to be licensed by a state to provide gambling services–that is, to run a gambling business–for you, gambling is not “gambling”. It’s your business. Income or profit from your operations will be treated like any other business income.

Case Studies: Reporting Gambling on Tax Returns

Case Study 1: Reporting Casino Winnings

John is an avid casino gambler and had a stroke of luck when he won a significant amount of money playing slot machines at his local casino. Aware of his tax obligations, John kept track of his winnings and received a Form W-2G from the casino as his winnings exceeded the threshold. John reported his gambling income on his tax return as “Other Income” on line 21, Schedule 1, Form 1040, as instructed by the IRS. He also documented his gambling losses, which he was allowed to deduct up to the amount of his gambling income, itemizing them on his Schedule A.

Case Study 2: Trading Cryptocurrency

Sarah is an active trader in the cryptocurrency market. She buys and sells various cryptocurrencies, aiming to make a profit from market fluctuations. Sarah understands that her cryptocurrency trading activities are treated like trading in any other commodities for tax purposes. Therefore, she keeps detailed records of her trades, noting the purchase and sale prices. At tax time, Sarah reports her cryptocurrency trading income as any other income from commodities trading, following the appropriate tax forms and regulations.

Case Study 3: Daily Fantasy Sports (DFS) Winnings

Michael is an avid player of daily fantasy sports (DFS). He enjoys participating in DFS contests and occasionally wins cash prizes. Michael is aware that his DFS winnings are considered taxable income. Although the tax treatment of DFS varies by state, Michael consults with a tax preparer who advises him on the specific reporting requirements in his state. Michael diligently reports his DFS winnings on his tax return and pays the appropriate taxes on his income.

Case Study 4: Licensed Gambling Business

Amy is the owner of a licensed gambling business that operates a small casino. As a business owner, Amy understands that the income generated from her gambling operations is treated as business income. She keeps meticulous records of her business expenses, employee wages, and revenue. At tax time, Amy reports her gambling business income and deducts eligible expenses, ensuring compliance with the relevant tax laws and regulations.