Whether you had a lucky night at a casino or managed to maximize your profits and win the poker pot online, your gambling winnings are taxed. If you were wondering how to handle your winnings, look no further! With this comprehensive guide to gambling taxation, you will gain a basic understanding of how gambling taxes work, what tax deductions are, find out whether you are entitled to one, and discover workable solutions that will allow you to pay the least amount of money possible.
Your Winnings Are Taxed
Let’s get it straight: if you have won money in a casino, online poker, or betting on your favorite horse, you must pay taxes. Unless you want to deal with the Internal Revenue Service (IRS) later on, you have to report all your winnings as income. There are a couple of forms to fill out, most notably Form W-2G, where you state your reportable winnings, while Form 1040 is a document that you need to fill out for the tax return.
If you have reported your winnings on Form W-2G, they are subject to a flat 24% tax. It is important to note that not all game winnings are equally subject to the IRS, as you must fill out the form only if you win a substantial sum of money. This sum will depend solely on the type of game. For instance, you need to report your winnings to the IRS if you win:
- From 600 dollars and more while betting on horse races;
- 1,200 dollars and more at bingo games and slot machines;
- 1,500 dollars and more in Keno;
- 5,000 dollars and more in poker tournaments, wagering pools, sweepstakes, and lotteries.
It is also worth mentioning that you shouldn’t fill out Form W-2G if you win at blackjack, baccarat, craps, or roulette. It doesn’t mean that you are exempt from taxation, but you won’t need to fill out the form, as the IRS classifies these games as games of skill (unlike slot machines that are regarded as games of chance), so different rules apply.
Still, take full advantage of tax exemptions when possible. For instance, winning from some foreign countries can often qualify for tax exclusion. Before rushing headlong into the game, take some time to figure out the particularities.
Keep Track of the Losses
Now, let’s talk about how to decrease the taxes you need to pay to the bare minimum. Luckily, there is a silver lining that sounds like this: your gambling losses are deductible, and you can save money on taxes. All you need to do is keep track of your losses.
Keeping track of losses and winnings, also known as a “contemporaneous gambling diary,” is a record that will allow you to prove to both the courts and the IRS that you have enough losses to qualify for a tax deduction. According to the IRS, a diary of this sort should include dates, types of wagers, addresses of casinos, amounts of winnings and losses, as well as the names of other people who were with you at a gambling establishment. In addition, you should also have other documents, like credit records, wagering tickets, and so on.
Here’s an example of how to deduct losses: if you won 10,000 dollars but lost 5,000, you are taxed only 5,000 in winnings. That’s why it is pivotal to record both losses and winnings. Sure, keeping a contemporaneous gambling diary might sound like a mouthful, but this practice will allow you to save a lot of money. It’s worth mentioning that not all states allow amateur gamblers to deduct their taxes. Qualifying as a professional gambler will allow you to overcome this obstacle and save money.
Going Full Pro
If you want to become a professional gambler, this is an additional reason to consider going full pro. You can decrease the amount of tax if you prove your gambling status. Here’s how the Supreme Court defines someone who meets the professional gambler standard: “If one’s gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby, it is a trade or business.”
So, if you prove that gambling is your primary source of income, you can qualify for a tax deduction and lower your taxes. Of course, this option does not apply to everyone; for instance, if you are a more casual gambler, you should consider the previous options.
Gambling Taxes Worldwide
The vast majority of European countries, as well as the Western world, taxes gambling establishments. For instance, Germany’s casinos have to pay one of the highest taxes in the world, while countries like Portugal have lower tax rates. There are also Canada, Australia, Denmark, Italy, and so on, where only bookmakers and gambling establishments have to pay taxes.
Let’s take a look at how English-speaking countries tax gambling. The UK legalized gambling more than 60 years ago and requires its gambling establishments to pay up to 15%. Although Canada allows its citizens to not pay for their winnings, professional gamblers and those who earn interest on their winnings must report it as their income. In Australia, you don’t have to declare your winnings or losses unless you are a professional gambler.
Therefore, your taxation obviously depends on your location. If you live in Canada, Australia, the UK, or a myriad of European countries, you usually don’t have to pay the gambling tax, as this responsibility falls on casinos. If you are based in the US, you have to report all of your winnings as income.To the disappointment of many, not all that happens in Vegas stays in Vegas, as both casinos and gamblers have to pay taxes. If you don’t want the IRS to plague you for years to come, keep track of your income and fill out all the necessary forms. Luckily, there are a couple of options that will allow you to pay less. Minimize money spent on taxes by keeping track of your winnings, deducting your losses, and taking advantage of tax exclusions.
