The Tax Man Cometh
Strategies to help you keep more of what you win
by Basil Nestor
Gambling income is taxed like regular income, so you may owe substantial money unless you can prove that your gambling activities generated an offsetting loss.
It’s spring…which means get ready to pay gambling taxes!
Gambling taxes, you say? Yes, you must pay taxes on your gambling income. And if you don’t plan carefully, you may have to pay taxes even if you’re a net loser.
Many players are unaware of this rule. There is no low-threshold limit on taxable winnings. Theoretically, you owe tax on every profitable bet, even if your income is only one lone dollar. Of course, the U.S. Internal Revenue Service won’t come after you for one humble buck. But if you’re a regular casino player, you will leave a paper trail that may detail substantial winnings even if you’re a net loser. And the IRS will want a share of those supposed profits. Scary, huh?
Here’s how it works…
Big Brother Is Watching
By law, casinos in the United States use IRS form W-2G to report jackpots and bingo wins of $1,200 and over ($1,500 and over for live keno). If you only play tables, you won’t run into W-2G reports except if you win a progressive jackpot on a side bet, or in a tournament when the payoff is more than 300 times greater than the entry fee.
But table players will bump into other systems designed to track gambling income. When a player has cash transactions that reach $10,000 per day or above, a casino is required to fill out a currency transaction report (CTR) which is a U.S. Treasury form. This necessarily involves the player, because a floor person asks for identification including a social security number. Failure to provide this information doesn’t prevent the report from being filed, but in some circumstances it does cause the casino to file an additional U.S. Treasury report regarding suspicious activity; this is called a SARC. Yup. The IRS has every angle covered.
And keep in mind that these reports are about cash transactions. Non-cash transactions involving chips, checks, and wire transfers have their own paper trails.
Here’s where it gets sticky. The government is interested in tracking income, but not losses. And that creates…
Tax Troubles For Net Losers
Let’s say you mostly play blackjack and video poker, and last year you received multiple W-2Gs totaling $15,000 for video poker jackpots. But you actually had a net loss of $5,000 playing video poker, and another $5,000 net loss playing blackjack. Your net loss for the year is $10,000. But the IRS doesn’t know that. They think you earned $15,000 gambling last year, and they want their cut of the profits.
Gambling income is taxed like regular income, so you may owe substantial money unless you can prove that your gambling activities generated an offsetting loss.
Unfortunately, deducting losses isn’t always a simple process. The first hurdle is that you can deduct losses, but only up to the amount of your gambling profits, and the net effect may bump you into a higher tax bracket. Why? Because tax rules say you cannot directly subtract a loss from profit and declare the difference, or declare nothing if you have a net loss. No, you must first declare all your wins as income.
Continuing with our example, if you want to deduct gambling losses, you must declare the entire $15,000 you won (higher tax bracket), then separately deduct $15,000.
And for every dollar you deduct, the IRS expects you to keep detailed records.
The Pen Is Mightier Than the Audit
The process is the same for net winners and net losers. If you have winnings to declare and want to keep more money, save anything with an amount on it. Begin with written reports generated by the casino. These include keno and sportsbook tickets, tournament-entry tickets, and any other receipts that show your action. Also remember that most casinos provide annual win-loss statements for their club members.
Collect ATM and debit receipts, bank statements, credit card receipts, cancelled checks, and other items that show your gambling transactions.
In addition, IRS Publication 529 says, “You must keep an accurate diary or similar record of your losses and winnings.”
The IRS specifically requests that your diary contain the following:
* The date and type of your specific wager or wagering activity.
* The name and address or location of the gambling establishment.
* The names of other persons present with you at the gambling establishment.
* The amount(s) you won or lost.
It sounds like a lot of work, but you can jot down the essentials on a piece of paper or on your phone/PDA in about 30 seconds. The IRS “suggests” that you also record the time of day and the table number or the machine number of the game you were playing.
Be practical, and don’t fret if you win $20 on a blackjack game waiting for your spouse at a table near the bathrooms. But at least make an effort to record wins and losses over $100.
By the way, a diary is useful not only for tax purposes, but also as way to audit your gambling strategies. Are you really playing a profitable game, or are you blowing through Ben Franklins like your wallet is a wind tunnel? The diary will tell you.
As with all things involving taxes, the subject has nuances and complications. Talk to a tax professional if you have questions about deductions, or read IRS Publication 529.
Remember, every dollar you track may be money saved from the tax man. Now is the time to start a diary for 2011. You won the money. You deserve it. Keep every dollar that you can.
Enjoy the game!
Basil Nestor is author of The Smarter Bet Guide to Blackjack, Playboy’s Complete Guide to Casino Gambling, and other comprehensive gambling guides. Got a question? Visit SmarterBet.com and drop him a line.
