What to Know About Gambling Income and Taxes
Winnings are Taxable, and Losses Can be Deducted
Gambling income is subject to the federal income tax and it consists of the following types:
- Income from wagers and bets
- Income from lotteries, sweepstakes, and raffles
- Income from prizes, awards, and contests.
The full amount of gambling income, less the cost of the winning bet, is included on the tax return. "The amount of income from a winning bet or wager is the full amount of the winnings less the cost of placing that winning bet or wager," reports Robert McKenzie in his in-depth article on "Gambling and Taxes." The cost of losing bets are reported elsewhere on the tax return as gambling losses.
Where to Report Gambling Income
Persons who are not professional gamblers report any gambling income as other income on Form 1040, Line 21.
The expense of bets, wagers, lottery tickets and similar gambling losses are deducted as a miscellaneous itemized deduction on Schedule A. However, "Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions." (Internal Revenue Code section 165(d), see also Treasury Regulations section 1.165-10.) Gambling losses are reported on Schedule A as other miscellaneous deductions that are not limited to the 2% of adjusted gross income threshold. On the Year 2014 Schedule A, this is located on Line 28.
"A gambler is considered to be engaged in the business of gambling if he or she gambles full time to earn a livelihood and not merely as a hobby," states J.K. Lasser's Your Income Tax.
Professional gamblers report their gambling income and related expenses on Schedule C as self-employed income. Net Schedule C income is subject to the federal income tax and the self-employment tax, plus any state income tax.
Recordkeeping for Gambling Activities
The IRS expects gamblers to keep records of their bets and winnings:
"You must keep an accurate diary or similar record of your losses and winnings. Your diary should contain at least the following information.
"Proof of winnings and losses. In addition to your diary, you should also have other documentation. You can generally prove your winnings and losses through Form W-2G, Certain Gambling Winnings, Form 5754, Statement by Person(s) Receiving Gambling Winnings, wagering tickets, canceled checks, substitute checks, credit records, bank withdrawals, and statements of actual winnings or payment slips provided to you by the gambling establishment.
- "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.
"For specific wagering transactions, you can use the following items to support your winnings and losses….
"Keno. Copies of the keno tickets you purchased that were validated by the gambling establishment, copies of your casino credit records, and copies of your casino check cashing records.
"Slot machines. A record of the machine number and all winnings by date and time the machine was played.
"Table games (twenty-one (blackjack), craps, poker, baccarat, roulette, wheel of fortune, etc.). The number of the table at which you were playing. Casino credit card data indicating whether the credit was issued in the pit or at the cashier's cage.
"Bingo. A record of the number of games played, cost of tickets purchased, and amounts collected on winning tickets. Supplemental records include any receipts from the casino, parlor, etc.
"Racing (horse, harness, dog, etc.). A record of the races, amounts of wagers, amounts collected on winning tickets, and amounts lost on losing tickets. Supplemental records include unredeemed tickets and payment records from the racetrack.
"Lotteries. A record of ticket purchases, dates, winnings, and losses. Supplemental records include unredeemed tickets, payment slips, and winnings statements."
(from Publication 529, Miscellaneous Deductions, IRS.gov)
Withholding on Gambling Winnings
Gambling winnings are subject to withholding for federal income tax at a rate of 25% in the following circumstances. For gambling winnings where the amount of the winnings minus the wagers are more than $5,000 and the winnings are from
- Wagering pools
- Other wagering transactions if the winnings are at least 300 times the amount wagered. (From the Instructions for Form W-2G)
The casino reports the amount of the gambling winnings and any tax withheld on Form W-2G, which is issued to the winner and to the IRS.
In addition to issuing a Form W-2G when withholding is required, casinos will also issue a Form W-2G when withholding is not required, specifically for the following type of winnings:
- $1,200 or more in winnings from slot machines or bingo
- $1,500 or more in winnings from keno games
- $5,000 or more in winnings from poker tournaments. (From the Instructions for Form W-2G)
Sharing Gambling Winnings
If two or more people are to share in the gambling winnings, they should fill out Form 5754 [pdf]. The casino will divide the winnings among the players and will subsequently report the winnings on Form W-2G to the IRS under the names of each of the winners.
- Internal Revenue Code section 165 paragraph (d) deals with gambling losses. The related Treasury Regulations section 1.165-10 further discusses gambling losses.
- J.K. Lasser's Your Income Tax, chapter 11, discusses prizes and awards, lottery and sweepstake winnings, and gambling winnings and losses. This chapter also discusses the special rules for professional gamblers.
- Publication 17, chapter 12, discusses lotteries and raffles, Form W2-G, and reporting gambling winnings and recordkeeping.
- Tax Topic 419, Gambling Income and Losses.
- Publication 525, Taxable and Nontaxable Income, discusses gambling winnings in the section on other income.
- Publication 529, Miscellaneous Deductions, discusses deductions not subject to the 2% limit including gambling losses.
- Instructions for Form W-2G and Form 5754, discusses the rules for withholding on gambling winnings and for issuing Form W-2G.
- Publication 505, Tax Withholding and Estimated Tax, discusses the rules for withholding in general and has a section specifically discussing gambling winnings.
- Instructions for Form 1040 for Line 21.
- "Gambling and Taxes" by Robert McKenzie.
- "Reporting Gambling Winnings" by Kay Bell.