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How to Report Gambling Winnings & Losses to the IRS

After a big win on a lotto ticket or after a great night at the casino, the last thing you’re probably thinking about are those pesky tax obligations that come along with it. While that brand new sports car or fancy yacht may look enticing, it’s important to remember that the IRS wants their fair share.

What Counts as Gambling Income in the Eyes of the IRS?

Gambling income includes winnings from lotteries, raffles, horse races, sports betting, casinos, and cold hard cash, which is a standard assumption. But did you know that it also includes the fair market value of prizes like cars, trips, etc.? So, if you made a deal with Wayne Brady, got lucky betting the ponies, or took on losses betting on the Lions, you need to make sure you’ve got your house of cards in order come tax time.

Reporting Lottery Winnings to the IRS

It’s no secret that winning the lottery is exciting! Whether it’s a scratch-off, draw game, or a raffle prize, it’s essential to know how the IRS will tax those winnings. The amount you will have to pay in taxes depends on how you choose to receive your winnings and the type of lottery won. Taxpayers can generally either choose to receive their winnings as one lump sum payment or in yearly installments.

If you take your winnings as one lump sum, the IRS will only tax you for that specific tax year. The total percentage of your winnings taxed will depend on the tax bracket that applies to the individual. The rule states that if you win over $5,000, the IRS will take an automatic 24% off the top. Then, they’ll subtract that 24% from the total percentage rate that the tax bracket specifies. That is the amount that will come due at tax time. Here is an example to illustrate: Imagine if you won $1,000,000. That puts you in the highest tax bracket, which has a 37% tax rate. The IRS would take your total winnings ($1,000,000), take their 24% off the top ($240,000), which would leave the remaining 13% ($130,000) due at tax time. But it’s not over yet! Once Uncle Sam gets his cut, that still leaves the state tax that you have to pay, the amount which varies from state to state.

Reporting Casino Winnings and Losses to the IRS

In the world we currently live in, not only do we have good old-fashioned casino gambling, but we also have online gambling. Online gambling has come by storm in many states in the past year. It has had much appeal to gamblers due to the pandemic. Instead of physically going to the casino, some gamblers were able to wager from the comfort of their home.

Itemizing Gambling Losses

If you have losses from gambling, you may offset the taxes on your winnings. But there are limits to itemizing your losses. So, when can you itemize losses on those tax returns? The rule is that your losses cannot exceed your winnings, meaning that you cannot carry over your losses to other income or for a future tax period.

To illustrate this point, we’ll use a few examples:

Let’s say you won $10,000 playing Blackjack, but you wagered and lost a total of $8,000 in the process. The loss can be itemized when filing your tax return because you only have $2,000 in profit/income. So, you’ll only be required to pay tax on that $2,000.

In another scenario, let’s say you again won $10,000 playing Blackjack, but you wagered and lost $12,000. You can only itemize your losses up to $10,000 on your tax returns.

It’s also important to note that the only way you can deduct gambling losses is if you are already itemizing your deductions on a Schedule A. You must also have kept records of your gambling winnings and losses. You would report the losses under the “Other Itemized Deductions” section.

Reporting Your Winnings to the IRS

The IRS considers winnings from gambling and winnings from the lottery the same. The IRS will take 24% of your winnings automatically, and you will still have to report the winnings on a Form 1040 as other income. Depending on the amount you win, the institution you are gambling with may be required to issue you a specific tax form for your winnings – a Form W-2G.

According to the IRS, an institution must provide you with a W-2G if:

  • The winnings (not reduced by the wager) are $1,200 or more from a bingo game or slot machine.
  • The winnings (reduced by the wager) are $1,500 or more from a keno game.
  • The winnings (reduced by the wager or buy-in) are more than $5,000 from a poker tournament.
  • The winnings (Except winnings from bingo, slot machines, keno, and poker tournaments) reduced, at the option of the payer, by the wager are:
  • $600 or more, and
  • At least 300 times the amount of the wager; or
  • The winnings are subject to federal income tax withholding (either regular gambling withholding or backup withholding).

Some may think you do not have to pay taxes if your winnings are below a certain amount, but this is an incorrect assumption. Even though this rumor has been spread widely over the internet, you must still report all winnings to the IRS. Even if you do not receive a W-2G, you still have to report your winnings as income when filing your tax returns. If you do not receive a W-2G, you likely did not win enough to warrant a required W-2G. You must still take it upon yourself to report your winnings as income, regardless of receiving a W-2G.

Even though winning some extra cash is great, it is still income and must be reported at the end of the day. Failure to report the income could result in not only a hefty tax bill with penalties and interest but also the possibility of having the IRS take collection action against you. But luckily, there are ways to get out from underneath tax debt if this is a problem you are currently facing.

Online Resources from the IRS

The IRS has what’s called an “Interactive Tax Assistant,” which has a “How Do I Claim my Gambling Winnings and/or Losses?” online tool. The tool is there to help taxpayers determine how to claim their gambling winnings or losses for the last three tax years. There are also multiple web pages and publications that the IRS has released discussing this very thing.

Contact an Experienced Tax Attorney

If you are experiencing issues relating to your gambling winnings/losses, give our office a call at (800) 571-7175 free of charge to speak to a senior tax attorney- or simply fill out our online form and an attorney will contact you.

Venar Ayar, Esq.

Venar Ayar, Esq.

Attorney-at-Law, Master of Laws in Taxation
Principal and founder, Ayar Law

Venar is an award-winning tax attorney ranked as a Top Lawyer in the field of Tax Law. Mr. Ayar has a Master of Laws in Taxation – the highest degree available in tax, held by only a small number of the country’s attorneys.