Bet on More Tax Questions in the Recession-Proof Gaming Industry

According to the American Gaming Association, US commercial gaming revenue reached a staggering $5.06 billion in July 2022, constituting a year-over-year increase of 2.8%. And this past July marks the third-highest-grossing month of all time for the industry.

Even with rising inflation and wonky global economics, the gambling industry seems to prevail. As sports betting soars with the US football season’s kickoff every September, tax practitioners should expect to see more clients with gambling-related tax questions.

All Winnings Are Taxable

Gambling winnings can come from a variety of games and events, such as from bingo, slot machines, poker tournaments, sports betting, online gaming, and more. Depending on the type of winnings and the amount won, the payer should issue an information statement—typically a Form 1099-MISC: Miscellaneous Income, or a Form W-2-G: Certain Gambling Winnings. If a taxpayer receives winnings through cash applications such as PayPal or Venmo, they may receive a Form 1099-K: Payment Card and Third-Party Network Transactions.

When a taxpayer receives an information statement indicating the amount won, so does the IRS. If a taxpayer doesn’t report the income on their Form 1040, the IRS will easily know of the underreporting, which can trigger a notice or even an audit. Recent legislation has directed new funding to IRS enforcement, sparking more scrutiny in tax compliance.

Regardless, if a taxpayer receives an information statement indicating their winnings, they must report all gambling winnings as “other income” on their Form 1040.

Withholdings and Estimated Taxes

Most gambling organizations will withhold federal income taxes from a player’s payouts of $5,000 or more. There are a few exceptions—for instance, gambling winnings from bingo or slot machines generally are not subject to income tax withholding.

Federal income tax is withheld at a flat 24% rate from certain kinds of gambling winnings. This means the winnings payout is immediately reduced by the taxes withheld, similar to how employee wages are immediately reduced by their designated withholding. IRS Publication 505: Tax Withholding and Estimated Tax provides more guidance on gambling winnings and the withholding process.

Withholding can actually help taxpayers pay their appropriate amount of taxes and avoid surprises when they file their returns. However, tax practitioners should consider helping clients make quarterly estimated tax payments to cover any potential shortfalls. Quarterly check-ups with clients are wise to discuss any income or lifestyle changes to best support clients with their tax and financial plans.

The Importance of Good Recordkeeping

Taxpayers can deduct gambling losses if they meet certain criteria. Gambling losses include the actual cost of wagers plus expenses the taxpayer incurs in connection with the gambling activity, such as travel to and from a casino.

Limit on loss deduction: The amount of the losses and expenses taxpayers are allowed to deduct can’t be more than the amount of their gambling winnings. If taxpayers don’t have any winnings, they can’t deduct the losses and expenses.

Must itemize: Taxpayers can only deduct gambling losses and expenses if they itemize their deductions on Schedule A in Form 1040 Taxpayers will need to have more expenses than the standard deduction to itemize; for tax year 2022, the minimum is $12,950 for single filers and $25,900 for married couples filing jointly. Practitioners may need to level-set with certain clients about their expectations to deduct their gambling losses and expenses.

Adequate records: A clear record of the winnings and losses must be kept. This typically involves an accurate diary of the gambling winnings and losses, with receipts, tickets, statements, or other records substantiating the amounts reported. The date and time of the specific wager activity, the name and address of the gambling establishment, and the name(s) of the people present at the gambling establishment also should be noted. Revenue Procedure 77-29 provides more guidance. Practitioners should also be careful to not “net” gambling winnings with losses. Taxpayers must report the full amount of their winnings as income and claim the losses and expenses (up to the amount of winnings) as an itemized deduction. This is especially important, as the IRS can easily match information statement earnings to “other income” reported on a return. Any “netting” could trigger notices or an audit. IRS Publication 529: Miscellaneous Deductions provides more discussion on gambling deductions.

Professional Gamblers

There are different rules for taxpayers who meet the professional gambler criteria based on facts and circumstances. The US Supreme Court ruled in Commissioner v. Groetzinger that “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.”

If a taxpayer is a professional gambler, gambling winnings and losses need to be reported on Schedule C: Profit and Loss From Business. Unlike amateur gamblers who can’t net gambling winnings with losses, professional gamblers computing their business income can net all wagering activity but can’t report an overall loss—a change resulting from the Tax Cuts and Jobs Act. The taxpayer also may deduct ordinary and necessary expenses incurred in connection to the business.

State Issues

In addition to federal tax issues, there are many state-related tax consequences for gambling. If a taxpayer’s home state has an income tax, they should expect to include their winnings in their income on their state return. And if a taxpayer wins money in another state, it likely will need to be reported in that state—potentially throwing additional filing requirements and rules into the mix.

Some states have additional rules for gamblers and may have promotional credits, revenue share, and withholdings on winnings. The American Gaming Association created an interactive map showing the national and state-by-state impact of the casino industry, as well as key regulatory and statutory requirements in each state.

Your Clients’ Favorite Sports Team?

As we approach year-end planning with clients and develop deep-rooted and long-term client relationships, consider tactfully inquiring about hobbies and potential gambling. An icebreaker conversation often starts with discussing a client’s favorite football or basketball team. Consider approaching the gambling topic to ensure your clients understand tax consequences and how you can best help them with all of their financial and tax decisions.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Susan Allen, CPA/CITP, CGMA, is a senior manager on the American Institute of Certified Public Accountants’ Tax Practice and Ethics team. She drives content strategy to ensure members receive the guidance and support they need to remain the premier providers of tax services.