This question is one of the most frequently asked questions among gamblers. The practice itself implies winners and losers. It is only natural to hope for the best once you enter the world of gambling, otherwise, you would not consider doing it in the first place. However, it is highly important to respect the law while gambling, regardless of whether you win or lose.
According to the US law, gambling winnings are taxable income, therefore, you are obliged to report your winnings to the IRS. In case you fail to do so, you are likely to face repercussions in accordance with law. This article will try to provide useful information regarding the rules, as well as the consequences of breaking those rules.
Gambling winnings and losses
As has been previously stated, gambling winnings are generally taxable. That comprises card games and casinos, as you would probably expect. But, it also includes bingo, horse races, game shows and so on. All gambling incomes must be reported to the IRS. On the other hand, you are also able to deduct your losses.
In order to do so, you are required to itemize your deductions first. It is also important to point out that these two things must be done separately. That means that you cannot just deduct your losses from your winnings and report the difference. Many people are unaware of that fact, which is why highlighting it is of paramount importance to gamblers.
The following rules are applicable to casual gamblers. There will be a separate section dedicated to professional gamblers.
Regardless of the game you choose, if you are lucky enough to win, you have to report your winnings on your Form 1040 as “other income”. Since gambling income counts as additional income, you may be requested to pay an estimated tax on it.
As you already know, there are many forms of gambling. Small amounts won at home games are easily kept out of sight of the IRS. However, if you win, for an example, $10,000 from a slot machine, you will be issued a document called Form W-2G from your provider, declaring the value of winnings. Your winnings will be transparent, which means you will not be able to hide them from the IRS. If you try to keep them a secret, that will be recognized as tax fraud and you will be in danger of facing serious consequences.
The rules and regulations listed above regard casual gamblers, i.e. people who gamble for fun. Therefore, if gambling is your profession, these do not apply to you. The reason is that gambling winnings are considered your regularly earned income and therefore are taxed according to that – at the regular income tax rate.
As a professional gambler, you are required to report your earnings and expenses on Schedule C. You will also use the same form for deducting your losses.
We are all familiar with the saying “innocent until proven guilty”, also known as the presumption of innocence. Nevertheless, when it comes to IRS, it is the other way around. In case they notice any irregularity in regards to your reported income, you will be considered guilty until you manage to prove otherwise. Tax fraud is a very serious crime that you can inadvertently commit by gambling. For that reason, it is highly important to be well informed and behave according to the information acquired.
The most efficient way to keep your income and expenses in order is keeping a journal. That way, you can easily keep track of your gambling winnings and losses, in order to know the exact amount of money you need to report. In addition to that, keeping a record of every piece of information related to gambling will enable you to deduct your losses more easily. Not only will you find it useful, but it is also demanded by the IRS.