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A recent notice from the United States Internal Revenue Service (IRS) reminds people who gamble on sporting events that their winnings are taxable income, among stressing other points. That focus might give some who are US taxpayers and also or only play online casinos a false impression.
The truth is that the IRS doesn’t care whether you won money betting on sports, betting on horse races, from a lottery drawing, winning a poker tournament, or playing an online casino game. It’s all taxable income from gambling to the IRS.
The onus is on the taxpayer to correctly report any winnings and pay the necessary tax on that income, just like income from any other source. The same may be true on the local and state level, depending on where in the US you legally reside.
IRS urges taxpayers to play by the rules
On Sept. 5, the IRS issued a notice to all taxpayers in the US, stressing the need to bet on sports legally. According to the IRS, “illegal gambling activities can result in criminal charges ranging from money laundering to tax evasion.”
The notice further states that “individuals who engage in sports betting activities are required to report their winnings on their annual tax return.” Moreover, the IRS urges people to keep records of their gambling activity.
To ensure correct reporting and withholding, the IRS advises taxpayers “to consult tax professionals or visit the official IRS website for guidance.” As a final warning, the IRS states that ignorance of the legal standards does not exempt a person from their responsibilities.
Ignoring this advice can have drastic consequences, as the IRS warns. This is a situation in which it’s far better to be safe than sorry.
Online casino winnings are taxable
When it comes to whether winnings from online casino play are taxable on the federal level in the US, there is a simple rule of thumb. As soon as you withdraw the winnings, that means you need to report them on your income taxes, at least at the federal level.
Whether or not you actually make a profit while you play online slots or online table games is completely irrelevant. Some taxpayers fall victim to that misconception.
The IRS does allow you to deduct your gambling losses from your taxable income. However, there are important caveats.
What to know about IRS gambling loss deductions
Among the important things to know is that your gambling losses deduction cannot exceed your gambling winnings for the year. Thus, your winnings for a tax year act as the maximum amount of gambling losses that you can deduct for that term.
Also, you can only deduct gambling losses if you choose to forego the standard deduction for your tax bracket and itemize your deductions. Before you do this, you need to consider whether that is the best choice for your situation overall.
If you don’t have eligible deductions at least equal to the standard deduction for your tax bracket, you might actually end up paying more tax going the itemized route than if you chose the standard deduction. That includes all your potential deductions, not just your gambling losses.
You must report your gambling winnings regardless of how much you lost during the year. Some people make the mistake of thinking that they only have to report any actual profit, falsely believing that they can just subtract what they lost from what they won and only report the difference.
You must also report your gambling winnings and potentially pay tax on them regardless of whether you itemize your deductions or take the standard deduction. The IRS considers your gambling winnings income either way.
If you fail to correctly report and pay, you risk incurring fines and interest from the IRS. The IRS has the authority to seize assets to settle your account if you cannot pay back taxes and fines.
While that can all sound daunting, the good news is that many regulated online casinos may automatically withhold a portion of your winnings and mostly take care of the paperwork for you. To the IRS’ point, that’s a huge advantage of only playing online casino games in a legal fashion.
Why licensed online casinos are a great ally
If you have gambling winnings from online casino play with an operator that is licensed in a US state, the process of paying and reporting can be quite easy. Most of the time, the casino operator will send you a Form W2-G at tax time.
This form makes it easy for you to report your winnings to the IRS and see what, if any, tax you owe on that amount. In many cases, the casino will have already withheld the adequate tax from your winnings, so all you really need to do is report them.
However, you should never assume that is the case. As the IRS suggests, you should consult a tax professional to ensure that you don’t need to pay any additional tax and have used the form correctly.
If you don’t receive a W2-G from the casino operator, that does not alleviate you of your responsibility. Additionally, if you have winnings from an unlicensed online casino, any winnings are still taxable income in the IRS’ view.
Many US states and even some cities have their own income tax requirements as well. In a majority of these places, gambling winnings are taxable income.
When it comes to gambling and taxes, the best courses of action are to consider all winnings taxable and enlist the aid of a tax professional. Because of this notice, you can’t say the IRS didn’t warn you if you choose to act differently.
