Online Gambling Taxes

People tend to say that only two things are certain: death and taxes. However, does the second part of the statement hold true when online gambling is involved? Many players fear whether they will keep all their winnings, and understandably so.

The US tax system can be confusing, which is why we wanted to cover the topic as fully as possible and tell you exactly whether you need to pay taxes, what taxes you need to worry about, and everything else you need to know.

However, it goes without saying that this guide is for informational purposes only. We are not tax professionals, so it’s crucial to consult one to see what applies to you so you know exactly what to do before April 15.

Gambling and Taxes — Gambling Income Explained

When talking about taxes in the world of gambling, you need to worry about the funds you win from the practice, i.e., gambling income.

In some instances involving large sums, such as $5,000 or more in winnings, the gambling institution must withhold taxes.

Gambling income includes all forms of gambling, be it online or in person. When it comes to online gambling, it includes everything, meaning online casinos, sports betting, lotteries, horse racing, sweepstakes casinos, and DFS.

Do I Have to Pay Taxes on Online Gambling Winnings?

To make things as simple from the get-go as possible — yes, gambling winnings are fully taxable in the US. You’ll rarely get to keep the entirety of your winnings, and a specific portion will have to go to the IRS.

I say rarely because there are instances when you won’t have to pay anything, depending on the form of gambling and how much you’ve won.

I also say a specific portion because the amounts you have to pay depend on a wide range of factors.

You’ll typically have to pay both federal and state taxes (as long as your state has an income tax).

How Are Online Gambling Winnings Taxed

Whenever you collect your gambling winnings, they become subject to a 24% federal tax. This covers the entirety of your winnings, meaning your stake too. So, if you’ve invested $30 in an online roulette game and you end up winning $410, you won’t be paying taxes on $380 only, but the full $410.

In some instances when large sums are involved (like $5,000 in winnings or more), the gambling institution is required to withhold taxes. The rate is 24%, but there are still two types of withholdings on these winnings:

• Regular gambling withholding at 24% (can be 31.58% for specific noncash payments)
• Back withholding at 24%

Back withholding won’t apply if your winnings are already subject to regular gambling withholding. If taxes are withheld, you won’t have to pay them again, but you will have to report them.

This is what’s crucial to understand about taxes on gambling winnings. Everything needs to be reported, even if the gambling site reports your winnings to the IRS. In other words, you must report all your winnings, always.

All cash winnings, online or offline, must be reported. The same is true for non-cash rewards. If you were to win an iPhone or a laptop, you still need to report it. In that case, you need to claim the fair market value of that item, as noted at the time you won it, and the taxes are based on that amount.

When you report your gambling winnings, you need to report them on your tax return as Other Income. This is done using Schedule 1 (Form 1040).

Form W-2G Explained

Most gambling wins are reported on Form 1040 as other income. However, if you win a larger amount, you’ll likely have to use Form W-2G as well. The law requires gambling institutions to issue the form to players who have won:

• At least $1,200 on a slot machine or bingo game
• At least $1,500 on keno
• At least $5,000 from a poker tournament
• At least $600 and 300 times the wager on other types of gambling

Games exempt from this form are most types of table games, including blackjack, baccarat, roulette, and craps. However, you still have to pay taxes on winnings from these games.

Different Federal Tax Rates on Gambling Winnings

It’s important to understand that your tax rate on gambling winnings is the same as your income tax rate. In other words, it isn’t fixed at 24%. This misconception stems from the fact that gambling institutions sometimes must withhold 24% of your winnings.

Your exact tax rate still depends on your income and the tax bracket you fall into. The rate can be in the 10% to 37% range, depending on your income level and filing status (single, married, etc).

There are seven tax brackets with tax rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The higher your income, the higher your tax bracket and, thus, the tax rate.

The income threshold for the brackets changes every year, so it’s essential to check the latest figures every time you file your taxes.

Remember that the income level includes all of your income, which also includes your gambling winnings, which is precisely why the exact tax rate on gambling winnings varies.

Can I Deduct Gambling Losses?

Yes, you can deduct gambling losses. In general, you need to itemize your deductions, and you’ll get to deduct gambling losses, but only up to the amount offset by the winnings you’ve collected. In other words, if you’re in the red for a specific period, you won’t be able to recuperate all of those losses with the help of deductions.

To illustrate, imagine you win $1,000 but lose $3,000. In this case, you can only itemize deductions up to $1,000, not the full $3,000. You report $1,000 as income on Form 1040 and separately claim $1,000 as itemized deductions. This offsets the income with deductions, resulting in no taxes owed on the $1,000.

To deduct losses, you must keep valid records of your winnings and losses, as these will be necessary to prove the numbers you’re claiming.

Keep a record of your winnings and losses and include receipts, statements, tickets, or any other documentation showing the amounts of both winnings and losses. Online casinos keep a history of your bets, so you can use that to prove your records and consequently deduct losses.

What’s the Situation for Professional Gamblers?

The tax system for a professional gambler differs from that of those who merely play casino games for fun.

However, one thing is still the same — professional gamblers can’t deduct losses exceeding their winnings. This decision was made in 1987 when the U.S. Supreme Court ruled it in the Commissioner vs Groetzinger case.

As for gambling winnings, professional gamblers don’t report them on a Schedule 1 (Form 1040) as other income, like everyone else. They must file Schedule C (Form 1040) because they are considered self-employed individuals.

This is important because a Schedule C allows professional gamblers to deduct other costs, effectively reducing their taxable income. For instance, pro gamblers can deduct their internet costs if they gamble online. They can also deduct travel expenses and meals if they attend gambling events like poker tournaments.

If you’re a professional gambler, you should consult a tax professional to see exactly what you need to report and pay since it’s a bit trickier than for casual gamblers. You can easily overpay if you don’t report your deductions properly.

What’s the Situation for Nonresident Gamblers?

The IRS also requires nonresident aliens to pay taxes on gambling winnings. The government typically taxes this form of income at 30%, but sometimes, you might qualify for an exemption from paying. The IRS has an interactive tax assistant that can help you determine this.

As a nonresident, you need to use Form 1040-NR together with a standard Schedule 1 (Form 1040) to report your gambling winnings. However, it’s also good to read Publication 519, U.S. Tax Guide for Aliens, and Publication 901, U.S. Tax Treaties, to learn more.

Gambling loss deductions aren’t possible for aliens unless they are residents of Canada.

Online Gambling Taxes — State Taxes

In addition to federal taxes, you must also pay taxes to your home state. You need to report your gambling winnings as income and pay taxes at both the federal and state levels.

You pay taxes to the state where you earn the income, not necessarily where you live. These locations often overlap for legal online gambling, but if you owe taxes to both a resident and non-resident state, you avoid double taxation. Your resident state typically provides a credit equal to the amount you paid to the non-resident state.

Each state has its own tax system, which can either follow a progressive model, similar to the federal system, or use a flat rate. Some states do not impose any state income taxes at all.

State-Specific Tax Rates

For online casino gambling, only a handful of states are relevant since this activity is legal in limited locations. Below is a breakdown of the tax rates in these states:

• Connecticut — 2% to 6.99%, based on your tax bracket
• Delaware — 2.2% to 6.6%, based on your tax bracket
• Michigan — Flat 4.25% tax rate
• New Jersey — 1.4% to 10.75%, based on your tax bracket
• Pennsylvania — Flat 3.07% tax rate
• Rhode Island — 3.75% to 5.99%, based on your tax bracket
• West Virginia — 2.36% to 5.12%, based on your tax bracket

In states with progressive tax systems, your tax bracket is determined by your income, akin to the federal system. However, while federal income ranges for tax brackets adjust annually, state tax rates tend to remain stable for several years.

Why Paying Gambling Taxes Matters

As with other types of taxable income, you might end up paying penalties if you don’t pay the taxes you owe. Moreover, if you miss out on paying the penalties, you’ll also be charged with interest.

The IRS will likely find out if you haven’t paid your taxes because regulated gambling institutions typically report copies of your winnings, i.e. the W-2G form, to the federal government. That way, the IRS will likely see that you haven’t paid your taxes.

All in all, paying what you owe in taxes is crucial. We hope this information has helped you better understand what you’re paying, how you’re paying it, and how to report everything. If you need more detail, it’s best to contact a tax professional, as our text is for informational purposes only and might not accurately describe or apply to your case.

FAQs about Online Gambling Taxes