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Casino-session – Thanks to legalized sports gambling, US casinos generated a record amount of gambling revenue in 2018. As is to be expected, questions regarding the taxation of gambling income and losses among individuals are increasing and will almost certainly continue to increase. If a complex person is a professional gambler. The purpose of this article is to help CPAs answer these questions for taxpayers.
Gambling winnings are fully taxable and individuals must report them as income on their tax returns, regardless of the size of the winnings. Gaming revenue includes, but is not limited to, winnings from casino games (eg, slots, blackjack, craps, roulette), lotteries, bingos, and horse and dog racing. Cash prizes, such as cars and trips, are generally included in gross income at the fair market value of such prizes.
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If an individual’s gambling winnings exceed a certain threshold ($600 or 300 times the amount wagered on most types of gambling winnings), the casino will usually issue a W-2G form to the individual reporting the income and amount. Withholding tax. The casino will send the appropriate W-2G form to the IRS.
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Gambling winnings and losses are determined on a per-session basis and regardless of the bet. The IRS defines a gaming session as when a patron places the first bet on a particular game type and ends when the same patron places the last bet on the same game type before the end of the same calendar day.
Non-professional gamblers report winnings as “other income” on line 21 of their tax returns. Gambling losses are excluded only to the extent of gambling winnings and are reported as itemized deductions on Schedule A, which are not subject to the 2% adjusted gross income threshold; Therefore, deductions for gambling losses are not among the various itemized deductions that were suspended by the Tax Cuts and Jobs Act of 2017 (TCJA). However, if the taxpayer fails to itemize, gambling losses cannot offset gambling winnings. Any unused deduction for gambling losses is lost forever (ie losses cannot be carried forward or back).
To prove their gambling winnings and losses, taxpayers must keep an accurate journal or similar record. The diary or record must contain the following information:
It is very rare for a recreational gambler to retain such detailed information. As a result, the IRS usually accepts other evidence of gambling winnings and losses, such as casino statements.
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Non-resident aliens must report their US gambling winnings as income; However, deductions are allowed for non-residents only if they are related to the business or the income is actually related to the business. Accordingly, non-resident recreational gamblers cannot deduct their gambling losses against their gambling winnings.
Determining whether a person is engaged in the business or trade of gambling is based on facts and circumstances. inside
480 U.S.C. 23 (1987), the Supreme Court concluded that “if an individual engages in gambling on a full-time, bona fide and regular basis to generate income for subsistence, and is not merely a hobby, it is a trade or business .” Courts have considered the following factors (without a single factor affecting them) in assessing whether a taxpayer has the requisite profit:
A professional gambler reports gambling income on Schedule C. When calculating business gambling income, an individual may account for all betting activities, but not report total betting losses. In addition, an individual can deduct all ordinary and necessary business expenses, which may include travel and meal expenses, legal and accounting fees, and subscriptions to magazines or gambling services. Unlike the rules for nonresident alien recreational gamblers, nonresident professional gamblers can reduce their gambling losses to win their gambling.
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Before the TCJA, the Tax Court held that a professional gambler could report a business loss due to the excess of net gambling winnings over business expenses, which would result in a net operating loss. The TCJA repealed this preferential treatment for taxable years beginning after 2017 and before 2026. Under the TCJA, all wagering transaction losses in those years include expenses incurred by a person in connection with the conduct of gambling activities. Accordingly, a professional gambler with business expenses in excess of net gambling income would report net income of zero on Schedule C.
Some professional gamblers – especially gamblers – will enter into “stake contracts” with benefactors, whereby the benefactor financially sponsors the professional gambler and in return receives a percentage of the winnings as compensation. Such relationships can raise questions about withholding taxes and gambling reporting requirements, especially if the benefactor is a foreigner.
A payment to a foreign person or entity is subject to a 30% withholding tax if the payment is fixed or determinable annual or periodic income (FDAP) from sources in the United States. Treasury regulations generally define FDAP, which the courts and the IRS interpret to include gambling winnings. An FDAP payer is considered a taxing agent and must file Form 1042-S, Report of Payments to Each Recipient, and Form 1042, which summarizes all of its Forms 1042-S. Both forms must be filed with the tax administration by March 15 of the following year for each calendar year.
An individual’s tax consequences, including gambling income and losses, can vary widely depending on whether the individual engages in gambling recreationally or as a professional player.
Taxation Of Gambling Income
Payments to a foreign person pursuant to a contribution agreement will be treated as gambling winnings and will therefore be withheld if directed to the United States. Payments made under this Agreement for contributions to games played in the United States are subject to a 30% US source withholding tax. Payments made pursuant to a wagering agreement for games played by a US person outside the United States could reasonably be sourced outside the United States and thus exempt from withholding tax; However, there is no clear authority determining whether the place of play or the residence of the payee is the deciding factor here. Accordingly, professional gamblers who make contractual payments to foreign payors, whether the games are inside or outside the United States, must cease such payments.
If the payer of the stake contract is also a professional gambler, he can claim that the payments are actually related to his US trade or business and are therefore exempt from withholding. Alternatively, the recipient may request that the payments not be subject to reduction or withholding under an applicable income tax treaty between the United States and the country of residence. In both cases, payments under the storage contract may be exempt from withholding tax if the recipient provides the appropriate withholding tax certificate.
An individual’s tax consequences, including gambling income and losses, can vary widely depending on whether the individual engages in gambling recreationally or as a professional player. CPAs whose clients have gambling income and losses should understand the specific manner in which those clients participate in such activities and whether they have additional reporting and withholding requirements in certain circumstances.
