When do you need to pay taxes from gambling winnings?

I’m writing this week’s post on a flight to Las Vegas, NV which is also my inspiration for my post. The running joke among family and friends has been that if I win big I’ll have to pay taxes on my winnings. Sadly, they’re right (and I know it) so I’m sharing my knowledge on how I plan to reduce my winnings.

What is considered gambling winnings?

Gambling winnings are any monies earned as a result of wagering in a casino or gambling establishment. Illegally earned money from gambling is also taxable but I’m not going to cover that in this article. Winnings can include money earned as well as the fair market value of prizes such as cars, houses, and trips. You know all the prizes people win on game shows? The fair market value is taxable to each winner.

Let me bring in an example. Let’s say you’re rolling the dice at the hottest craps table on the strip and you’re up big, $10k, those earnings are technically taxable. Most casinos traditionally do not complete issue form W-2G for earnings from table games. What’s better yet is that you can walk away from the table with all of your chips and redeem chips as you wish rather than all at once to prevent the casinos from having to report a large transaction. Remember, despite how you win or how much, it’s all subject to tax.

But let’s say instead you win your money from an electronic game such as a slot machine or keno. Well, then the rules are a little different for reporting purposes.

What is form W-2G?

Typically form W-2G is issued to taxpayers that win any amounts as follows:

1. $600 or more in earnings;
2. $1,200 or more in earnings from bingo or slot machines;
3. $1,500 or more in earnings from keno; OR
4. Any gambling winnings subject to federal income tax withholding.

The last one is where gamblers might get tripped up. You see, casinos have the authority to dictate whether they should issue form W-2G if a patron earns an amount that should have federal income taxes withheld. It’s safe to assume that somewhere around $10k (per transaction) is the limit where a casino will issue a W-2G regardless of how you won your money. However, this is only on redeemed amounts. So if you win $10k at a table, go catch some sleep, and come back and lose back $8k hours later, you’re now only up $2k and would potentially receive a W-2G on that amount only (if at all). If instead you cashed in the $10k first and completed the paperwork necessary to receive a W-2G, and then subsequently lost $8k back to the casino, you’d then receive a W-2G for $10k.

Can I deduct my losses?

Great question! If you find yourself losing your shirt on your next trip out to Sin City then you’re out of luck. You can only deduct gambling losses up to the extent of gambling winnings in the same tax year. Gambling losses are also subject to the miscellaneous itemized deductions limit of 2% of AGI so you may not even receive the full benefit of all of your losses depending on your filing situation. So if we refer back to my earlier examples, in the first instance a W-2G would have been issued for $2k at most which is simple enough to cover taxes on. But in the second example the gambler received a W-2G for $10k with $8k in losses to write-off which will undoubtedly give them less than $8k in a tax deduction because of the 2% of AGI rule.

Expense such as airfare, hotel stays, meals, and transportation cannot be considered “losses” for tax deduction purposes. Only professional gamblers would have the luxury of writing off any of their expenses to generate income as a gambler, and even then, receiving such recognition from the IRS would be a feat in itself. Unless you’re a world famous poker player, there probably isn’t much luck for you.

What records should I keep for my deductions?

In order to deduct any losses you will want to be very detailed in your record-keeping. Unless you religiously use a player’s club card to help track your cash in / cash out, and receive a report from the gaming establishment, it can be very challenging for casinos to accurately monitor cash activity for every player. A handwritten notebook that can be supported by bank statement activity and ATM or withdrawal receipts would be extremely useful for tracking your gambled cash in to deduct losses against any earnings you may have. Remember, just because you don’t receive form W-2G doesn’t mean your earnings aren’t taxable. All gambling winnings should be reported when preparing your taxes.

I hope you found this week’s read interesting. I post about every two weeks so make sure you follow me on social media and share with others!