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Taxpayers and Tax Pros Need to Heed IRS Gambling Income Reporting Requirements

S.J. Steinhardt
Published Date:
Jan 30, 2024

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As gambling becomes more popular, accounting and tax professionals need to be prepared to work with clients who must report their betting income to the IRS, Accounting Today reported.

The relevant tax form for bettors or advisers is IRS Form W-2G for the reporting of gambling winnings and any federal income tax withheld on those winnings. The central tax issue concerns whether wagers represent a legitimate business or a fun amateur hobby, said Miklos Ringbauer of Los Angeles-based MiklosCPA.

"For practitioners, it is very important that we educate ourselves or ... know when we are unable to support the client properly," he said. "The taxpayer has to decide if they are starting a new business or they are just enjoying some good quality time, and they have to be able to defend their positions no matter which one they do."

The rising number of states with legalized sports betting or new casinos necessitated the need for more tax services concerning this income. U.S. commercial gambling revenue rose by 14 percent from the prior year to a record $60.4 billion in 2022, the American Gaming Association reported.

“Gambling winnings are fully taxable, and you must report the income on your tax return,” the IRS advises in a tax topic. “Gambling income includes but isn't limited to winnings from lotteries, raffles, horse races, and casinos. It includes cash winnings and the fair market value of prizes, such as cars and trips.”

The tax code requires institutions that offer gambling to issue Forms W-2G if a gambler wins $600 or more on a horse race (or if the win pays at least 300 times the wager amount); if a gambler wins $1,200 or more at bingo or on a slot machine; and if a gambler wins $1,500 or more at keno; or $5,000 or more in a poker tournament, according to an Intuit tax guide. Table games in a casino, such as blackjack, roulette, baccarat, or craps are exempt from the W-2G rule.

"This doesn't mean you don't have to claim the income and pay taxes on it if your winnings aren't enough to warrant the tax form," another Inuit tax guide said. "It just means that the institution won't send a Form W-2G."

Gamblers and their advisers need to determine if betting can be considered a business, using such criteria as frequency of their in-person or online gambling, the quality of records such as bank statements or careful logs of the activity, and the gross amount of the winnings, according to Accounting Today.

If clients ares professionals, they can deduct any wages, educational materials or other costs as expenses for running their small company, but they must “abide by the same rules that other business owners have to" in paying "not only income taxes but self-employment taxes as well" and being prepared for any audits, according to Ringbauer.

Under the Tax Cuts and Jobs Act (TCJA) of 2017, gamblers may itemize a deduction up to the value of their winnings on Schedule A. For all itemizing gamblers, the law temporarily removed the limitation that exemptions for losses be no higher than 2 percent of their adjusted gross income. Professional gamblers can no longer carry a net operating loss in their business above the amount of their winnings, said a 2018 article in the Journal of Accountancy.

Fewer taxpayers are itemizing due to the higher standard deduction in the TCJA, but amateur bettors "must keep an accurate diary or similar record of your gambling winnings and losses and be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses," according to the IRS

"If you are just a casual gambler and you happen to win $10,000 in Vegas, that would be subject to ordinary income taxes," Ringbauer said, describing the choice of being amateur or professional as one with disadvantages and benefits on either side. Still, he said, "[y]ou as a taxpayer are required to report your worldwide income. Failure to do that will have significant penalties. So remember you are signing your tax return under penalty of perjury."

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