If you won money at a casino, horse race, raffle drawing, or lottery, you need to pay taxes on that income. Here’s what you’ll owe and what you can do to reduce your tax bill.
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What counts as gambling income?
Gambling income is what you win from lotteries, raffles, horse races, casinos, and other types of gambling. It includes cash and other prizes. For example, if you win a car, you’ll owe taxes on the car’s fair market value.
What tax form do you get for gambling income?
You will receive a Form W-2G if you receive gambling winnings over a certain amount or if you have income taxes withheld on your gambling income.
What amount do you need to win to receive a W2-G?
The minimum amount to receive a W2-G depends on the game.
- Bingo: $1,200 or more not reduced by your wager
- Slot machines: $1,200 or more not reduced by your wager
- Keno: $1,500 or more after subtracting your wager
- Poker tournament: $5,000 or more after subtracting your wager or buy-in
- Other games: $600 or more AND at least 300 times your wager
Regardless of the above amounts, you will receive a W2-G if your winnings are subject to withholding.
When does withholding apply to gambling winnings?
For cash gambling winnings, the payer must withhold 24% if your winnings minus your wager are $5,000 or more and are from one of the following.
- Wagering pools
- Horse races, dog races, and jai alai if the winnings are at least 300 times the amount wagered
- Other transactions if the winnings are at least 300 times the amount wagered
- For bingo, slot machines, keno, and poker tournaments, regular withholding does not apply but backup withholding does (more below).
For noncash gambling, there are two options.
- The winner must pay 24% of the fair market value of the prize to the payer as tax withholding.
- The payer pays the tax withholding at a rate of 31.58%. The additional amount is because the amount the payer covers in taxes is also taxable income to the winner.
When does backup withholding apply to gambling winnings?
Backup withholding applies at a rate of 24% when each of the following three conditions are met.
- The winner doesn’t provide a correct taxpayer idendification number.
- Regular gambling withholding wasn’t withheld.
- The amount is equal to or greater than the minimum amount to receive a W-2G.
What if I didn’t get a W2-G?
Not getting a W2-G does not make your gambling winnings non-taxable. You must report every dollar of your winnings if you are required to file a tax return. You may be required to file a tax return if you have income over the standard deduction or meet certain other requirements.
What do you do if you get a 1099-K for gambling winnings?
If you bet online, you may receive a 1099-K if you receive electronic payments of at least $600. Form 1099-K is an additional tax form the payment processor has to issue. It is separate from a W2-G.
Form 1099-K does not change the tax rules for gambling. You would still follow the above rules. When filing your tax return, you do not necessarily report the amount on your 1099-K. You report your actual winnings and losses.
It is possible that a 1099-K can trigger an IRS audit since the amount reported may be above your taxable winnings. The IRS has no way of knowing this and will only see the higher amount. You may get a CP2000 notice or other IRS notice asking if you underpaid your taxes. When you submit an explanation with your documentation, the IRS will go by your original tax return if you filed correctly.
What’s the tax rate on gambling and lottery winnings?
Gambling and lottery winnings are taxed at your ordinary income tax rate according to your tax bracket. If you will owe more than you had withheld, make an estimated tax payment. Estimated tax payments help make sure you don’t owe too much at tax time. You may also owe a penalty if you don’t pay enough in estimated tax payments.
Lottery winnings and other prizes that pay over several years are taxable in the year you receive them. If you have the option to take a lump sum or installments, the installments could put you in a lower tax bracket than taking it all at once.
What are the penalties for not reporting gambling winnings?
The usual IRS penalties apply if you fail to report gambling winnings.
- If you don’t file your tax return at all, the penalty for failing to fail is 5% of the unpaid tax per month up to 25%.
- If you substantially understate your income on your tax return, the penalty is 20% of the unpaid tax. A substantial understatement is when you understate the tax you owe by more than the greater of $5,000 or 10% of the tax you actually owe.
- The penalty for failing to pay, including on income you didn’t report, is 0.5% per month.
- Interest applies on any unpaid taxes.
- If you intentionally fail to report your gambling winnings, you could face criminal charges for tax evasion.
Can you deduct gambling losses?
You can deduct gambling losses only if you itemize your deductions. You can’t deduct gambling losses if you take the standard deduction.
The maximum deduction is the amount of gambling income you reported on your tax return. Gambling losses can zero out your gambling winnings, but they can’t reduce other income.
What do you need to deduct gambling losses?
To deduct gambling losses, you must keep a record of your winnings and losses. This includes keeping a diary or similar record of your winning and losses. You also need to be able to provide other supporting information such as receipts, tickets, statements, or other records showing the amount of both your winnings and losses.
Bank statements alone are not proof of gambling losses. You would need a diary to show your play and possibly receipts, tickets, and other evidence showing where the money went.
Similarly, your diary alone is not proof of gambling losses. You need the bank statements, receipts, or tickets to show that you actually were spending money.
Keep your records for at least six years in case of an audit.
What is a gambling session and why does it matter for taxes?
Gambling wins and losses go by sessions. Sessions are defined by time, place, and activity.
For example, say you’re playing slot machines. You don’t need to track each individual pull. You track the money you started with and the money you left with. If you start with $100, quickly win $1,000, and lose it all before you leave, you have a $100 loss. If you head to a different casino (new place) or call it a day (new time) after your $1,000 win, you’ve ended your session up $1,000 minus the amount you bet so far.
There is some debate over what counts as changing activities. Most tax professionals say changing games counts as changing activities. Others say if you’re continuously bouncing between games at the same casino, it’s still a single session.
There are a couple of special cases.
- When you’re betting on races, each individual race counts as a session even if you’re continuously placing bets at the same place.
- Events with defined lengths, such as poker tournaments, count as a single session even if they’re over multiple days, have breaks, or use multiple locations. The reason is that you’re buying in at the beginning and getting paid out when the event is over.
Do itemized deductions reduce your Adjusted Gross Income (AGI)?
Itemized losses don’t reduce your AGI. They only reduce your taxable income.
For example, say you make $50,000 per year in wages, won $100,000 gambling, and had $100,000 in deductible gambling losses. Since your gambling winnings and losses offset, you’ll pay taxes based on $50,000. However, your AGI will be $150,000 ($50,000 + $150,000). This may affect your eligibility for things like IRA contributions or other tax deductions and credits.
Can you deduct gambling losses on your state taxes even if you don’t deduct them on your federal taxes?
It varies by state, but you can generally deduct gambling losses at the state level even if you can’t or don’t deduct them on your federal tax return. Some states have different rules for gambling losses than federal tax law.
If you’re not deducting your gambling losses on your federal taxes because it doesn’t help you to itemize your deductions, you may still be able to use itemized deductions on your state taxes.
Can you deduct travel costs and other expenses related to gambling?
Most people can’t deduct travel costs or other expenses related to gambling. For example, if you go to Las Vegas and win big, you can’t deduct the cost of your trip to offset your gambling winnings.
The exception is professional gamblers who gamble as their job. They can generally deduct things like travel costs as business expenses. They may also be able to deduct their full gambling losses on Schedule C instead of using the itemized deduction rules.
How do you handle gambling winnings paid in Bitcoin or other cryptocurrency?
Gambling winnings paid in Bitcoin or other cryptocurrency follow the same rules as above. You’ll use the fair market value of the cryptocurrency you bet or received.
You may also owe other cryptocurrency taxes such as capital gains taxes if the amount of your cryptocurrency increases.
What if the gambling was illegal in my state or under federal law?
If you engaged in a type of gambling that’s considered illegal, you should generally still report that income to the IRS. Remember, Al Capone was arrested and convicted of tax evasion.
The IRS generally can’t report your gambling activities to law enforcement. They just want to get paid.