8 Tax Tips for Gambling Winnings and Losses
Whether you're betting on Tom Brady or Patrick Mahomes to win this year's Super Bowl, don't let the IRS beat you at tax time.
An estimated 23.2 million people will plunk down a bet on the Super Bowl this year. And, of course, wagers aren't just made on the outcome of the game between the Kansas City Chiefs and the Tampa Bay Buccaneers—you can bet on the length of the national anthem, whether the coin toss will come up heads or tails, which songs will be played at halftime, the color of the Gatorade dump on the winning coach and so much more. It's a great day for serious and casual gamblers alike!
However, if you're lucky enough to win some cash from a smart bet, don't forget that Uncle Sam wants his cut, too. So, before you run out and spend your new-found fortune, here are 8 things to remember about taxes on gambling winnings and losses.
You Have to Report All Your Winnings
Whether it's $5 or $5,000, from an office pool or from a casino, all gambling winnings must be reported on your tax return as "other income" on Schedule 1 (Form 1040), line 8. If you win a non-cash prize, such as a car or a trip, report its fair market value as income.
And, please, make sure you report all your gambling winnings. If you won $500, report $500. The IRS isn't hunting down small-time winners, but you still don't want to think of yourself as a tax cheat.
You Might Get a Form W-2G
Generally, you'll receive an IRS Form W-2G if your gambling winnings are at least $600 and the payout is at least 300 times the amount of your wager. The thresholds are $1,200 for bingo or slot machine winnings, $1,500 for keno winnings and $5,000 for poker tournament winnings (and the payout doesn't have to be 300 times the wager for these types of winnings). Your reportable winnings will be listed in Box 1 of the W-2G form.
If a W-2G is required, the payer (sports betting parlor, casino, racetrack, etc.) will need to see two forms of identification. One of them must be a photo ID. You'll also have to provide your Social Security number or, if you have one, an individual taxpayer identification number.
In some cases, you'll get the W-2G on the spot. Otherwise, for this year's winnings, the payer must send the form to you by January 31, 2022. In any event, if your bet was with a casino, we're fairly certain you'll get the W-2G. But if your bet was just a friendly wager with a friend … well, don't count on it.
Withholding Might Be Required
Generally, if you win more than $5,000 on a wager and the payout is at least 300 times the amount of your bet, the IRS requires the payer to withhold 24% of your winnings for income taxes. (Special withholding rules apply for winnings from bingo, keno, slot machines and poker tournaments.) The amount withheld will be listed in Box 4 of the W-2G form you'll receive. You'll also have to sign the W-2G stating, under penalty of perjury, that the information listed on the form is correct.
When you file your 1040 next year, include the amount withheld as federal income tax withheld (line 25c on your 2020 tax return). It will be subtracted from the tax you owe. You'll also have to attach the W-2G form to your return.
Again, this is what to expect when you plunk down a bet at a casino or with some other legally operated gaming business … don't expect your buddy to withhold taxes from the money you win from a friendly wager (although, technically, he or she should).
Your Losses Might Be Deductible
Did you have a bad night at the blackjack table or pick the wrong team to win? There's a silver lining if you lose a bet or two—your gambling losses might be deductible. (Gambling losses include the actual cost of wagers plus related expenses, such as travel to and from a casino.)
There are a couple of important catches, though. First, unless you're a professional gambler (more on that in a second), you have to itemize in order to deduct gambling losses (itemized deductions are claimed on Schedule A). Since the 2017 tax reform law basically doubled the standard deduction, most people aren't going to itemize anymore. So if you claim the standard deduction, you're out of luck twice—once for losing your bet and once for not being able to deduct your gambling losses.
Second, you can't deduct gambling losses that are more than the winnings you report on your return. For example, if you won $100 on one bet but lost $300 on a few others, you can only deduct the first $100 of losses. If you were totally down on your luck and had absolutely no gambling winnings for the year, you can't deduct any of your losses.
If you're a professional gambler, you can deduct your losses as business expenses on Schedule C without having to itemize. However, a note of caution: An activity only qualifies as a business if your primary purpose is to make a profit and you're continually and regularly involved in it. Sporadic activities or hobbies don't qualify as a business.
Report Winnings and Losses Separately
Gambling winnings and losses must be reported separately. Say, for example, you made four separate $100 bets on the Super Bowl. If one of those bets came through for a $500 payout, you must report the full $500 as taxable income. You can't reduce your gambling winnings ($500) by your gambling losses ($400) and only report the difference ($100) as income. If you itemize, you can claim a $400 deduction for your losses, but your winnings and losses must be handled separately on your tax return.
Keep Good Records
To help you keep track of how much you've won or lost over the course of a year, the IRS suggests keeping a diary or similar record of your gambling activities. At a minimum, your records should include the dates and types of specific wagers or gambling activities, name and address/location of each casino you visited, names of other people with you at each casino, and the amounts you won or lost.
You should also keep other items as proof of gambling winnings and losses. For example, hold on to all W-2G forms, wagering tickets, canceled checks, credit records, bank withdrawals, and statements of actual winnings or payment slips provided by casinos.
Audit Risks May Be Higher
If you receive a W-2G form along with your gambling winnings, don't forget that the IRS is getting a copy of the form, too. So, the IRS is expecting you to claim those winnings on your tax return. If you don't, the tax man isn't going to be happy about it.
Deducting large gambling losses can also raise red flags at the IRS. Remember, casual gamblers can only claim losses as itemized deductions on Schedule A up to the amount of their winnings. It's a slam dunk for IRS auditors if you claim more losses than winnings.
Be careful if you're deducting losses on Schedule C, too. The IRS is always looking for supposed "business" activities that are really just hobbies.
State and Local Taxes May Apply
If you look carefully at Form W-2G you'll notice that there are boxes for reporting state and local winnings and withholding. That's because you may owe state or local taxes on your gambling winnings, too.
The state where you live generally taxes all your income—including gambling winnings. However, if you travel to another state to plunk down a bet, you might be surprised to learn that the other state wants to tax your winnings, too. And they could withhold the tax from your payout to make sure they get what they're owed. You won't be taxed twice, though. The state where you live should give you a tax credit for the taxes you pay to the other state.
You may or may not be able to deduct gambling losses on your state tax return. Check with your state tax department for the rules where you live.