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Online Gambling Taxes Guide 2023
In the United States, all gambling winnings are subject to federal income tax, regardless of whether the winnings are from a legal or illegal source. This includes winnings from casino games, lotteries, sports betting, horse racing, and other forms of gambling.
The IRS requires individuals to report all gambling winnings on their tax returns. The amount of taxes owed on gambling winnings will depend on the winnings, the taxpayer's income tax bracket, and any deductions or credits they may be eligible for.
Here are some key things to remember when paying taxes on gambling winnings in the United States.
Federal Taxes on Online Gambling Winnings
All gambling winnings – including those from online gambling, regardless of where – are subject to federal income tax. If you win money from online gambling, you’re legally obligated to report it as income on your tax return.
The IRS requires individuals to report all gambling winnings on their tax return as “Other Income.” The amount of taxes a player owes depends on the value of their winnings, their income tax bracket, and any deductions or credits that the player may be eligible for.
If you win more than $600 from online gambling with a single operator, they’ll likely issue a W-2G form to help report your winnings to the IRS. The IRS will receive a similar form – if they don’t receive the amount they’re owed, they’ll know.
Of course, they’ll know regardless. Even if you don’t receive a W-2G form, you’re still required to report all gambling winnings on your tax return.
State Taxes on Online Gambling Winnings
You may also be required to pay state taxes on your online gambling winnings, depending on your state of residence. Each state has its own tax laws and regulations for reporting and paying taxes on gambling winnings, including those from online gambling.
If you live in a state that imposes a state income tax, you’ll be required to pay state taxes on your online gambling winnings in addition to federal taxes. The amount of state taxes owed will depend on the state’s tax rate and your total taxable income.
The following states have no income tax – residents won’t owe the state any share of their potential gambling winnings:
- – Alaska
- – Florida
- – Nevada
- – South Dakota
- – Texas
- – Washington
- – Wyoming
Additionally, New Hampshire and Tennessee only tax income from dividends, interest, and a handful of other sources. In regard purely to revenue from online gambling, they can be lumped in with the above states.
Illinois, Indiana, Massachusetts, Michigan, and Pennsylvania all have a flat income tax rate – you’ll owe the same percentage of your income to the state regardless of how much income you make. The remaining states all employ a graduated income tax rate, meaning the percentage you owe will depend on your total taxable income.
Several states have yet to legalize online gambling within their borders, but players may still owe state taxes for any revenue they earn from gambling abroad. How this breaks down varies, but players will have to pay taxes to either their state of residence or the state where they earned their winnings – not both, if done properly.
Deducting Gambling Losses on Taxes
While the process isn’t simple, anyone willing to itemize deductions on Schedule A of their tax return can deduct gambling losses from their taxes. Here’s everything you need to know:
- Eligibility – To deduct gambling losses on your tax return, you must first be able to itemize your deductions instead of taking the standard deduction. You’ll need to add up your eligible deductions, including gambling losses, and compare them to the standard deduction to determine which option is preferable.
- Record Keeping – Keeping detailed records of your gambling activities, including date, type of wager, gambling establishment, and value of winnings and losses, is a necessary step to deduct losses. Without proper documentation, it’s unlikely you’ll be able to deduct your gambling losses from your taxes successfully.
- Deduction Limits – You can only deduct gambling losses of equal or lesser value than your gambling winnings. If you won $1,000 gambling in a given year, you won’t be able to deduct more than $1,000 from your taxes regardless of how much you lost.
- Reporting – You must report both gambling winnings and losses on your tax return – each value must be reported separately, not as a net profit. Losses can be reported as an itemized deduction on Schedule A (Form 1040). Winnings can be reported on Form 1040, or on a W-2G form if provided.
IRS Tax Forms for Online Gambling
The IRS uses no shortage of different forms to collect revenue from online gambling. Here’s a quick rundown of the most common ones:
- Form W-2G – If you win more than $600 from a single online gambling operator, they may issue a Form W-2G to report the winnings to the IRS. The form reports the amount of winnings as well as any federal taxes withheld, and is given to both the winner and the IRS.
- Form 1040 – All gambling winnings, including those from online gambling, have to be reported on your Form 1040. You’ll need to report the total value of your gambling winnings for the year regardless of whether you received a Form W-2G.
- Schedule A – If you want to itemize your deductions on your tax return, including gambling losses, you’ll need a Schedule A tax form to append to your Form 1040. This allows bettors to deduct their gambling losses up to the value of their gambling winnings.
- Form 1099 – Players may receive a Form 1099 for earning money via any number of methods. If you win over $600 on a daily fantasy sports platform, for example, you’ll likely receive a Form 1099-MISC to help report that income on your taxes.
Tips for Paying Online Gambling Taxes
Here are some tips to know in advance of paying your online gambling taxes:
- Keep Records – Any attempt to deduct gambling losses from your taxes will have to start with diligently keeping records of your gambling history. Losses can only be deducted up to the value of your winnings, which must be reported separately.
- Know your Tax Obligations – Make sure you know your federal and state tax obligations related to online gambling. Laws on online gambling taxes vary between states, and players who earn winnings outside their state of residence need to know the state to whom they owe taxes.
- Play with Reliable Online Gambling Providers – Online gambling is only legal when done via platforms licensed to operate in a player’s location. Sticking to legal platforms is the only way to ensure that winnings are accurately paid out, let alone that forms to report them with are provided.
- Stay Current on Tax Law Changes – Online gambling, especially sports betting, is a growing business in the United States. Laws regarding online gambling taxes vary between states, and they’re prone to changing as new states open their markets to sports betting or online gambling as a whole.
How Do I Pay Taxes as a Professional Gambler?
While few players in the online gambling world would claim to be professional gamblers, tax laws are notably different for those who designate online gambling as a primary source of income. Here’s a handful of differences in how taxes are handled in such cases:
- Definition – Earning recognition from the IRS as a professional gambler requires a pursuit of gambling full-time, with regularity, and towards the production of income for a livelihood. Even with the established legal terminology, this bar is easier to clear in theory than in practice.
- Deductions – Professional gamblers file their results on Schedule C, net their wins and losses, and can deduct business expenses from their taxes. These would include such things as Internet expenses, or expenses on travel or meals for the purpose of participating in gambling events.
- Taxes – Because professional gambles are regarded as self-employed, they are obligated to pay a range of taxes that recreational gamblers are exempt from. These include Social Security and Medicare taxes – which they pay as both an employer and employee – among others. This may also include estimated taxes, which may need to be paid throughout the year by those with a significant amount of online gambling income.
This isn’t an exhaustive list – for those who meet the threshold to qualify as a professional gambler, it’d be advisable to consult a tax professional to navigate the range of federal and state laws regarding their tax liability.
What Happens if I Don’t Pay Online Gambling Taxes?
Players can look forward to a range of consequences if they neglect to pay taxes on their online gambling income. Platforms operating legally in the United States will report all of your winnings to the IRS – they’ll know if taxes aren’t paid.
For players who simply neglect to pay taxes on reported online gambling income, the IRS will most likely impose penalties and/or interest on the outstanding debt. These can quickly become a much larger tax bill – and one that, eventually, the IRS might garnish your wages or bank account to pay.
If the IRS suspects that you haven’t reported all of your gambling income, they may conduct an audit of your tax return. At best, an audit can still be a tedious and time-consuming process with the potential to result in added taxes, penalties, and/or interest. At worst, an audit can lead to legal action – including, in extreme cases, criminal charges against bettors they believe willfully avoided paying taxes on significant gambling income.