IRS Issues Reminder Regarding Gambling-related Income

With the proliferation of sports betting and online casino gambling in America, lots of gambling money is changing hands. Of course, the sportsbooks and casinos are winning, but there are still billions of dollars moving back and forth.

It's because of the amount of money that is trading hands that the Internal Revenue Service (IRS) has decided to step in with a little reminder. The reminder is focused on informing the American population that all forms of gambling winnings have to be reported on federal tax returns. Additionally, that same requirement exists in some states.

To benefit the nation's gambling enthusiasts, a deeper look into this issue seems in order.

The IRS' Definition of Gambling Winnings

It's of vital importance that anyone who gambles in any form understands what the IRS counts as gambling winnings. To them, gambling winnings refer to the gross winnings created by the gambling process.

Example #1: If someone places a sports wager and wins, the gross winnings would be the profit that exceeds the amount of the wager.

Example #2: If a retail or online slot player hits a jackpot of any size, the winnings from that jackpot would technically be counted as gross winnings.

Example #3: If an online blackjack player wins a hand of blackjack, the winnings from that hand would technically be counted as gross winnings.

In all fairness, the IRS is not trying to create reporting nightmares. They don't expect sports bettors and casino players to keep track of every tiny win for reporting purposes. With that said, big wins should be counted because they have a high profile.

IRS Reporting Requirements

All taxpayers are required to file annual tax returns with a few exception. If there were any significant gross gambling winnings during the year, those must be reported on the tax return.

The IRS has reporting requirements for both the gambling facilitators (retail and online race tracks, casinos, sportsbooks, lotteries) and their customers or the gamblers. By law, gambling facilitators are required to report any gross winnings that came at odds of 300-1 or higher. They are also required to report any payouts that exceed $5,000. Those winnings are to be reported to the IRS via IRS form W-2G.

While gamblers are required to report all gross gambling winnings regardless of the odds, most people only report that which has been reported by one or more gambling facilitators. As long as this is done, it's very unlikely that the IRS will seek further information unless a particular gambler has a lot of banking activity associated with gambling facilitators.

Off-setting Gross Winnings

The IRS does permit gross gambling winnings to be offset by gross losses. If a sports bettor wins $500 today and loses $300 tomorrow, they can use the $300 to offset the $500, creating taxes on $200 only. Note: Offsets cannot exceed winnings. In other words, gamblers cannot create a tax credit by claiming gambling losses beyond winnings.

Warning: It's not a good idea to play games with the IRS. If you have any reportable gambling winnings, report them. You can then offset those winnings with losses as long as you have support for your deduction. Note: The deduction will only be permitted if you itemize deductions.