Online gambling like casino games, fantasy sports, and lotteries gives players an opportunity to win money. Every now and again someone might even hit a jackpot and win hundreds of thousands or even millions of dollars.
However, even when you get lucky you likely need to pay a tax on your winnings. This is one of the reasons why no wagering casinos are very popular in countries where winnings are taxed.
If you claim a bonus with wagering requirements, you’ll likely have to allocate funds from your winnings in order to meet these requirements. So, let’s see how your gambling rewards are taxed when you gamble on the internet.
Players Must Report Their Winnings
Typically, citizens need to pay tax on their winnings. However, there are several countries where governments don’t tax the winnings:
- Czech Republic
Moreover, there are lots of countries where operators will automatically deduct the tax portion from your reward. In other words, you don’t need to report anything.
In the US though, you must report everything, even if you won an insignificant amount. Of course, the IRS won’t organize a witch hunt for someone who didn’t report $1000, but you can still get into trouble.
So, it’s just not worth it to withhold this information. Even if you win rewards like a trip to another country, you need to report the value of that reward as a form of income.
Populating W-2G Form
If you win more than $600 and the original wager was at least 300 lower than the reward you will need to fill out the W-2G form. Actually, the reward threshold can vary depending on the gambling activity. So, if you played bingo or slots the reward threshold is $1,200.
If you won $5,000 in a Poker tournament, the original wager doesn’t need to be 300 times lower. Also, you need to submit the form before the month of February of the following year.
In these instances where you need to populate the W-2G form, the taxed amount is 24%. However, this 24% tax only applies to US citizens, if you are a foreigner then your reward will not be taxed. You should also include this withheld amount on your 1040. This way the withheld amount will be subtracted from the total amount you owe for the taxes.
It’s possible to get a deduction on your losses if you itemize each of your bets. However, if you gamble frequently, this is going to be a real pain in the neck. Meaning people rarely do this.
Moreover, it’s often not worth the trouble, as you cannot deduct losses that exceed your winnings. There is a scenario where keeping track of your losses makes sense. For example, if you are registered as a professional gambler. This way your losses are treated as a business expense.
At any rate, it’s really important to keep losses and winnings separate. The IRS only views your winning bets as income and ignores all the previous bets you made.
So, if you gambled $500 and won $600 your income won’t be $100. Only the winning bet that got you $600 is viewed and used as a basis to determine the income.
State And Local Taxes
In the event you are visiting another state and gambling there, your rewards will be taxed by that state. However, you are still bringing your winnings back home so your state will view it as income.
This is why you need to make sure that you document paying the income tax in a different state. This way your state will give you a tax credit, as your winnings won’t be taxed twice.
Hopefully, you have a better understanding of how this process works. It would be ideal if you gamble somewhere where you get to fully enjoy your winnings. Things can get a bit complicated, especially since you need to keep track of what you are doing.