The basics of the gambling tax laws SIDEBAR

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THE TAXMAN
COMETH
Frequently asked questions
about gambling and income taxes

By Yolanda-Smulik Roche, E.A. and Roger C. Roche, E.A.

It really doesn't matter where you won the money. If you received a copy of form W2-G or 1099, so did the IRS. Tax liability is based on total worldwide income, including income from sources outside the United States (which includes Indian reservations), unless specifically exempt by treaty or law. In fact, you'll even find income from illegal activities mentioned and listed in the Internal Revenue Code as being taxable.
     The W2-G is the form the IRS issues to winners over a certain threshold: $600 or more in winnings from horse racing, dog racing, jai alai, state lotteries and other wagering transactions in which the winnings are at least the amount of the wager; $1,200 for bingo and slot machines; and $1,500 for keno (less the amount of the ticket purchased for the winning game). Carry a photo ID when playing these games as the casino will need to see it to complete the W2-G.

Can I deduct losses on one form of gambling from another? I had an overall loss playing poker but hit a slot progressive last year.
÷C.M. Biloxi, MS

Yes. It doesn't matter what type of wager it is. That's why it's always a good idea to always keep records÷lottery tickets, sportsbook wagers and keno bets are all forms of gambling.

My wife is not as successful playing the ponies as I am, and I would like to take advantage of her losses by applying them to my wins for tax purposes. Is this permissible?
÷Bill H. New York City

Yes, married couples can combine their wins and losses for reporting purposes (regardless of the type of gambling), as long as they file a joint return.

I have been trying to find out about cashback and bonus coupons. As a player who visits Atlantic City frequently, the cashback has started to add up. I called the IRS and couldn't get an answer from them. It seems to me that since cashback and bonus coupons are directly related to the amount you bet, it should be included either as "winnings" or be used to offset losses. I can make a case in my own mind for either, but what does the IRS actually say? Should it be reported at all? And if so, how?
÷Linda C. New York City

The IRS doesn't have the final word on this one. Initially, the IRS took the position that the value of "comps" received were not gaming income, and therefore taxpayers were not entitled to write off losses against the value of these comps. However, the IRS required these comps to be reported as income, and was subsequently taken to Tax Court by a taxpayer.
      The taxpayer in this case played primarily at one casino over a period of three years, during which time he received free automobiles, vacations, jewelry and other complimentary goods and services from the casino. He received Forms 1099-MISC (Miscellaneous Income) from the casino, reflecting the value of these comps as prizes and awards. The taxpayer included theses amounts on his tax returns and also an equal amount as 'gambling losses' on a Schedule A.
      The fact that the taxpayer had gambling losses vastly greater than the amount claimed was not disputed by the IRS, but the IRS disallowed his deduction for gambling losses based upon the argument that the comps were not gambling winnings but an "award," thereby preventing the taxpayer from deducting any of his gambling losses. The taxpayer challenged the IRS in Tax Court in 1996 and prevailed when the court ruled that the value of the complimentary goods and services received as an inducement to gamble could be rightfully represented as gains from gambling, and offset by gambling losses.
      We believe that coupons and cashback fall under the category of comps, and should be treated as gaming winnings. Although it would be more favorable to reduce losses rather than add to winnings, at least we can treat them as gaming income and get to write off losses against them.
      By the way, we checked the status of this case when we wrote this article, and the IRS has not appealed the ruling to date, so it will remain the law unless they appeal and the ruling is overturned.

I won a new car in Las Vegas. The casino offered me $33,000 or the car, and I chose the car. They then gave me a tax form showing my winnings as $33,000. Do I have to show the entire $33,000 as income? I read an article that said I might be able to claim a lesser amount, based on what I could have sold the car for immediately after winning. I talked to a local dealer and he said he would have sold me the same car for about $29,500, and that he would buy my car from me for an amount slightly less than that.
÷R.L.  Topeka, KS

The IRS Regulation Section 1.74-1 states that non-money winnings shall be taxed at fair market value. Since the casino offered you either $33,000 or the car, and since you choose the car, it seems that establishes the "fair market value." The IRS has recognized a court decision that defines fair market value as "being the price which property will bring when offered for sale by a willing buyer to a willing seller, neither being obligated to buy or sell." This definition does not seem to fit the circumstances. It has been our experience that the IRS only accepts the "fair market value" decided by the establishment offering the prize.

Could you please tell me when casinos are required to withhold gambling [from] winnings?
÷E.R  Cincinnati, Ohio

I am going to assume that you are a U.S. citizen, and you did not win the money in a poker tournament. IRS Regulation 31.3402(q)-1 "Extension of withhold to certain gambling winnings," states the following: "Winnings subject to withholding means any payment from:
(1) A wager placed in a State-conducted lottery (defined in paragraph (c)(2) of this section) but only if the proceeds from the wager exceed $5,000;
(2) A wager placed in a sweepstakes, wagering pool, or lottery other than a State-conducted lottery but only if the proceeds from the wager exceed $1,000; or
Any other wagering transaction (as defined in paragraph (c)(3) of this section) but only if the proceeds from the wager exceed $1,000 and are at least 300 times as large as the amount of the wager."
      Blackjack, baccarat, craps, roulette and the big six wheel are exempt from withholding and reporting of winnings.

I have friends who enjoy playing video poker. They also believe in following all tax laws÷they report gambling winnings from W2-Gs, as well as gambling winnings not recorded on W2-Gs. They play together, usually at machines next to each other. When one of them gets lucky enough to hit a royal flush, he usually gives a gift to the other one because it appears to be illegal to split the payoff. The W2-G states: "I declare that no other person is entitled to any part of these payments." It appears that if they played as partners, they would be breaking the law by splitting the money from a royal flush.
÷Anonymous from the Internet

You're right about what you are attesting to when you sign a W2-G, which is that you are the sole recipient of the winnings. However, splitting winnings is not breaking the law. The IRS conveniently provides a form (Form 5754), "Statement by Person(s) Receiving Gambling Winnings," which allows the group wagers to each receive a W2-G for their share. The winner and those who are getting a share provide the necessary information needed to fill out multiple W2-Gs, including the amount each gets.

I'm a few years away from retiring and I've decided to supplement my income by playing poker competitively. The problem is, I have no profits to write off my losses against. Can I carry these losses/expenses into next year as business people do?
÷C.O. Phoenix, Arizona

No. Unfortunately, professional gamblers do not seem to have equal protection under the law. First, Congress has limited the deduction for gambling losses to the amount of winnings in Section 165(d) of the Internal Revenue Code. Also in the Internal Revenue Code, Congress authorized the Treasury Secretary or their delegate to prescribe rules and regulations necessary to administer the Code. With that authority, the IRS imposed a further limitation in its Regulation 1.165-10, which states that losses can only be applied to gains that occurred in the same year as the losses. These two pieces of tax law effectively prohibit the carry forward or back of the excess of losses in any one year over that year's winnings.

I won some jackpots at a casino on Lake Michigan this year. We have a house in Indiana, but over the years we have claimed California as our residence. Will Indiana expect to collect taxes on my winnings because the boat is in Indiana? I'm a bit puzzled on this.
÷Anonymous from the Internet

Most states tax income earned in their state, regardless of residence, and most states offer a credit to their residents for taxes paid to other states. This is true in your case. A copy of your W2-G is sent to the state in which the money was won, so they will be expecting you to file a non-resident Indiana return recognizing the income reported, if you meet their minimum requirement for filing. Most states allow the deduction of gaming losses. If you end up paying Indiana tax, that amount can be credited to the amount of tax on your California return.

I'm a Canadian living in Toronto and like to make occasional trips to casinos in the U.S. Recently, I won $12,856 at keno, and the casino withheld 30 percent of my winnings for US income tax. They didn't allow for the fact I was down $300 on the day and had the tickets. A local fan said that he thought the money was "recoverable" for Canadians once they return to Canada. Is this true? Can you give me any direction in how to proceed?
÷Anonymous from the Internet

If this was in 1998 or later, you are in luck. As a result of a recent change in the tax treaty between the U.S. and Canada, Canadian citizens who won enough to have the withholding of tax on their winnings, may file a U.S. Non Resident Tax Return on which they can deduct U.S. gaming losses from their reported U.S. winnings and potentially get a refund for the full amount withheld (if you have as much or more in losses than winnings). If your U.S. loses are less than your winnings, you will get a partial refund.

Yolanda-Smulik Roche, E.A. and Roger C. Roche, E.A. have a firm of Enrolled Agents which specializes in taxation issues faced by the gambler. If you have a question regarding tax laws and regulations as they apply to gaming, please mail your question to: R.B.S., PO Box 60908, Sunnyvale, CA 94088-0908, or e-mail it to questions@rbstaxes.com. We will keep your identity confidential. If you would like to utilize our professional services or order our book, The Tax Guide for Gamblers, please call (800) TAX-7271 (We accept all major credit cards). You can also visit our website at www.rbstaxes.com.

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