Even when the federal Wire Act banned online gambling in the U.S. a 2016 Gallup report revealed about ⅔ of Americans engaged in online gambling activities. After the Supreme Court reinterpreted the Wire Act as one that does not encroach on the rights of state governments to legalize Internet-based gambling in their jurisdiction, several states embraced online gambling as a means for increasing tax revenues. Since the tax months are near, it would be best to know how the IRS imposes and collects taxes on casino winnings.
How are Taxes Collected on Online Casino Winnings?
Withholding Taxes – To ensure tax collection, licensed online casinos and sports betting sites, are required to withhold taxes on sports bets slots, bingo, keno and other lottery game winnings. The tax withheld is based on net winnings (Prize Money minus Total Amount of Bets) of more than $5K. The online casino of the state that allows regulated online gambling will then issue IRS Form W-2G as proof that the online gambler already paid the tax due.
Winnings from Casino Table Games – Winnings from casino table games are not subject to withholding tax; The IRS still requires gamblers to include the winnings and losses in their income tax return, particularly if an individual is widely known as a professional gambler. In such cases, professional online gamblers like poker tournament players, also have to report their gambling losses so they can reduce the taxable winnings. Regardless of whether a person is a professional gambler or just a casual recreational gambler, it’s important to keep all related receipts and withholding tax certifications in case, one gets audited by an IRS examiner,
There is no 2% limit to the amount of gambling losses deductible from total winnings, but the maximum amount that can be deducted is up to the total amount of winning.
Winning Non-Cash Prizes from Online Casino Promos – All winnings whether large or small, cash or non-cash, even if won from an online casino promotional contest during the year, are to be included in a taxpayer’s income tax return. The basis on which the gambling tax rate will apply, is on the fair market value of the non-cash prize at the time it was won. Some examples of non-cash prizes are cara, smartphones or vacation packages.
Winnings from Illegal Gambling Sites
If a person is to play in an illegal online gambling site, can that player avoid payment of taxes on winnings? The reference to illegal here pertains to online gambling casinos or sportsbooks that are not duly licensed by the state or jurisdiction in which an online casino gambler regularly resides. Under the IRS Tax Code, even if winnings were gained from online gambling sites not registered with the state or country gambling regulator, the illegal winnings should still be included in one’s income tax report.
This means that even if one plays in no register casinos, which do not require opening and maintaining a playing account, the IRS still requires reporting and payment of taxes on net winnings