The Odds of Being Taxed on Gambling Winnings
November 2021 | Kiara Sims, Staff Writer/Editor
There are two things that are always certain in life: death and taxes. But in Vegas, certainty becomes a trinity of death, taxes, and gambling. Contrary to the age-old saying, what happens in Vegas does not stay in Vegas, and some visitors are surprised when the Internal Revenue Service (IRS) reaches out after a fun trip. When considering the taxation of gaming, particularly in Nevada, the factors of game type, residency, and risk aptitude all play into the odds of being properly taxed after gambling in Las Vegas.
It is common for auspicious Las Vegas players to receive a ‘hand pay,’ but the meaning and circumstances of hand pays differ depending on jurisdiction and game. In Las Vegas, the term ‘hand pay’ indicates that someone won an amount above the mandated reporting minimum and will receive a W2G in addition to their cash win from staff.[1] A W2G tax form shows income from certain gambling activities as well as any federal income tax that has already been withheld. The W2G threshold changes depending on the method of gaming. In Las Vegas, a mandated hand pay will occur at different points for table gaming, keno, slot machine gaming, and sports betting, and casinos are obligated to withhold federal income tax from any hand pays starting at $5,000.[2]
The IRS is the primary tax authority in the United States, and they utilize their power through Internal Revenue Codes (IRC). Some IRCs have had direct interaction with gaming in past cases, such as IRC sections 162(a) and 165(d). Section 162(a) describes the common deductions allowed, specifically regarding expenses incurred by a practice of trade or business.[3] Section 165(d) specifies that, when reporting losses from wagering for tax purposes, they can only be reported up to the amount of wagering gains.[4] These IRCs have been used together to rule on gambling as a business expense for individuals who gamble as their trade of choice. One prime example is Mayo v. Commissioner of Internal Revenue, which held that taxpayers incurring expenditures in the trade of professional gambling as defined under section 162 were not subject to a limitation of gambling expense deduction as defined in section 165.[5] These cases are typically held in Tax Court, which only deals in cases between the IRS and taxpayers. However, the IRS is not the only federal body that matters in these instances. Legislation has a large impact on federal taxation, which gives the Senate and the House substantial power over tax rates, common practices, and temporary tax breaks in times of national struggle.
Many tax considerations are not federally based in Las Vegas. To the delight of residents, Nevada does not have a state income tax,[6] which lessens complications of tax reporting for gamblers. However, for non-residents, their home state will have its own taxing expectations. For foreign nationals, these taxing expectations often culminate in a casino withholding a higher percentage of their winnings during a hand pay to ensure that taxes are paid and reported in the United States for large wins.[7] There are also local considerations to tax jurisdiction. Particularly in the Silver State, the Nevada Gaming Commission (NGC) also yields power over all gaming venues.[8] For individuals, the Nevada Gaming Control Board (NGCB), controlled by the NGC, does not have a large impact. However, for casinos and businesses operating in gaming, the NGCB is the body that enforces licenses, taxation, fees, penalties, and fines related to gaming.[9]
Regardless of when and how a W2G arrives within the control of the IRS, gamers are legally obligated to report their gambling wins even if it was under the minimum reporting requirement.[10] Taxpayers often net their income by subtracting qualified expenses from their income, which lowers the actual income that a person would have had. Similarly, taxpayers are also able to net their gaming winnings with their losses,[11] meaning that less auspicious players likely have close to $0 in income, if not a net loss for their tax year of gambling. Unfortunately, the ability to report a value of $0 leads to conflicts between the IRS and taxpayers who either assume they do not need to report winnings without a W2G or neglect to claim/net the W2G that was sent to the IRS by the gaming institution. This is the ultimate difference between reported income and taxable income, as when a hand pay is not involved, many taxpayers do not report their taxable income. When a hand pay is involved and a taxpayer properly claims it, many taxpayers claim equal losses without proper backup documentation, leaving room for the IRS to contest the validity of the tax return.
One might think that a casino-provided document detailing wins and losses for the tax year would be sufficient for the IRS, but this has proven a feeble argument in precedent. In Mayer v. Commissioner of Internal Revenue, Mayer, the gambling taxpayer, filed his taxes and reported his gambling net income according to the data provided by Caesars. This is a common and generally accepted practice. The Tax Court, however, determined that a Caesars Entertainment win and loss statement was not sufficient evidence of accumulating gambling losses, resulting in a decision that made Mayer pay taxes on the full winnings with no consideration to his previous losses for netting purposes.[12] Other cases that the IRS has pursued against taxpayers are rooted in a lack of reporting and a lack of backup documentation. In Coleman v. Commissioner of Internal Revenue, the Tax Court surprisingly ruled in favor of Coleman, another gambling taxpayer who provided no tax return at all. The Court used bank statements to determine that Coleman did not have remaining winnings and must have had a net gambling loss within 99% confidence range. He then had to file an amended return displaying the net income process for his gaming.[13] Most taxpayers are not as lucky as Coleman, and it is unlikely that neglecting to file a tax return when the IRS has a W2G will result in the same outcome.
Issues of proper claim and reporting will only grow in the future. With the COVID-19 pandemic forcing gambling taxpayers to stay home, online gaming rose in popularity. Many casinos now have online hubs for slot machines, and online gaming has expanded from video games to sports betting. These money-making methods are fairly unstandardized, and they currently lack consistent reporting and execution guidance. Looking at sports betting, its legalization is happening state by state and varies by specifications of physical, online, and mobile format.[14] Because sports betting does not need to occur in person, it has many viable formats, but those that are remote create additional regulatory difficulty for organizers and legislators. Due to its novelty, many taxpayers are unsure if their virtual gambling gets reported to the IRS, causing additional inconsistency. Whether it be online or not, income made from these gaming activities are subject to current and future tax legislation on gambling. Legislative changes will likely start to mention online and mobile gaming, as lawmakers must consider the new normal that the United States faces.
The Tax Cuts and Jobs Act of 2017 (TCJA) is by far the largest legislative change that has impacted gaming taxation recently. Its effects were particularly bad for professional gamblers, as the TCJA limited deductions for gambling.[15] Without these limitations, gambling losses could have previously offset income that was not from gambling or gaming. Beyond tax reform, gambling laws are often changing. There are constant calls for adjustments in the reporting limitations, and with Nevada making far less in tax income from gaming than other states with large gambling industries,[16] state-based change may not be far. Since these changes will impact how income from gambling is treated by the IRS, it is important for gamblers to monitor which of their activities are reported and maintain a record of their gains and losses. After all, Las Vegas may be Sin City, but most tourists probably do not think that tax evasion will be the crime that they commit while there.
With many taxpayers neglecting to report income that is not from a hand pay and the inability for the IRS to pursue all of them, what are the odds of the average taxpayer being taxed on their gambling winnings? First and foremost, these odds will change based on residency and game type. Secondly, these odds are subject to legislative and cultural changes, both recent and upcoming. Lastly, these odds shift with every new tax code or piece of legislation passed. In a world that is constantly changing, tax law is never stagnant. For the average taxpayer gambling in Las Vegas, it is important to ask questions during a hand pay, because those winnings are reported to the IRS by the casino. If the odds are against the taxpayer, a lack of self-reporting could culminate in legal troubles.
Sources
“Why Did I Receive a W2G?,” Bet MGM, accessed November 22, 2021.
Ibid.
26 U.S. Code § 162
26 U.S. Code § 165
Eric Zilber, John W. McKinley, and Matthew Geiszler, “TCJA Clarifies Wagering Loss Deduction Rules,” The CPA Journal (The CPA Journal, June 11, 2019).
Rocky Mengle and Sandra Block, “9 States with No Income Tax,” Kiplinger (Kiplinger, October 19, 2021).
“Gambling Winnings Tax on Foreign Nationals: US Tax Return and IRS,” Artio Partners, September 18, 2017.
“Gaming Commission,” Nevada Gaming Control Board: Gaming Commission, accessed November 22, 2021.
“Tax & License Division.” Nevada Gaming Control Board: Tax & License Division. Accessed November 22, 2021.
“Topic No. 419 Gambling Income and Losses,” Internal Revenue Service, accessed November 22, 2021.
Ibid.
Reece Morrel, “Why the US Tax Court Hates Casino Win/Loss Statements,” Morrel Law PLLC, June 11, 2018.
CPA James A. Beavers, “Gambler Is Big Winner in Tax Court,” The Tax Adviser (The Tax Adviser, January 1, 2021).
Ryan Butler, “Sports Betting Legalization Tracker: New York Operators Announced Soon,” Action Network (The Action Network, November 3, 2021).
CPA Wei-Chih Chiang, “Tax Reform Law Deals Pro Gamblers a Losing Hand,” Journal of Accountancy (Journal of Accountancy, October 1, 2018).
David McGrath Schwartz, “Nevada's Tax Income from Gaming Well below Other Markets,” Las Vegas Sun, October 7, 2011.