The key tax question about gambling income

The continuing expansion of gambling means that financial advisors and tax professionals are more likely to work with clients who must report their betting income each year to the IRS.

For bettors and advisors who should become familiar with IRS Form W-2G for “certain gambling winnings,” the central tax issue revolves around whether wagers represent a legitimate business or a fun amateur hobby, according to certified public accountant Miklos Ringbauer of Los Angeles-based MiklosCPA. Questions for financial professionals near Las Vegas or other gambling centers are “part of our everyday life,” he noted. However, the recent record growth of the industry is making “hard discussions with clients” about their status more relevant nationwide and providing more opportunities for bettors to go pro, according to Ringbauer.

“For practitioners, it is very important that we educate ourselves or to know when we are unable to support the client properly,” he said. “The taxpayer has to decide if they are starting a new business or they are just enjoying some good quality time, and they have to be able to defend their positions no matter which one they do.”

READ MORE: Shohei Ohtani’s deferred $680M drives home tax and planning lessons for financial advisors

The numbers

Since people have gambled as long as they have engaged in any other type of vice, advisors may have fielded previous questions about betting, as it relates to ESG screens that prevent so-called sin investments or other vehicles that focus specifically on buying into them. 

The rising number of states with legalized sports betting or new casinos is driving more need for tax services involving the burgeoning income. As an industry, U.S. commercial gambling revenue jumped 14% from the prior year to a record $60.4 billion in 2022, according to the American Gaming Association. That includes a 73% bump in sports betting revenue that’s up to $7.2 billion and a 35% spike in online gambling to more than $5 billion. And 84 million Americans — 34% of the adult population — visited a casino in 2022.

Some of those gamblers will be finding out in tax season that they have passed a kind of milestone if they get a Form W-2G denoting that they “scored big” enough for a gaming house to report them to the government and send them a record of their income, according to a guide by Intuit TurboTax. While table games like blackjack, roulette and craps aren’t subject to the requirement, gamblers who rake in at least $600 or 300 times their wager on a horse race, $1,200 in bingo or slot winnings, $1,500 at keno or $5,000 in poker will receive the form.

“This doesn’t mean you don’t have to claim the income and pay taxes on it if your winnings aren’t enough to warrant the tax form,” the blog said. “It just means that the institution won’t send a Form W-2G.”

READ MORE: IRS flip-flops on gift tax question involving grantor trusts

For the professionals

Gamblers and their advisors will use other criteria than the form to decide whether to count their betting as a business, though. The frequency of their in-person or online gambling, the quality of records such as bank statements or careful logs of the activity and the gross amount of the winnings play a role in the determination. 

If the client is a professional, they can deduct any wages, educational materials or other costs as expenses for running their small company, but they “have to abide by the same rules that other business owners have to” in paying “not only income taxes but self-employment taxes as well” and being prepared for any audits, according to Ringbauer. Most professional gamblers classify their income as Schedule C unincorporated self-employed business activity, he noted.

“It is purely about the intent. It is very important that they are following the rules and guidelines in order to maintain that status,” Ringbauer said. “If you are a gambler, you have to make sure that you follow those items just like any other business would have to abide by those laws. They must follow IRS guidelines in order to qualify for taxation purposes.”

Just as in many areas of tax policy, the 2017 Tax Cuts and Jobs Act tweaked the rules around gambling in mixed ways that could expire at the end of 2025. 

Gamblers may itemize a deduction up to the value of their winnings on Schedule A. For all itemizing gamblers, the law temporarily removed the limitation that exemptions for losses be no higher than 2% of their adjusted gross income. On the other hand, another minor provision was “momentous for taxpayers who claim to be engaged in the trade or business of gambling,” said a 2018 article in the Journal of Accountancy. In a reversal of a previous tax court ruling, professional gamblers can no longer carry a net operating loss in their business above the amount of their winnings, authors Wei-Chih Chiang, Yingxu Kuang and Xiaobo Dong noted.

“Congress may extend it further. In the meantime, professional gamblers’ winning streak apparently has come to an end,” they wrote in the article, which was titled, “Tax Reform Law Deals Pro Gamblers a Losing Hand.”

READ MORE: ‘Generalist’ advisors add estate planning value, from trusts to tax efficiency

For the amateurs

The higher standard deduction stemming from that law is prompting many fewer taxpayers to itemize, so amateur gamblers will likely pose fewer complexities in their annual returns. If they choose to claim a deduction for losses up to the level of the additional income from bettings, they still “must keep an accurate diary or similar record of your gambling winnings and losses and be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses,” according to the IRS. 

In filing with the agency each year, gamblers add the amount from any Form W-2G to any other winnings on top of their overall income, Ringbauer noted. Due to the self-employment taxes paid by business owners, amateur gamblers in some cases may give Uncle Sam a lower amount than if they had classified themselves as professionals.

“If you are just a casual gambler and you happen to win $10,000 in Vegas, that would be subject to ordinary income taxes,” Ringbauer said, describing the choice of being amateur or professional as one with trades and benefits on either side.

Regardless, advisors and tax professionals should remember that there is “a lot of misinformation out there,” so they “have to help our clients understand the consequences of being too zealous in their activity,” he noted. For instance, they may need to offer clients a gentle reminder of the rules for additional income besides the wages at their day job.

“You as a taxpayer are required to report your worldwide income,” Ringbauer said. “Failure to do that will have significant penalties. So remember you are signing your tax return under penalty of perjury.”