Every big jackpot winner dream of holding that oversized check and imagining the possibilities with their newfound fortune. However, there can often be an unwelcome surprise during tax season if proper planning is not done. Winnings from online gambling, while exhilarating at the moment, are still considered taxable income by the IRS and state tax authorities. Knowing what taxes will be owed on casino earnings and how to report and pay them is an essential responsibility for players striking it big at Internet gaming sites.
Tax Implications for Winnings at Online Casinos
What is Considered Gambling Income?
The IRS defines any money you win from gambling as gambling income. This includes winnings from casino games, sports betting, horse racing, lottery games, and other online or in-person wagering forms. The full amount of your winnings for the year must be reported as income.
Reporting Requirements
If you have gambling winnings for the year that meet or exceed certain thresholds, federal tax law requires the casino to issue you a Form W-2G showing the amount you won. The casino files a copy with the IRS, so your winnings are also reported to tax authorities. Even if no taxes were withheld from your payout, you still must claim it as income. State laws have separate reporting requirements you must follow.
Federal Tax Obligations
The IRS taxes gambling winnings are the same rates as regular income based on your federal income tax bracket. This means your winnings raise your total taxable income for the year. In addition to owing federal income tax, you may have to pay a Net Investment Income Tax of 3.8% on winnings that exceed certain high-income thresholds.
State Tax Liabilities
States also tax gambling winnings as income, often applying a flat tax rate regardless of your tax bracket. Some states automatically withhold state taxes when you win; others expect you to make estimated payments or settle up at tax time. A handful of U.S. states do not tax gambling income at all. Be sure you know what is owed for your particular state.
Withholding & Estimated Payments
If taxes are withheld from your payout by the online casino, this helps cover some of the taxes you will owe so you don’t face penalties. However, it likely will not cover all taxes due. You may need to make estimated quarterly tax payments on your winnings to avoid underpayment penalties when you file your return. Professional gamblers must make quarterly estimated payments.
Record-Keeping for Tax Reporting
Keeping accurate records of your gambling winnings and losses makes reporting the income each year much simpler. Online casinos provide annual records of your account activity. Save any Forms W-2G, casino annual statements, and other documentation showing amounts won gambling online. Deducting allowable gambling losses involves strict record-keeping rules as well.
Conclusion
Since online gambling regulations vary widely from state to state, ensure you understand your home state’s laws related to reporting gambling income and paying taxes. Some states/countries don’t allow casino online gambling at all, while others have legalized and regulated sites. Research what’s required to remain fully compliant in the eyes of state and federal tax agencies.