Monday March 6, 2023 – The Sixteenth Amendment to the Constitution provides Congress with the “power to lay and collect taxes on incomes, from whatever source derived.” Gambling can be a fun and exciting activity. Remember, the Internal Revenue Service (IRS) recognizes winnings from casinos, lotteries, horse racing, sports betting and other gambling activities as income and subject to taxes. Gambling losses may be deductible on your federal tax return, but only up to the amount of winnings.
To claim any deductions for your gambling losses, though, it’s important to keep contemporaneous records of all your gambling activity throughout the year. Whether it’s a casino or sportsbook ticket stub, an online receipt or bank statement with the transaction listed, having documentation of your losses is essential.
Depending on where you live, additional state taxes may also apply to your gambling winnings. Some states require that you pay taxes on all your gaming revenue (not just the amount over a certain threshold), while others might not have any rules in place at all. In Illinois, where I live, the State taxes all winnings, and does not allow deductions for losses.
I have had at least one client with larges winnings – hundreds of thousands of dollars. But larger losses. The State of Illinois taxed the full amount of winnings. In this case, that meant a very large State Tax bill.
Professional gamblers (not an easy designation) may be subject to additional tax requirements. Professional gamblers are considered self-employed and must pay self-employment taxes on their winnings. They may also be required to pay estimated taxes throughout the year.
So, if you don’t keep good records and you get audited, it’s a gamble. Good Luck.
Attorney Steven A. Leahy discusses IRS taxes on Gambling on Today’s Tax Talk.