Gambling, in one form or another, is certainly nothing new. For some people gambling is nothing more than an occasional form of entertainment while for others it is a profitable way to make a living. Over the last decade, recreational gambling has increased noticeably, due in large part to the rapid growth of online gambling websites. Legal gambling once required a player to make a trip to a casino; however, in today’s electronic age a player need only sign onto the internet. One thing that has not changed, however, is the tax treatment of gambling winnings. Whether your winnings came from an actual casino or from and online website, gambling winnings are always taxable.
According to the Internal Revenue Code, gambling winnings include, but are not limited to, cash or prizes won from lotteries or raffles, horse or dog races, or casinos. Whether the winnings came from a brick and mortar casino or an online casino is irrelevant to the Internal Revenue Service (IRS). If the winnings were other than cash the fair market value of the prize is also considered income and, therefore, is taxable.
A taxpayer with gambling winnings to report may not file a 1040A or 1040EZ. Instead, all winnings must be reported on line 21 of Form 1040. Sometimes, a payor will provide a winner with a Form W-2G “Certain Gambling Winnings.” Form W-2G is much like a Form 1099-Misc. in that it provides a payee with a record of the amount paid out to the payee during the year. It will also indicate whether or not federal income tax was withheld by the payor. As a general rule, only large winnings are reported on a Form W-2G, making it unreliable as a method of keeping track of gambling winnings.
The good news is that if you itemize deductions you may also deduct gambling losses; however, gambling losses are only deductible up to the amount of gambling winnings. As with other deductions, the IRS requires a taxpayer to be able to provide receipts, tickets, or other tangible documentation of the losses if claimed as a deduction.