Ever since I was a little girl I dreamed of competing in the World Cup (the men’s World Cup). It was probably in law school that I realized my dream would never see fruition.[1] There were two major problems with my plan (1) I was a female and (2) I was not good at soccer. However, the love of watching the World Cup never died, and every four years, I meticulously analyze the statistics and attempt to beat out other fans by having the best bracket.
Ever since I was a little girl I dreamed of competing in the World Cup (the men’s World Cup). It was probably in law school that I realized my dream would never see fruition.[1] There were two major problems with my plan (1) I was a female and (2) I was not good at soccer. However, the love of watching the World Cup never died, and every four years, I meticulously analyze the statistics and attempt to beat out other fans by having the best bracket.World Cup 2018
As representatives of 32 countries compete to bring home the gold trophy, the decision in Murphy v National Collegiate Athletic Association could not have come at a better time. The Court now allows states to regulate sports betting, a reversal of gambling rules.[2] Before you walk off with your winnings though, let’s discuss the tax rules for gambling wins.
US Citizen – Non-Professional
Gambling winnings are required to be reported on an individual’s 1040.[3] If you have ever hit it big in Vegas, you probably remember getting a W-2G, which “casually” tells the IRS to look for some gambling income on your 1040. For amateur gamblers, gambling losses are reported as an itemized deduction on Schedule A, Itemized Deductions.[4] Notably, however, the terms “gains” and “losses” have never truly been defined for these purposes.
The Internal Revenue Code provides that “losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.”[5] The term “transactions” in section 165(d) could be interpreted to mean every single play in a game of chance or a series of plays or wagers.[6] So should a taxpayer log a QuickBooks entry for every bet he or she makes? In 2008, recognizing that this method would be “unduly burdensome,” the IRS issued a legal memo allowing a casual gambler to recognize a wagering gain or loss at the time he or she redeems tokens.[7] Those taxpayers who choose this safe harbor, however, could not net their wins and losses across the year.[8]
For example, after losing $2,264 in prior weeks, a couple decides that their time has finally come and once again takes a gamble at a nearby casino. They have $500 as seed money. The couple manages to win a $2,000 hand but ends up losing $400 of the winnings by the time they cash out. The couple would need to report $900 in income.[9] However, the couple may deduct up to $900 (of the original $2,264) in losses so long as they itemize.[10] But with the standard deduction set to decrease the number of people that would itemize for the year 2018,[11] gambling losses might not be deductible at all for many taxpayers.
US Citizen – Professional Gamblers
Professional gamblers report gambling winnings and losses directly on Schedule C, Profit or Loss from Business. Unlike other taxpayers who have to navigate a complicated tax reporting scheme for each game, professional gamblers are able to net their wagering activities. However, they cannot take an overall wagering loss. Furthermore, “ordinary and necessary” business expenses (expenses other than wagers) incurred in connection with the gambling are deductible.[12]
As with many legal answers, the difference between an amateur and a professional gambler lies in the “facts and circumstances”—with the burden resting on the gambler to prove his status.[13] Courts have often looked to the hobby loss rules to decide whether a taxpayer is a professional or amateur gambler.[14] Those rules look to the following factors:
- The manner in which the taxpayer carries on the activity;
- The expertise of the taxpayer or his advisers;
- The time and effort the taxpayer expended in carrying on the activity;
- An expectation that assets used in the activity may appreciate in value;
- The taxpayer’s success in carrying on other similar or dissimilar activities;
- The taxpayer’s history of income or losses with respect to the activity;
- The amount of occasional profits, if any, that are earned;
- The financial status of the taxpayer; and
- Elements of personal pleasure or recreation.
Thus, the biggest hurdle in achieving professional gambler status is to overcome the hobby loss limitations. In other words, my love for picking FIFA brackets and goal differentials will not be enough for me to claim professional gambler deductions.
US Citizen – Gambling Abroad
For those lucky enough to travel to Russia for the 2018 World Cup—I envy you. If you are a Russian citizen, gambling wins are taxed at a rate of 13%.[15] If you are a non-Russian resident, there could be a 30% withholding rate on your winnings.[16] On the bright side, this withholding could qualify for a foreign tax credit.[17] However, if you are a US citizen, your withholding rate could be as low as zero percent[18] under existing tax treaty benefits. Gambling winnings, however, will still need to be reported on your 1040.[19]
If you are bringing your winnings back to the U.S., remember that cash entering into the United States will need to be reported. U.S. Customs Border Protection (CBP) requires that any person who physically transports, mails, ships, or is transporting more than $10,000 in currency and other monetary instruments into the United States from or through a place outside the United States is required to file a FinCEN Form 105, Report of International Transportation of Currency or Monetary Instruments (CMIR).[20]
World Cup 2026
Still distraught that I was unable to attend the World Cup, I vow this will not happen again in 2026 when the US hosts the World Cup. Unless change is made, my winnings (there’s no way I could lose, right?) will be subjected to the tax procedures described above. However, if you are a foreigner visiting the US, you too could be subjected to US taxation.
Foreign Citizen – Gambling in The U.S.
In general, non-professional foreigners are subject to Chapter 3 withholding at 30% on the gross proceeds from winnings won in the United States. The tax withheld and winnings are reportable on Forms 1042 and 1042-S.[21] Similar to the US citizen’s winnings abroad, a tax treaty may be able to reduce the amount of withholding.
However, casual winnings from playing blackjack, baccarat, craps, roulette, or big-6 wheel in the United States are exempt from tax.[22] A Form W-8BEN is not required to obtain the exemption from withholding, but a Form W-8BEN may be required for purposes of Form 1099 reporting and backup withholding. Gambling income that is not subject to Chapter 3 withholding is also not subject to reporting on Form 1042-S.
If you are a foreigner (Nonresident Alien for tax purpose) who has to file a tax return for U.S. source gambling winnings, you must use Form 1040NR.[23] Unlike citizens, nonresident aliens can’t deduct gambling losses[24] unless the NRA is a professional gambler. A NRA whose gambling winnings are connected to a trade or business, however, may deduct gambling losses to the extent of winnings.[25]
The Payor’s Responsibility
As stated, the payor is responsible for withholding on gambling winnings. From a payor’s perspective, it is very important that the gambler’s citizenship be disclosed.[26] For US citizens, the payor must provide a copy of the Form W–2G to the winner by January 31 and to the IRS by February 28 of the year following the year in which the reportable payment is made.[27] The Form W–2G must include, among other things, the name, address, and taxpayer identification number of the payee and a general description of the two forms of identification used to verify this information. Additionally, the casino may withhold 24% of the winnings and remit it to the IRS.[28] A proposed regulation provides that, in addition to government-issued identification, a properly completed Form W–9 signed by the payee is an acceptable form of identification.[29]
On the other hand, if the winner is a foreigner, the payor must generally withhold 30 percent of the winnings and report it on form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, and Form 1042–S, Foreign Person’s U.S. Source Income Subject to Withholding.[30] As mentioned, an exception applies to bingo, keno, and slot machine winnings (but not poker or Magic: The Gathering winnings).[31]
Withholding can be set aside if the gambler is a citizen of a country that has a current tax treaty with the US.[32] To claim benefits under a tax treaty, claimants must provide a Form W-8BEN.[33]
Advice:
With the definition of “transaction” being hotly debated between the taxpayers and the IRS, there’s an amount of uncertainty. It is best practice to maintain accurate records of all your winnings and losses. Records should reflect:
- The date and type of the specific wager or wagering activity;
- The name and address or location of the gambling establishment;
- The names of other persons present at the gambling establishment; and
- The amounts won or lost.[34]
So before picking your favorite team to win it all, make sure you keep track of your bets. As we all know, the best part of winning loads of money is handing a chunk of it over to the IRS!
[1] The women’s world cup was founded in 1991.
[2] Murphy v. NCAA, 138 S. Ct. 1461 (2018).
[3] I.R.C. §61(a).
[4] I.R.C. §§67(b) & I.R.C. 165(d).
[5] I.R.C. §165(d).
[6] C.C.M. 2008-011 (Dec. 12, 2008).
[7] Id.
[8] Shollenberger v. Commissioner, No. 5504-08, 2009 Tax Ct. Memo LEXIS 310 (T.C. 2009).
[9] See 2015 IRB LEXIS 129, Notice 2015-21, 2015-12 I.R.B. 765 (I.R.S. March 3, 2015) & C.C.M. 20153601F (Sep. 4, 2015) (the rules for determining “transactions” vary for bingo, keno, slot machine play, and poker tournament with multiple buy-ins).
[10] See I.R.C. 67(b) & I.R.C. 165(d).
[11] Tax Cuts and Jobs Act, 115 H.R. 1, 2017 H.R. 1, 115 H.R. 1 §1002 (the Job Cuts and Tax Act increases the standard deduction).
[12] Mayo v. Commissioner, 136 T.C. 81, 97 (2011) (the court held the the limitation on deducting gambling losses does not apply to ordinary and necessary business expenses incurred in connection with the trade or business of gambling. Thus, a professional gambler offset his business loss against other income from the year).
[13] Commissioner v. Groetzinger, 480 U.S. 23, 107 S. Ct. 980 (1987).
[14] Treas. Reg. 1.183-2(b)(1).
[16] Id.
[18] Publication 515 (2018), Withholding of Tax on Nonresident Aliens and Foreign Entities (Chapter 4 withholding does not apply to these proceeds).
[19] I.R.C. §61.
[20] 31 U.S.C. § 5613; 31 C.F.R. § 1010.340.
[21] Publication 515 (2018), Withholding of Tax on Nonresident Aliens and Foreign Entities (Chapter 4 withholding does not apply to these proceeds).
[22] Id.
[23] Form 1040NR, “U.S. Nonresident Alien Income Tax Return.”
[24] Publication 515 (2018), Withholding of Tax on Nonresident Aliens and Foreign Entities (Chapter 4 withholding does not apply to these proceeds).
[25] I.R.C. 873(a).
[26] Proposed § 1.6041–10(e) retains the rules in § 7.6041–1(c) (payors may rely on the two types of identification to verify the payee’s identity, at least one form will need to include the payee’s photograph).
[27] Section 7.6041–1(c).
[28] I.R.C. 3402(q) (withholding does not include winners of bingo, keno, and slot machines). See also, “Instructions for Forms W-2G and 5754 (2018).”
[29] Treas. Reg. § 1.6041–10(f).
[30] I.R.C. 1441(a) & I.R.C. 1442(a).
[31] Proposed Treas. Reg. § 1.6041–10.
[32] Publication 515 (2018) (the following foreign countries have current tax treaties with the United States: Austria, Belgium, Bulgaria, Czech Re- public, Denmark, Finland, France, Germany, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, Russia, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Tunisia, Turkey, Ukraine, and the United Kingdom. Gambling income of residents of Malta is taxed at 10%).
[33] Publication 515 (2018).
[34] Rev. Proc. 77-29.
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