The online gambling and betting industry has grown significantly in the past few years. Since casinos are shut down due to the COVID-19 pandemic, people are playing betting games in online casinos. Many people are unaware of the fact that they must report online betting winnings and losses to the IRS while filing tax returns.
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Tips for reporting winning and losses from online betting
1. Report all your winnings and losses while filing tax returns
If you have any winnings or losses from online betting, then you are liable to report while filing tax returns. Cash prizes as well as non-cash prizes are both included as winnings from online betting and must be reported under the head income from other sources. You have to report the details on Schedule A (Form 1040).
Maintain all the records from your online betting, whether winnings or losses. Even non-cash prizes must be reported while filing income tax returns. You must report the fair market price of the prize.
2. Fill the Form W-2G
If you have won a big amount of winnings, you will have to fill the form W-2G along with Form 1040 to report all your winnings, including cash and non-cash winnings. The betting website will send you this form if your winnings are $600 or higher on a horse race, and the payoff must be a minimum of 300 times the betting amount.
The threshold limit extends to $1,200, $1,500 and $5,000 at bingo or slot machine winnings, at keno winnings and on poker tournament winnings, respectively. If your winning is from table games in an online casino, then you don’t have to fill the Form W-2G.
3. Withholding might be needed
If your winnings exceed $5,000 in online betting and the payoff is a minimum of 300 times the betting amount, then the payer or these betting websites will withhold 24% of your total winnings as per the rules by IRS. The withholding rules might be different if they are from slot machines, bingo, poker tournaments etc.
The amount withheld by the betting website must be listed in Form W-2G Box 4. Remember to include the amount withheld while filling the Form 1040 next year as ‘federal income tax withheld’ to get deductions from the total tax of next year.
4. Online betting losses might be deductible
Don’t get upset if you have incurred losses from online betting a few times. There may be a chance all your losses will get deducted. While reporting your winnings and losses, always remember, losses from online betting or gambling are tax-deductible but only to the extent of winnings. Losses from online betting include both the actual cost of wager and related expenses.
To get this deduction, if you are not a professional gambler, you must itemize your losses on Schedule A (Form 1040). Also, if you claim standard deductions, then you cannot itemize your deductions anymore. Since the standard deductions are doubled, it’s advisable to get a standard deduction.
5. Winnings and losses must be recorded separately
Winnings and losses from online betting or gambling must be recorded separately. You cannot directly deduct the winnings from your losses and report the net amount while filing tax returns. You must report the total winnings and losses (if you don’t want to claim standard deductions) separately on Schedule A (Form 1040).
For example – if you made 2 different bets of $200 each and you win $1,000 on a single bet, then the total winnings you have to report will be $1,000 and not the net amount of $800, i.e., after deducting the losses from the winnings. The loss of $200 must be reported separately from the winnings.
6. Maintain detailed records of your online betting
It is very important to maintain a detailed record of your online betting winnings and losses. As per IRS rules, to keep track of your winnings and losses, you should have a record of your betting activities.
The detailed records must include receipts, tickets or statements of your betting activities. These records are required to get deductions from betting losses and must have the following information:
- Date of online betting
- Type of betting activity
- Name and address of the company or website
- The total amount of winnings and losses
7. Your tax returns might be audited
If you have won a huge amount from online betting and getting the W-2G Form along with your winnings, then remember the IRS is getting a copy of the document as well. There is no need to hide the actual amount of your winnings. You can get a deduction from the tax returns for the next year. Hence, you must disclose all your winnings while filing tax returns.
Also, if you claim deductions for losses that you actually incurred can also make you look questionable if you cannot provide a detailed record of your losses. Your tax returns can be audited anytime by the IRS department if your tax return report looks suspicious.
Reporting your winnings and losses from online betting can be overwhelming and tedious. You have to remember a lot of rules and sections before filing the complete tax returns. You must disclose every detail of your income and losses from online betting as well as other gambling activities to the IRS while filing tax returns.
Certain state and local taxes may be applied to your total winnings that you must disclose at Form W-2G. If the IRS finds any fraudulent report on your tax report, you might have to pay a huge amount of fines and penalties for filing a false report. These are some important tips you must remember while filing a tax returns report.