The Role of Tax Professionals in Helping With Slot Machine Winnings

As gambling flourishes across the nation, tax professionals need to be ready for gamblers by identifying which winnings are automatically taxable and helping clients keep accurate gambling records.

Tax Court decisions and IRS guidance confirm that gamblers can use session accounting to calculate their gambling gains and losses (see Shollenberger and LaPlante). This method requires accurate recording of every session as they occur.

Taxable Jackpots

Many gamblers do not keep adequate records to demonstrate winnings and losses from gambling, relying instead on bad advice, gut instinct, or urban legend. Meanwhile, judges in numerous tax court cases have strongly advised gamblers to maintain diaries or keep gambling diaries as part of a plea agreement for tax court cases requiring diaries.

As gambling becomes ever more prevalent, accounting and tax professionals must be prepared to assist clients who report betting income to the IRS. At present, slot machine jackpots of $1,200 require filing a W-2G form; however, according to an advisory council report by the IRS only slot jackpots over $1,200 require filing W-2G tax forms; it has recently been recommended by them that this threshold should be raised in line with inflationary conditions.

Reps. Dina Titus (D-NV) and Guy Reschenthaler (R-PA) also introduced legislation that would enable taxpayers to net their wagering wins and losses on an ongoing session basis rather than bet by bet, which would greatly simplify recordkeeping while decreasing compliance costs for casinos and taxpayers alike. Furthermore, taxpayers would be eligible to deduct expenses associated with gambling activity just like any other business activity.

Taxable Winnings

As gambling operations proliferate online and at land-based casinos, the IRS is seeking ways to enhance compliance and tax collection efforts – one key way being the reporting of winnings over $1,200, which must be reported via W-2G from gambling establishments. Winnings from slot machines, keno and bingo games generally count towards tax liability unless specifically excluded by the IRS.

Tax laws broadly define taxable income, including gambling winnings. But taxpayers have options available to them to reduce their gambling tax liability; one option being itemizing deductions of gambling losses up to the value of winnings.

Taxpayers may deduct expenses associated with their gambling activities, such as travel costs, subscriptions for gambling advice and home office expenses. Furthermore, several tax court cases have determined that gamblers can use session accounting to record any gambling gains or losses at the moment when tokens are redeemed rather than at some later date.

Taxable Payouts

U.S. federal law mandates that individuals report all gambling winnings. If an individual attempts to circumvent these regulations, they will quickly find themselves in hot water with tax authorities; as a result, seeking tax advice from a CPA who understands local gambling-related regulations would likely be in their best interest. Typically casinos must report jackpot payouts of $1200 or greater on form W-2G while tax regulations differ depending on whether someone qualifies as professional gambler.

CPAs can assist their clients by helping to determine whether they qualify as professionals by considering factors like frequency of gambling and quality of records such as bank statements or careful logs. Furthermore, they can use strategies like the session method that allow netting wins and losses to arrive at net income; this also prevents inaccurate 1099-Ks from third-party payment processors that appear as unreported income to the IRS.

Taxable Returns

As more individuals profit from betting, tax professionals must be ready to work with gamblers and their winnings.

Case law and IRS guidance dictate that gamblers determine their gambling gains or losses at the end of each session rather than by bet, since any fluctuating wins and losses do not count toward wealth until it can be definitively calculated by their taxpayer.

CPAs should encourage their clients to keep a gambling log as part of their effort to comply with IRS session accounting rules, recording each session’s date, location, buy-ins and cash-outs as well as supporting documentation to substantiate significant wins and losses. Furthermore, clients should avoid third-party payment processors that issue 1099-Ks to avoid potentially inaccurate reports that trigger IRS letters about unreported winnings that result from them withdrawing gambling money through third party payment processors that issue 1099-Ks that give an impression of unreported winnings which in turn trigger letters from IRS authorities to clients that prevents unreporting wins by mistakenly declaring and reporting through third party payment processors who issue 1099-Ks instead.