The taxation of gambling winnings is widely misunderstood (or at least widely not followed). Gambling gains are included in gross income, reported on “other income” on form 1040. Losses from gambling are allowed to the extent of gambling gains, but only as an itemized deduction. The amount spent to generate any win reduces the win. For example, a single one dollar bet that wins twenty dollars results in $19 of income reported on the front of form 1040. If the gambler has up to nineteen $1 dollar bets that were losers, the $19 of lost bets can offset the income, but this assumes that the taxpayer itemizes deductions. Additionally, the myriad of tax limitations that are based on adjusted gross income are increased by the gambling winnings reported as other income, but not offset by the Schedule A deduction.
Realizing the lax (at best) reporting of gaming winnings, the IRS proposed new regulations that are rattling the casino industry. IRS Notice 2015-21 provides for mandatory electronic player tracking for tax reporting using player loyalty cards and considers lowering the winnings threshold from $1,200 to $600.
The American Gaming Association (“AGA”) is the national trade association which represents licensed Tribal and commercial casino operators and gaming suppliers. Not surprisingly, the AGA has objected to these new regulations, suggesting that these changes will dampen player activity overall. This related article describes the AGA’s specific objections, including a more detailed discussion of why the internal controls are insufficient for the purpose the IRS now wishes to rely upon them.