It’s not easy for gamers.
If your game is slots or blackjack or craps, there is the house edge. Poker players have to deal with the rake. Sports bettors are facing a rise against the Vig.
And when the player – whether he or she is a pro or just one of the tens of millions of casual gaming customers – is a little lucky and collects some money, there is the not-so-insignificant problem of taxes. And even there, the deck is stacked against players.
It really always was, but the 2017 tax reform (technically known as the Tax Cut and Jobs Act or TCJA) really underscored the inequality that gamers, especially casual gamers, face.
Here is a problem. Many people realize that gamblers cannot calculate their net gambling losses and do not use those excess losses to offset other types of income. Tax rules have always been like that; Regardless of what gambling losses a player suffers, these losses can be used to offset gambling winnings, but only up to the total amount of money won. Any excessive losses, well, the player just ate these.
Technically, the rule of being able to deduct losses to offset profits is still part of tax law, but in practice most casual gamers will never be able to use that deduction these days. Why? Because those deductions are shown on Appendix A of an individual’s tax return as part of the individual deductions.
But – and here it comes – the new standard deduction for taxpayers as part of the 2017 tax reform is so high that the vast majority of taxpayers no longer list any deductions. Hence, the net gambling losses of the casual gamer are no longer in the picture, as the taxpayer cannot declare both a gambling loss deduction and the standard deduction. The 2020 standard deduction is $ 12,400 for single and separate registrations, $ 24,800 for joint registrations, and $ 18,650 for heads of household.
Report your gambling winnings
OK, that takes care of gambling loss deduction (most taxpayers won’t be able to take it) but the really uncomfortable news is what players have to do in order to report their gambling winnings. These winnings are reported on the front of Form 1040 on line 8. This would be the gross number of profits without taking losses into account. Let that sink in.
Immediately above this is line 8 (logically) line 7, in which taxpayers report capital gains or losses. That’s true. A stock trader can even be a daytrader (which some call a gamble) wheel-and-deal, and those taxpayers can settle their results.
“It is certainly not fair to consider how business income and expenses are treated and how capital gains and losses are treated versus gambling wins and losses,” said Marissa Chien, a Las Vegas-based tax advisor and author Customers include professional players. “It really goes back to our Puritan roots as a country that gambling was viewed as a ‘sin’ – although that view is certainly changing.”
The consequences of requiring taxpayers to report gross profits are significant. This amount is carried over to line 11, Adjusted Gross Income, which can affect a number of wide-ranging tax circumstances, such as: For example, whether someone is qualified for a stimulus test or how much of their social security benefits are taxable.
AGA questions tax reduction and employment law
How players and winnings are treated is not lost to the American Gaming Association. As the 2017 TCJA snaked its way through Congress, AGA, the trading group that represents the gambling industry, sent a letter to Capitol Hill stating that gambling loss deduction was all but gone for many taxpayers.
The AGA’s letter referred to the higher standard deduction:
“With such a higher standard deduction, small and medium-sized gaming machines may not be able to list their deductions, even with their gambling losses, and therefore may not be able to offset gaming winnings reported as income with the full amount of their gaming losses earnings.
“For tax reasons, AGA strongly recommends that players should be allowed to deduct gaming losses from gaming winnings in order to calculate their taxable net gaming income for reporting on adjusted gross income without having to show their deductions. ”
This appeal went nowhere.
And note that the AGA indicated that “small and medium-sized slot machines” would be affected.
Because slot players receive tax papers (a W-2G) every time they win a jackpot of $ 1,200, a tidy sum but certainly not life changing. Meanwhile, $ 500 worth of baccarat players can move stacks of chips back and forth without these discrete events producing similar documentation.
“When you think of someone who is … a modest income person who wins a slot jackpot of $ 1,200 and then loses $ 2,000 a year, but is still responsible for paying the marginal tax on that $ 1,200 because this is the (tax). The form they were given – which they cannot list – is a very potentially regressive tax on someone who actually has no income from it, ”said Chris Cylke, AGA senior vice president of government relations.
Slot jackpot appeal
One area of taxation where the AGA seeks progress is the threshold for generating these W-2Gs on slot jackpots. This limit was set more than 40 years ago and has never been recalibrated taking inflation into account. Using common inflation adjustment formulas, the jackpot of $ 1,200 during the Jimmy Carter administration when the limit was set would be more than $ 5,000 today.
The AGA appeals to the Treasury Department to raise the limit on these W-2Gs for slot machines, but can take action from Congress to achieve this.
“I wouldn’t say anything is imminent, but I would say we feel we have some momentum here and we will continue to focus on that,” said Cylke. “While there are many different areas of disagreement in the gaming industry, I think we’ve talked to all the operators in the industry who say, ‘This is ridiculous, it creates a lot of overheads. ‘And during COVID, the less unnecessary interaction you need to have with a customer, the better. And so there are just too many of those $ 1,200 jackpots (today) which was never intended. “
The advent of online gaming, whether it be sports betting or online casino games, is obviously creating tax obligations for gamblers who may be surprised to receive notifications from gambling providers of their winnings. It has always been a good idea for gamblers to keep an eye on their gambling sessions and keeping logs of online betting is equally important, especially since mobile betting can happen at a brisk pace.
Professional players hit hard
While casual gamers and slot players that make up the gaming industry’s customer base have been affected by not being able to settle their gaming results, professional gamblers also got a rude jolt with the 2017 tax reform. First of all, there is quite a test for a taxpayer to qualify as someone who gamble as a professional for a living as opposed to someone who gambled for recreation. In this case, the gambling activity is a hobby.
Professional players, say a poker player who is out in the country most of the time playing tournaments and cash games, use Schedule C (Profit or Loss from Business) like any other businessman. There professional poker players would list travel expenses, meals, accommodation and the like.
And, as other entrepreneurs would do, the loss of business could be used to offset other income if those expenses exceeded income. That was up to the 2017 tax reform. Now professional gamers can only use these expenses to offset their winnings. The restriction will expire in 2025, and it remains to be seen whether Congress extends it.
Don’t forget about state taxes
After all, players can even get a raw deal from their home states. A handful of states – up to eleven, according to some that keep track of them – don’t allow any gambling loss deductions at all, so every penny that players win is treated as taxable income.
Some of these non-deductible states for gambling losses – Michigan is one – recently passed laws legalizing sports betting and online gambling.
One point that is often raised when legislators consider such gambling legislation is that there is an incentive to attract players who have taken their business to offshore bookmakers that it is better to mess with legal, regulated gambling providers where bettors can be sure that they are collecting their winnings and where there is recourse in the event of a dispute.
While all of this is true, it seems that when drafting gambling law, lawmakers might also consider giving a fair shake to the customers they are trying to get a fair shake in at tax time.
Remember, federal taxes are due by May 17th after the date has been extended by the IRS from its normal April 15th deadline.