Case Study
To better understand gambling income and gambling losses, consider a case study in a Las Vegas casino. After 3 days of gambling, you spent money on casino bets on the first 2 days, but you made a profit of $3,000 on the last 3 days. This results in gambling loss and gambling income in 3 days.
Gambling income
All gambling winnings are fully taxable and must be reported on your US tax return. You need to report the fair market value as income not only for cash prizes, but also for winning products such as cars and travel.
Gambling losses
Direct expenses spent on wagering such as slot machines and roulette are deductible as gambling losses. However, the gambling loss must have occurred within the same year as the gambling income. Also, the deductible gambling loss is up to the same amount as the gambling income, and if the loss exceeds the income, the excess is not deductible.
Gambling income documents
If you are a resident of the US under US tax law, you will be issued a gambling income form W-2G by the company that operated the casino.
Things to keep in mind when reporting gambling losses
In order for your gambling losses to be deductible from your gambling income, you must keep accurate diaries and records and provide records such as receipts, tickets or statements showing the amount you have won or lost. For the case study, it is important to have a solid reproduction of the loss record up to day 2.
US states with no income tax
In the US, in addition to federal taxes, you must pay taxes to the state you reside in, but Nevada, Washington, Texas, Florida, Alaska, South Dakota, and Wyoming are states that do not collect income tax.
If you earn income from gambling, you must pay taxes in the state in which the income was generated. However, the state of Nevada, where Las Vegas is located, has no income tax, so gambling income must be taxed federally, but not stately.
Regarding foreign nationals who do not reside in the United States
If foreign nationals who are not residents of the United States, especially those who are not residents of Canada, experience gambling losses in the United States, they cannot deduct those losses for tax purposes.
If these nonresident aliens derive income from gambling unrelated to commercial activities conducted in the United States, that income is subject to a 30% withholding tax. You may also be subject to taxes by the specific state in which the income is generated. At the end of the year, your payer will provide you with Form 1042S, which shows the amount of income tax and withholding tax.
If you are a Japanese national, under the US-Japan Tax Treaty, taxes withheld on gambling winnings may be exempt and refundable by filing a US income tax return (Form 1040NR).
Summary
All gambling winnings are taxable, including winnings of cash and goods. Gambling losses are deductible up to an amount equal to your income, but losses in excess of your income are not. Form W-2G is required to report gambling income, and detailed records are required to deduct losses.
Some states in the United States do not collect income tax, so each state requires different tax treatment.
Additionally, foreign nationals who do not reside in the United States may not be able to deduct gambling losses and their income may be subject to a 30% withholding tax. However, if they file a U.S. income tax return (Form 1040NR), they may receive a refund under the U.S. tax treaty.
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