Tax Implications of Online Blackjack
One question that many individuals do not consider with respect to online Blackjack, at least in the United States, or even online gambling in general, is what are the tax implications of gambling activities? For the purposes of this page, we will compare the implications of online Blackjack to those of playing Blackjack in Brick & Mortar Casinos. In order to accomplish this, we will take a look at the following tax aspects of gambling activities:
- Part 1-Mandatory Reporting (By Casinos)
- Part 2-Mandatory Reporting (By Players)
- Part 3-Keeping/Maintaining a Gambling Log
Part 1: Mandatory Reporting (By Casinos)
With respect to Brick & Mortar (aka Land-Based) casinos, there are a number of instances in which the casino is required to report a player’s winnings to the IRS for tax purposes.
There are a few different types of winnings that could apply, in one way or another, to Blackjack played in a Brick & Mortar Casino that would result in the issuance of a W-2G form from the casino to the player. The easiest way that a player could end up with a W-2G form is by playing Electronic Blackjack, as it is treated as a slot machine, where slot machine winnings equal to or in excess of $1,200 (regardless of the amount wagered) will result in the issuance of a W-2G.
In other words, if a player were to win any hand of Electronic Blackjack at a base bet of $600, or more, or were to bet less and still win an amount in excess of $1,200, (the amount bet does not offset from the $1,200) then a W-2G could be issued. Some people might ask: Why would a player ever play an Electronic Blackjack game such that winnings of this nature are possible?
First of all, in my experience, most casinos do not have an electronic Blackjack game of any kind that would allow for a sufficient enough base bet to result in winnings of $1,200, or more. However, if a casino did have such a machine, then it could make sense to play it if the casino were running a jackpot matching promotion, or some other similar promotion incumbent upon hitting a jackpot. It would be a relatively low variance way to hit a ton of jackpots quickly, of course, the casino would likely disallow the game in a real hurry! Other than that, I would be inclined to stay away from such games as they would result in a bunch of needless W-2G forms.
Furthermore, poker tournament winnings in excess of $5,000 (after accounting for the buy-in) can result in the issuance of a W-2G, and Blackjack Tournaments, while not specifically mentioned in the code, function much the same way.
Another theoretical way that a W-2G could be issued is for Table Game winnings that meet the following two criteria:
A.) They are $600, or more, dollars after the amount of the wager has been offset from the total win.
AND
B.) The result of the pay is at least 300x the amount originally wagered.
There are innumerable side bets at various table games that could result in a win of this nature, (the Fire Bet at Craps is just one example) but I cannot think of any payouts in excess of 300x the amount bet at Blackjack right off of the top of my head. However, if you ever see one, and want to avoid a W-2G form, then you would want to stay away from such a bet. Side bets are usually sucker bets, anyway, except for those that can be beaten via a card-counting system.
It is also important to understand the difference between a CTR (Currency Transaction Report) and a W-2G form. CTR’s are issued in the event that any cash transaction in excess of $10,000 takes place, and that is true when a player cashes out in excess of $10,000 in winnings at once. For this reason, a CTR can be issued regardless of whether or not the player even wins, and it is also not in any way based on winnings from an individual hand, or result.
CTR’s also differ in the sense that they are not casino-exclusive. Whereas W-2G forms are exclusive to gambling activities, CTR’s can and should be issued by any institution, retailer or business in which a customer (or the business itself) executes a transaction involving $10,000, or more, in cash. The reason for the existence of CTR’s is to avoid money laundering, so that the Federal Government can more accurately track where cash is coming from, the source, and what it is being used for.
There are also not necessarily any tax implications with respect to CTR’s because CTR’s are not in any way related to actual income. For example, a player could buy in for $20,000, which will result in a CTR if the player uses cash, lose $10,000, and cash out for $10,000, which will involve another CTR. Clearly, the player did not win anything, but CTR’s are not in any way related to income in a sense of taxation.
CTR’s also cannot be used to offset any gambling winnings that may have generated a W-2G, and again, the reason is because the issuance of a CTR does not necessarily mean that the player has won. Theoretically, a player could buy-in for $20,000, disseminate $10,000 amongst his friends to cash out, and then cash out $10,000 himself (generating another CTR) and claim a $10,000 loss to offset W2-G winnings, easily, if such a thing were allowed.
In any case, there are a few circumstances in which a casino might issue a W-2G as a result of Blackjack play, and they theoretically can any time they want, (the reporting requirements cited above are mandatory reporting requirements, W-2G’s could theoretically be issued for lesser amounts) but when it comes to playing the base game of Blackjack at a live table, W-2G’s are not something that one can expect to happen.
While Electronic Blackjack could be an exception, though the maximum bets on Electronic Blackjack are usually designed to prevent W-2G’s from happening, and tournaments as well as side bets could also be an exception, the base game of Blackjack will not result in the issuance of a W-2G. However, that does not mean that the player is not theoretically required to report anything:
Part 2: Mandatory Reporting-By Players
The most common misconception as relates to the issuance of W-2G forms to players is that players are not required to pay taxes on their gambling winnings UNLESS the player in question is issued a W-2G. While this often ends up being the case from both a pragmatic and actual standpoint, the fact of the matter is that player are required to report ALL gambling winnings to the IRS, whether or not any W-2G’s have been issued. If W-2G’s have been issued to the player, but the player has annualized gambling winnings in excess of the amounts of the W-2G’s, then the player is required to report those winnings, as well.
While we would certainly not advise what effectively amounts to tax evasion, as a practical matter, we will admit that most players (other than professionals) do not file in the full amount of their gambling winnings and generally only report when they have been issued W-2G’s. Aside from the obvious fact that most players would prefer not to pay taxes on such winnings, there is also the fact that (absent a W-2G) the IRS really has limited means (or none at all) to know that the player in question has even been gambling, whether or not the player won for the year, and if the player did, how much.
An important thing for a player who is issued a W-2G to understand is the fact that gambling losses are permitted to offset a player’s gambling winnings, and that is true even if the player was not issued a W-2G but is self-reporting. However, for recreational gamblers, gambling winnings can only be reduced by losses to the extent of the gambling winnings in question.
For example, a player could be issued a W-2G for $5,000, but may have incurred $10,000 in overall losses for the year. By keeping proper records, (which players should be encouraged to do, as casino Win/Loss statements are often actually incorrect) the player will be able to determine whether or not he or she has actually incurred a loss for the year in excess of winnings.
Players might wonder: How is it fair that gambling winnings should be taxed as income, but gambling losses in excess of winnings cannot be offset, and losses can only be offset to the extent of any winnings?
The simple answer is that it is not fair, and for recreational players (in my opinion) gambling winnings should not be considered a source of income at all. Alternatively, gambling losses could be allowed (even in excess of winnings) to offset a player’s income, but then that could lead to all kinds of fraud as individuals would be able to significantly reduce their tax obligations by claiming gambling losses that simply do not exist.
Furthermore, even if we are to keep the current system in place, we would argue that the thresholds for mandatory reporting should be increased because, at the time that the current thresholds in place went into effect, that amount of money was simply worth a lot more.
For example, using the $1,200 standard of slot machines and this handy inflation calculator:
http://data.bls.gov/cgi-bin/cpicalc.pl
We see that $1,200 in the year 1980 has the same buying power as $3,515.94 in today’s money. To look at that in reverse, $1,200 in today’s money has the buying power of $409.56 in 1980.
In other words, virtually every year, while the actual cash amounts of the mandatory issuance of a W-2G remain the same, the actual value of those thresholds decreases. Over several years, the value of such money will decrease substantially, so effectively, the (value) requirement for the issuance of a W-2G gets lower every year.
Once again, our position is that neither gambling winnings or losses should have any tax implications whatsoever for the actual player, but such is not the case. We understand why not all claimed losses can be deducted from income earned by more traditional means, (because that would be an easy avenue to tax fraud) but at the same time, considering gambling winnings as INCOME GAINED while not considering gambling losses as a reduction to income, or NEGATIVE INCOME (other than to the extent of gambling winnings) is fundamentally unfair to players.
While we have emphasized that most recreational players do not generally file W-2G forms either way, unless they are issued them for hitting some sort of mandatory threshold pay, some of you out there may be steadfastly determined that you must file your taxes strictly in accordance with the letter of the law. For those of you out there who fall into this category, or for those of you who would like to offset any possible W-2G mandatory reporting winnings with your losses, record keeping is absolutely essential:
Part 3: Keeping/Maintaining a Gambling Log
For those of you who are determined to do things strictly, ‘By the book,’ it is important to note that the reporting of gambling winnings is required if your winnings exceed any W-2G forms you may have been issued, or even if you have enjoyed winnings for the year in the absence of any W-2G forms. It is also important for people who are issued W-2G forms to understand that in order to offset those W-2G forms, they are allowed to report their gambling losses to such an extent that the W-2G forms can be nullified completely.
With respect to the IRS, the minimum gambling log that someone should keep would incorporate all of an individual’s gambling activities with sessions preferably listed by date, location, general game(s) played, and the amount either won or lost in the session in question. Again, while we would not actually recommend filing your taxes incorrectly, (as such could constitute tax evasion) given seemingly proper gambling logs, the IRS is really in no position to question any claimed losses by the player in question.
Again, this is relevant to Online Blackjack because any sessions played in Online Blackjack could also contribute to a player’s winnings or losses.
First of all, the notion that it is illegal for a player to play online pursuant to the UIGEA (Unlawful Internet Gambling Enforcement Act) is both misguided and completely incorrect. With exception to certain activities, such as sports betting in states that the Federal Government has not authorized, it is in no way illegal for an individual (at the Federal level) to participate in Online Gambling activities as a mere player. The UIGEA focuses mostly on transactions involving US-Based banks, who cannot knowingly transfer funds, in or out, for the purposes of Online Gambling. Furthermore, it also focuses on operators, who cannot knowingly accept US funds for the purposes of Online Gambling, of course, operators with no ties to the US are effectively untouchable in this regard.
It is true that Online Gambling is patently illegal in several states, however, the IRS is in no position to care whether or not a player is breaking a state law by gambling online, they simply want any gambling-related income (ie: winnings) reported. In fact, the IRS specifically has a line item upon which income arising from illegal activity should be reported. Of course, any online gambling winnings would still be W-2G based because, on a Federal level, gambling online is not illegal.
Furthermore, while some states may have laws that make it illegal to gamble online, the actual enforcement of such laws is usually focused on operators rather than mere players. With exception to illegal sports betting, in fact, I can find virtually no instances of a player being charged with online gambling whilst acting as a mere player.
In other words, even online players are theoretically expected to report any winnings as income for taxation purposes. Similarly, it stands to reason that any online losses could be used to offset W-2G winnings (if any) for taxation purposes provided the proper gambling logs are kept.
One problem that some players run into (primarily those on the lower end of the income scale) is that the Standard Deduction is in excess of the W-2G winnings (which can only be offset on a 100% basis) and furthermore, the Standard Deduction is a greater deduction than would be any deduction for deducting the W-2G winnings combined with other deductions that the player may have. When this happens, the W-2G winnings (or any winnings for players feeling compelled to report them all) effectively cannot be written off because to do so would actually result in greater taxable income than simply taking the standard deduction.
Ironically, one workaround that such situated players may have for this problem is simply to report ALL gambling winnings and then offset them with losses, and again, that is going to require the player to keep a comprehensive log of all gambling activities as described above. Theoretically, each individual instance of winning (whether it be a hand, an hour, or a session) could be reported as winnings and the gambling log that the player keeps is largely arbitrary in that sense…as long as it remains consistent.
In case I haven’t explained that well enough, let me provide a little more detail:
For Heads of Household, the Standard Deduction for 2016 is going to be $9,300. If such a person were to have W-2G winnings of $2,000 (which can be offset 100% by losses, but not more than 100%) and the person has a maximum of $4,000 in other itemized deductions, then the total is $6,000 and the person in question will have a lesser tax obligation, of course, by taking the $9,300 standard deduction. As a consequence of this, however, the player effectively ends up having his W-2G winnings taxed as income, even if, in fact, the person lost money gambling for the year.
While this problem may seem insurmountable, technically, it’s actually not. The person in question may be able to claim ALL gambling winnings that he or she has incurred throughout the year, at least to such an amount in excess of the standard deduction, and if the person has lost for the year overall, write off those gambling winnings as a deduction:
Once again, if we look at the Standard Deduction of $9,300 against the $2,000 W-2G and the $4,000 in other itemized deductions the person was already going to take, we get a difference of $3,300 that the Standard Deduction is the superior deduction. However, if the player’s winnings exceed the difference between the two by at least the amount of the W-2G form, then the player (tax brackets aside) will be able to claim a deduction in excess of the Standard Deduction if the player has lost overall.
For example, if the player instead claims $7,300 in gambling wins, and losses equal to or exceeding the $7,300, then combined with the $4,000 in other itemized deductions that the player would have otherwise taken (were the Standard Deduction not superior) then the player will have a total of $11,300 in deductions, which is $2,000 greater (the amount of the W2-G form) than the Standard Deduction would have been. As a result, the player does not end up having the amount of the W-2G form taxed as income despite the fact that it is NOT ACTUAL INCOME because the player lost for the year, overall.
It is for that reason that it is important to keep a log of all gambling activities consisting of, at a minimum, the information that was detailed in the first part of this section. If the gambler loses so much as $0.01, or breaks even, from gambling, then there is no reason why the player should have to pay taxes on W-2G forms as though actual income gains took place. Most players, in whatever arbitrary measurements they use to describe a, ‘Session,’ will, in fact, lose money over the course of a year by way of gambling, but even with that, they will have winning sessions and losing sessions. For everyone aside from, ‘Once a year,’ type people, the sum of winnings from gambling, ‘Events,’ should meet or exceed the amount of the Standard Deduction and can be offset with losses that will also exceed such amount in addition to any W-2G’s the player may have.
Again, playing Blackjack Online is not illegal at the Federal Level, and as a result, any losses (or wins) from Online Blackjack are theoretically required to be reported. That being the case, any losses from Online Blackjack can offset winnings from any other gambling activity, even if it takes place at a Land-Based casino or some other physical gambling venue.
Conclusion:
Online casinos that are located abroad do not, strictly speaking, have any obligation to report a player’s winnings to the IRS because they do not fall under the jurisdiction of the Federal Government of the United States of America in any way whatsoever. However, players who play at those casinos are, in fact, technically required to report their gambling winnings as they are technically required to report all gambling winnings whether or not a W-2G has been issued.
For precisely that reason, with accurate and comprehensive record keeping, players are able to offset any gambling winnings, including W-2G mandatory issued winnings, with their online gambling losses, if any, including Online Blackjack. In most cases, Online Gambling is not illegal at the State Level if one is acting as a mere player, and it is NEVER illegal at the Federal level, (with exceptions for sports betting) so the IRS is completely unconcerned with the source of the gambling wins, or losses, they just want a player’s taxes filed correctly.
