The gambling industry in the United States is projected to exceed gross revenues of $200 billion in 2015, and that number should only continue to grow as new casinos open and states look to expand their gambling offerings. Thus, gambling houses and players alike need to pay attention when the Internal Revenue Service (IRS) hovers close over Lady Luck’s shoulder and proposes changes to increase the reporting burdens and collection of individual income taxes.
Currently, Internal Revenue Code (IRC) §6041 requires information reporting by every person engaged in a trade or business who, in the course of such trade or business, makes payments of gross income of $600 or more in any taxable year. As a result, gambling houses currently have to report payouts of $600 or more in the tax year on a majority of their games of chance—poker, blackjack, roulette, etc. (The amounts for bingo, slot machines, and keno are higher.) This reporting involves issuing a Form W-2G to the individual receiving the payout.
For the individual, a nonprofessional gambler’s winnings are fully taxable as “Other Income” on Form 1040. Gambling income includes, but isn’t limited to, winnings from lotteries, raffles, horse races, and casinos—both cash and the fair market value of prizes such as automobiles and trips. Gambling losses are deductible only as itemized deductions. The amount of losses deducted may not be more than the amount of gambling income reported.
The IRS allows taxpayers to measure their gains on a per-session basis. Essentially, a taxpayer doesn’t have to compute each wager separately to determine a net win or loss and by how much. Instead, he or she can tally the total at the end of a gambling session. It’s important to keep an accurate diary or similar record of gambling winnings and losses because 100% of all gambling winnings are reportable as taxable income—whether a W-2G is issued or not.
Internal Revenue Bulletin 2015-12 (March 23, 2015) proposes Treasury Regulation §1.6041-10(b)(1), which includes new rules for determining the reporting threshold of winnings from electronically tracked slot machines (ETSM). This form of “play” is on machines that are part of an electronic system controlled by the gaming house, such as through the use of a player’s card or similar system.
Under the proposed regulations, a W-2G must be issued for ETSM winnings when two criteria are satisfied: (1) the net amount of winnings earned from ETSM play during a single session is $1,200 or more and (2) at least one single win during the session equals or exceeds $1,200. Under proposed §1.6041-10(b)(3), a session begins when a player places the first wager on a particular type of game and ends when the player places his or her last wager on the same type of game for the calendar day.
Thresholds of reporting winnings from bingo, keno, and nonelectronically tracked slot machine (non-ETSM) play will remain unchanged (i.e., reporting is required on payments of gross winnings of $1,200 or more from a bingo game or a non-ETSM and net winnings of $1,500 or more from keno (net of the wager)). But the proposed regulations also include the following clarifications: (1) All winnings from all cards played during one bingo game are combined, (2) all winnings from all “ways” on a multiway keno ticket are combined, and (3) winnings from different types of games aren’t combined to determine whether a reporting threshold has been met. The IRS believes today’s technology provides opportunities for gambling houses to reduce and simplify their compliance concerns.
WHY THE EXCITEMENT?
Tucked within the current proposal, the IRS states that it and the Treasury Department are considering the feasibility of significantly lowering all existing and currently proposed reporting thresholds. The future threshold amounts under consideration would be gross winnings of $600 or more from bingo, keno, and all slot machine play (ETSM and non-ETSM). This would substantially increase reporting requirements and overall compliance tracking for all gambling houses (i.e., additional W-2G forms being sent to players).
This proposal would directly conflict with the industry-standard net winning method used in calculating player revenue from keno games. Standardization of winning calculations—gross vs. net—would require a substantial change in data collection procedures by both gaming houses and players, a potentially contentious issue the IRS doesn’t seem anxious to tackle at this time.
The higher reporting thresholds for bingo, slot machines, and keno were established in 1977. Nearly 40 years later, advances in technology now allow the gaming industry to electronically track wagers and winnings for these games as well.
Despite these technological advances, the American Gambling Association (AGA) disputes the IRS’s claim that lower thresholds wouldn’t be burdensome. Industry supporters claim these changes would lead to significant downtime for machines to collect the required data—leading to decreased revenue for state tax collectors. The AGA has calculated that if the current $1,200 threshold were indexed for inflation, it would be $4,700 today.
MORE CHANGES LOOMING
The industry and players have a reason to take notice of these proposals. The March 2015 Bulletin mentions that the Treasury and IRS intend to propose future reporting changes (under Reg. §31.3402(q)-1) for other forms of gambling, such as horse racing, dog racing, and jai alai. Whether tax revenues will go up as the IRS expects is debatable. What isn’t debatable is that expanded data collection requirements and an increase in the number of W-2G forms being prepared and transmitted to taxpayers will lead to increased costs for both for-profit gambling houses and nonprofit groups.
THE U.S. gaming industry
Consumer spending on casino gaming
Amount of gaming taxes generated by commercial casinos
Combined total of commercial and tribal casinos in the U.S.
Source: American Gaming Association and Oxford Economics. Data for 2013, the most recent year available.
© 2015 A.P. Curatola