If there’s one thing that I hate about the current state of brick & mortar gaming in the United States, (and there are many) it’s that a rather small jackpot of $1,200 triggers a form known as a W-2G. For those of you abroad or who have never hit such a jackpot, a W-2G is simply a mandatory reporting form that goes to the Federal Government for the purposes of taxation. The player is also given a copy which includes the amount won as well as the bet amount.
United States v. Abroad
In many countries, a person is not even expected to pay taxes on gambling winnings whatsoever, so I imagine that this is something of a surprise to hear. In the United States, technically, an individual is supposed to pay taxes on ALL gambling winnings, except to the extent that they can be offset (to zero, not below) by gambling losses.
The fundamentally unfair aspect of this system is that gambling wins constitute income, but gambling losses DO NOT constitute an expense or loss of income for any purpose other than to directly offset gambling wins. In other words, if you end up with $10,000 in total W-2G’s at the end of the year, that effectively gets added to your income unless you have offsetting losses. However, if you LOSE $10,000 gambling for the year overall, your income remains the same.
Of course, certain states (Ohio perhaps being one of the worst offenders) also like to get a piece of the action. In the case of an Ohio resident, any W-2G is going to result in added reportable income, but gambling losses MAY NOT be used to offset wins. In other words, you’re paying state income taxes on every W-2G regardless of your overall results.
Fortunately for many gamblers, other states have a similar rule as relates offsetting gambling wins with losses as for the purposes of Federal taxation. Better still, many states do not have a state personal income tax whatsoever so any W-2G’s would be completely irrelevant to the state.
Offsetting Wins with Losses in the United States
DISCLAIMER: First of all, I should point out that I am in no way, shape or form an accountant or any other kind of tax expert, so what I am stating is a layman’s understanding of the way it works. Perhaps we should say a layman’s educated understanding since I have familiarized myself with rudimentary gambling law.
I would not encourage...
...anyone to fill out their taxes in a dishonest way or to do anything short of full reporting, but it does bear mention that ALL wins are technically supposed to be reported, not just those triggering a W-2G. That doesn’t necessarily mean that a player is expected to put the results of every single spin, but generally speaking, records should probably be technically kept on every gambling, ‘session,’ or gambling day.
This is actually a good idea for many people, because for most recreational players who gamble with any frequency (if they’re honest with themselves) end a year down for the year rather than up. For these players, this record can be used (if audited) to back up the W-2G that the player is attempting to offset. If the player has no W-2G to offset... I’m not going to say there’s no real reason to worry about filing anything one way or another.
A rudimentary personal gambling record, in my opinion, should consist of the following items:
- Casinos Visited
- Games Played
- Overall Result per Casino
You might want to go into more specifics than that, but that should really be good for the purposes of offsetting a W-2G (if that happens) and it would be better records than most people keep. These records may also be useful so that you can look back at the end of the year and make sure that you are gambling responsibly. You can make sure that the overall amount you have lost for the year (if anything) is not an amount that you find staggering or well in excess of your planned entertainment budget.
Casinos offer Win/Loss statements that are available for players at the beginning of the new tax year for the previous year. Unfortunately, these win/loss statements are often woefully inaccurate. There are also reasons beyond taxation that one might want to use certain, ‘Tricks,’ to show a huge loss, but we’re not going to get into that here other than to say it’s pretty easy to do if you really think about how.
Anyway, win/loss statements at table games, in order to be accurate, have to rely upon accurate tracking of your buy-ins and what you leave the table with. Unfortunately, the supervisors might be really busy that day, might not really care in general or just don’t see you leave...so this information for an individual session is often complete guesswork.
When it comes to the machines, obviously, the machines can only track what you are doing when you have your players' club card in the machine. Even outside of deliberately misrepresenting loss amounts, there is any number of potential reasons that these figures may not end up getting tracked accurately. Sometimes, it could be as simple as the card reader not working. Sometimes the card reader tracks your player's club points, but for one reason or another, fails to track win/loss. Sometimes a player will simply forget to put his/her card in.
I’m also not quite sure how different players card systems treat free play in terms of win/loss. I honestly haven’t really inquired. I guess I would assume that any results stemming off of free play constitute money won, but you never know.
For those reasons, if you keep a daily log of your gambling activities, the best that a win/loss statement could ever hope to do is be as accurate as your own records.
...while I wouldn’t advocate for fibbing on your daily gambling log, I will say that it wouldn’t necessarily be very hard to do. For one thing, there is any number of forms of gambling that have no player tracking whatsoever, so the player is left to his/her own devices to report losses. One example that I can think of is claiming lottery purchase losses, (scratchers and tickets) but they could theoretically ask for the losing tickets as proof. Going around and collecting losing horse/sports betting slips is another possibility, but that’s time-consuming...though it does provide, ‘Proof.’
Personally, if one were inclined to create an artificial loss, which again I am NOT suggesting, it could just be forms of gambling that are not otherwise trackable and for which there would be no written documentation proving losses to begin with. For one thing, a player could claim to have lost money in the casino (or did, in fact, lose money) but did not play on the players club card that day. Further, many states have bars/parlors with video lottery terminals, but no players club system whatsoever. A player could claim to have lost money in these sorts of establishments and it’s highly unlikely that the IRS is going to demand video footage to ensure that the player was actually there.
Obviously, I don’t think a player would get away with saying they lost five figures in one session at this sort of place, but losses in the high hundreds to very low thousands aren’t uncommon.
The Current W-2G Standard
The first thing that we want to look at is what are the current W-2G reporting standards.
Let’s list them here:
- The winnings (not reduced by the wager) are $1,200 or more from a bingo game or slot machine,
- The winnings (reduced by the wager) are $1,500 or more from a keno game,
- The winnings (reduced by the wager or buy-in) are more than $5,000 from a poker tournament,
- The winnings (except winnings from bingo, slot machines, keno, and poker tournaments) reduced, at the option of the payer, by the wager are: $600 or more, and At least 300 times the amount of the wager.
- The winnings are subject to federal income tax withholding (either regular gambling withholding or backup withholding).
These are pretty self-explanatory, but I will go ahead and expand on each item just a little bit.
1) This is the most common type of W-2G for casino-goers. Simply put, even though the W-2G states the wager amount, the wager amount is immaterial to the fact that a jackpot of $1,200 (or more) will trigger a W-2G. If you could play $600 on an Electronic Craps machine and hit a winner, that would be a W-2G for the $1200 payout...not ideal.
While it says, “Bingo Game or Slot Machine,” most casinos take this to mean any electronic gaming device, including video poker (obviously) video keno and electronic table games.
2.)This item refers strictly to LIVE Keno games, so not lottery televised Keno or video keno, which are both subject to the $1,200 standard as though a slot machine. This is reduced by the wager, so if you had a win of exactly $1,500 and wagered $0.01, or more, that would not trigger the W-2G and I would argue it if they tried to give you one.
3.)Does what it says on the box.
4.)This is the one that you often see apply to table games’ side bets. The first quality that must be satisfied is that the total payout is over $600 (the casino can decide whether or not the bet amount offsets) AND over 300x the amount of the wager. The word, “AND,” here is key, otherwise, this sort of thing would be happening constantly and casinos would be loathed to accept too much action on side bets.
One example of a side bet this could often apply to is the Fire Bet in Craps in which a player makes and hits all six point numbers before a seven-out. This event generally pays 1,000-to-1 and the minimum bet is generally a dollar, so it’s not possible to cause this event without triggering a tax form.
Hopefully, if you are loathe to receive a tax form, you will be able to look at the paytable for side bets (which most people shouldn’t be playing anyway because of the crappy RTP) and choose not to play the ones where this could happen. Side bets with potentially huge payouts generally have worse house edges than others anyway, so you’re really getting your money in bad.
5.) Just refers to winnings of $5,000, or more, on the following:
- Wagering pools,
- Lotteries, or
- Other wagering transactions if the winnings are at least 300 times the amount wagered.
Another thing to keep in mind is something known as a “Currency Transaction Report,” which is a form that can apply to things other than gambling, as well. Basically, anytime $10,000 (or more) in cash exchanges hands with a payer and a payee in a 24 hour period, the business is required to fill out a currency transaction report. While these may have exactly nothing to do with taxes, they are submitted to the Federal Government. This is mostly to avoid things like, “Structuring,” and money laundering, which are both beyond the purview of this writing. Additionally, an operator may choose to fill out a SAR (Suspicious Activity Report) basically at their whim.
Today we are going to focus on the mandatory W-2G reporting of an electronic device win of $1,200, or more because this is by far the most common W-2G issued in this country.
I couldn’t uncover the first year (necessarily) that these W-2G’s became the case, but I do know it was at least as far back as 1986. I also found something relating back to 1981, but I can’t be entirely certain that the reporting standards were the same.
Another thing to keep in mind with W-2G’s...
They count as income, no matter what, even though you can take a dollar-for-dollar deduction of that income using gambling losses. However, when it comes to calculating your total income, the W-2G amount applies whether or not you, “Zero it out,” with deductions.
That’s extremely important because it can do two things:
- Put you in a higher tax bracket.
- Effectively be non-deductible if the standard deduction is better for you anyway.
In many cases, individuals will fill out an EZ tax form in which they are not itemizing deductions because the sum of the deductions is less than the standard deduction in the first place. If this is the case with a W-2G, (with no other gambling wins filed) then you are going to incur an increase in income but will effectively NOT be able to take a deduction due to the fact that the standard deduction is greater anyway.
That might be complicated, so let’s do a quick example:
A single individual had a standard deduction of $12,000 during the 2018 tax year. After adding up his other deductions (and considering offsetting the W-2G with losses), he only arrived at a total of $8,000 in itemized deductions. The amount of the W-2G was $2,000 and he did not keep a log of any other wins or losses. In this case, the best option is simply to take the standard deduction, (because it’s better) but as a result, the individual now effectively pays taxes on the full $2,000.
Another thing to remind you of is that, just because you can offset it, doesn’t mean that it doesn’t constitute income. While it can be deducted, it is going to go to the base income amount that is being reported one way or another...there are so many potential implications to this that it is beyond the purview of this article for me to list them. I probably only know a small percentage of them anyway.
Now and Then
Once again, I can track this W-2G reporting as far back as 1977, so that’s as far back as we are going to go. Let’s use this handy inflation calculator to determine the buying power of $1,200 now (as opposed to 1977) and vice-versa:
In general and estimated terms, $1,200 in 1977 is worth about $5163.32 now and $1200 in 2019 was worth $278.89 then.
In other words, having to fill out a W-2G on a $1200 win now is effectively the same thing as would be the jackpot threshold being $278.89 back then. The $1,200 threshold of 1986 is effectively the same thing as though the jackpot threshold were $5163.32 now.
Average bet amounts are also generally greater at this time than they were in 1977, so that somewhat double compounds the problem. Not only is $1,200 worth a lot less than it was then, but (all else being the same) people are more likely to hit a jackpot of $1,200, or more.
Of course, all things are not the same. For one thing, many slot machines are intentionally designed (returns) to be able to accept a higher bet, but to be such that there are a ton of smaller/medium pays so as to intentionally avoid W-2G’s excessively.
Consider the case of a “Penny,” slot machine that has a maximum bet of $3.00. It’s not unusual for such a machine to be set up such that no possible single line pay would result in a total of $1,200, or greater. In many cases, the only way that this event would happen is catching bonus games and running extremely well. I’m aware of a $5 machine, for example, in which the highest possible pay on a single spin (during free games) is $250 and $125 otherwise. It is unbelievably unlikely and would generally require several free game retriggers to hit the $1,200 threshold. Granted, the $125 and $250 pays are relatively frequent.
Anyway, if you look at a single-line quarter denomination bet three slot machine ($0.75 total bet) that would have been really common in the late-80’s, triggering a W-2G would require a win of at least 1,600x your bet. Generally speaking, this would only be the top pay and many machines were specifically designed to have a top pay of $1,199 for that bet amount.
The latter concept hasn’t changed, (maybe not $1,199 specifically) but the bet amounts and amounts to be won have. If you have a maximum bet of $5.00 on a, “Penny,” machine, then a win of only 240x your bet triggers a W-2G, pretty huge difference.
Why wouldn’t the casino want to avoid hand pays, though. For that matter, why wouldn’t the player want to avoid them? The only people (entities) who really benefit from the whole thing are the slot attendants and, perhaps, the IRS.
- The casinos don’t like hand pays because it takes the slot attendants away from doing other things they could be doing, (ticket/bill jams, fixing machines that have gotten, ‘stuck,’ answering questions players have...etc.) in order to deal with the hand pays. The casinos have to pay these people, obviously and may have to increase staff just so they have enough attendants to handle hand pays and anything else that may need to be done.
- They’re not good for the player because, whether the player ends up paying additional taxes or not, the player must eventually deal with the W-2G vis-a-vis tax filing. More than that, while tip amounts vary from person-to-person (one standard is usually 1-2% of the jackpot amount) most people generally feel obligated to tip on a handpay and it is expected.
- Slot attendants win on the deal because they get tips. However, casinos can set a machine to, “Lock up,” on whatever they want to. Even if the W-2G threshold were to go up, the machine could be set to lock on $500 or $1,000. While a marginal number of players will not tip in this situation, a good many will. Most UX machines, in my experience of it happening, will lock up on a win of $1,000 (or more) even though there is no tax form on $1,000-$1,199.99.
- I don’t know how the IRS fares on the deal, overall. There’s definitely some cost associated with the work to track all of these and make sure people are filing on them. I assume that the handpay taxes are profitable, overall, or they would have increased the threshold of their own accord or asked the Treasury Department to do it.
- Having gambling winnings constitute income (though offsetable) but not gambling losses is fundamentally unfair to the taxpayer. Why should an overall win be taxable income, but an overall loss (other than for gambling professionals in certain cases) not be tax deductible? The answer to the latter is simple: If losses were fully deductible, then anyone could cheat on their base taxes from employment by claiming gambling losses that don’t actually exist. The only, “Fair,” solution (in my opinion) would be to get rid of the gambling taxes completely...but that’s not about to happen.
- The $1,200 threshold, which has been the case for over 40 years, is absolutely ridiculous. It absolutely is not representative of the spending power that it was back in 1977 and it limits the amounts that the slot manufacturers are willing to payout on certain hits because the casino does not want to deal with constant handpays. Players could enjoy more medium-high pays and higher variance machines if these frequent handpays were not a concern.
The Proposed Change
According to CDC Gaming Reports:
In a letter to Assistant Treasury Secretary David Kautter, Rep. Dina Titus, D-Nevada, and Rep. Darin LaHood, R-Illinois, said the $1,200 reporting threshold was set in 1977 and has never been updated. A $1,200 jackpot has been devalued due to inflation and causes “excessive burden to the gaming industry, a main economic driver in our districts.”
Hopefully, the Congressmen and Congresswomen of other gambling states will hop aboard on this issue and start to push a bill through. Unfortunately, I could see it facing opposition from the Christian Conservatives, at least in those states in which Commercial Casinos are not allowed by law.
As the article states, the IRS is not going to be inclined to do this of their own accord, instead, they wanted to REDUCE the mandatory reporting requirement to $600 as of three years ago. Additionally, they wanted to make player tracking for taxation purposes MANDATORY. Obviously, this would hurt small businesses (states with bars and slot, ‘parlors,’ that have a limited number of machines) the most because introducing a tracking program to the machines would be an extremely costly measure for such a small operation.
The funny thing about this is that it would have totally backfired (in my opinion) on the IRS. Many players get their W-2G’s, claim the income and pay the taxes on the same often without the understanding that they can offset the losses. If the taxable threshold were reduced to $600, people might be more inclined to investigate the tax codes more thoroughly, and therefore, would be more likely to offset the W-2G’s with losses.
Making this all the more likely, in fact, would be the mandatory player reporting/tracking. Obviously, the systems would have to be made more accurate (the machine wouldn’t spin unless everything was being correctly tracked) and the casinos would likely be REQUIRED to provide the player with the balance at the end of the tax year.
What does that mean?
What it means is that the IRS would likely have fewer people paying income tax when those people have, in fact, incurred a loss for the year. I imagine a substantial portion of the taxes derived from W-2G’s come from players who did not have a winning year. Again, MOST players who gamble recreationally with any real frequency generally lose for the year. Exceptions are those players who hit huge jackpots, are advantage players or only gamble one or a few times.
As you see above, $5,000 falls just a bit short on relative value indexed to inflation...but any improvement is a good improvement. Hopefully, any Legislation (or Treasury Department changes) would include a stipulation that changes it further by $500 or by $1,000 every time the inflation-indexed value decreases relative to the $5,000 starting point. In other words, to always keep it (in value) about what $5,000 is worth today.
I guess we’ll see how this one goes. While I would prefer for the unfair gambling tax to be eliminated completely, (I don’t like the notion of anything that can only INCREASE income while the opposite does not REDUCE income) I would definitely be in favor of mandatory reporting amounts to reflect economic realities vis-a-vis inflation.
Honestly, I would be quite surprised if the Department of the Treasury is inclined to change this, so it is going to require a Congressional effort between the Senate and the House. It’s tough to say where both bodies of Congress would stand on the matter and, if a low priority issue, it could die one or more, “Legislative deaths,” which is just where it fails to make it to a general vote.
Anyway, we’re stuck with $1,200, at least for now, but hopefully, this article was helpful to you as well as an interesting read. I hope a few people read this who were unaware that the wins could be offset by losses, as that may be helpful to them. If you’d be so kind, let me know in the comments if you learned anything new or what your W-2G experiences have been.