December 23, 2010

Form W-2G Basics

I am often asked the following: How could the IRS or a state agency know I have income from gambling?

There are many ways the tax authorities could find out. How about the obvious way: When they are told.

The Internal Revenue Code requires the payer of gambling winnings to issue to the winner a Form W-2G under certain circumstances. The form looks like this. For our purposes, two of these circumstances are particularly relevant:

  • The winner receives more than $5,000 in winnings (reduced by the wager or buy-in) from and poker tournament; or
  • The winner receives $600 or more in gambling winnings (except winnings from bingo, keno, slot machines, and poker tournaments) and the payout is at least 300 times the amount of the wager.

The “payer” is the gaming establishment. For example, if you finish second place in a poker tournament at Harrah’s Resort in Atlantic City and win $8,000, the casino is supposed to issue to you the Form W-2G along with your winnings. Note that you may not receive the full $8,000:

When a payer is required to furnish a Form W-2G to a gambling winner, the payer is generally required to withhold federal income tax if the proceeds exceed $5,000, as long as the amount of the proceeds is at least 300 times as large as the amount wagered.  Effective March 4, 2008, poker tournament sponsors must withhold on payments of more than $5,000 to a winner, regardless of whether the proceeds are at least 300 times as the amount wagered.

When the payer turns around and remits the withheld amounts to the IRS, the IRS finds out about you, because you provide to the payer your identification information. This may or may not be a big deal.

The IRS also should find out about you because the winner is also required to file with the IRS the received Form W-2G on or before February 28 (March 31 if filed electronically) of the calendar year following the calendar year in which the payment of winnings is made.

If you are a casual gambler and have substantial non-gambling sources of income, then IRS receipt of the W-2G does not necessarily make you an audit target. BUT, if you are a full-time poker player, and either fail to file any tax returns for the year you receive the W-2G or file a return reflecting only W-2G amounts as income, the IRS may get very curious. You don’t want the IRS to get curious.

The IRS may approach you, asking for all of your records from gambling from the year. I cannot stress enough the importance of keeping proper track of your gambling activity throughout the year. Otherwise, things could get messy.

Posted By taxdood at 03:32 PM



9dJhQhKhAh posted on December 23, 2010 at 19:57 PM


What about online players?

Also, thoughts on major sites issuing W-2G's to tournament winners to help regulate and legalize online poker in the US?

taxdood posted on December 24, 2010 at 01:50 AM


1) I assume with your first question you mean how could the IRS or a state agency know online players have income from gambling.

Let's eliminate one possibility: Not from Form W-2Gs. The reason for this is simple: The "payer" is a foreign entity.

Ultimately, there is no obvious answer. They could because you are a popular figure. They could because you transferred your winnings to a US bank account generating interest. They could link you to a legitimate company that is somehow involved with the activity.

My point here is that the longer you play online poker and try to get away with not reporting to the IRS, the longer you are exposed, and the greater the repercussions. I wouldn't want to be worried all the time that I may finally get caught. I always advise to take the tax hit up front by timely reporting. Gives you a lot of peace of mind.

2) When legalized, U.S. sites hosting online poker will be required to issue some federal form to gambling winners. One of the chief components of the legalization platform is the generation of federal and state revenue.

Skeptics of the Reid Bill will become convinced only if they are confident in the ability of the IRS to collect the tax revenue. This will require a solid reporting system. It will become far more difficult to shield income from online poker when the legalization day arrives.

(Note my use of "when" as opposed to "if"; that's my confidence level in seeing this happen.)


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