Gambling and Taxes


Gambling, as one of the sectors of the hospitality industry, has fared relatively well during the pandemic compared to other sectors. Online poker, for example, has hit a record high, according to the Market Watch. But as Sir William Petty said about the early English lotteries, it is really "a tax upon unfortunate self-conceited fools."

In America, lotteries were the equivalent of a voluntary tax as regular taxation was often disliked by the population. The first Federal tax was levied in 1864 as a way to regulate lotteries. In 1895 all lotteries were banned in Louisiana.

Around the same time period, the first slot machine was invented by Charles Fey. Various sources mention both 1887 and 1895 as the first year the mechanical version of the machine was presented by the San Francisco car mechanic. It would take Congress another 40-50 years to tax it for the first time, although loopholes still existed. Gamblers were prosecuted by the IRS but the industry itself was not actively attacked. Even with the Wagering Tax Act of 1952, enforcement was complicated. In states such as New Hampshire, voluntary taxation was still preferred over, for example, sales tax. However, the criticism remained that this was a regressive tax and affected lower income groups more than any other sector of the population. None of this affected the popularity or the overall success of gambling.

Commercial casino gaming brought in over $35 billion in 2017. In 2018 and 2019, it surpassed $40 billion. While COVID caused a severe drop in the total revenues for the first six month of 2020, the month of June, in particular, also gave the industry a sharp rise over April and May. As of today, 872 of the 989 casinos have reopened.

Gamblers, whether professional or casual, are primarily encouraged to keep accurate records. As a casual gambler, one is to report the activity on a Schedule A, with losses allowed but only to the extent of the winnings. Otherwise, the government can be accused of subsidizing gambling if they allow further loss write offs. Business expenses, in addition to losses, are only allowed for professional gamblers. Even so, the total deduction cannot exceed the gains. Topic 419 provides more information for casual players. Some of the other publications and forms related to taxes and gambling include W-2G (to report winnings), 5754 (statement form), 3079 (gaming) and 3908 (gaming tax law). The IRS even has a video summarizing what you should know: https://www.youtube.com/watch?v=LAx1iCXPeRw.

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United States