Until recently, the IRS’s latest regulations on gambling winnings were rules released back in 1983. Both technology and industry practice have changed significantly since then. To modernize its approach, the IRS has released new rules, first in December 2016 and more recently in September 2017, which change reporting thresholds and procedures for many types of gambling, from keno to horse and dog races.
Video Gaming and Slots
The December regulations put in place improved rules for reporting winnings from bingo, keno, and slot machines as requested by thousands of taxpayers who sent comments to the IRS. Gambling winnings for electronically tracked slot machine play are required to be reported if: (1) the total amount of winnings netted against the total amount of wagers during the same session of play is $1,200 or more; and (2) at least one single win during a session is $1,200 or more. A “session” of play is determined with reference to a calendar day. The reporting threshold for keno is $1,500. Reportable gambling winnings in the case of bingo and slot machine play are not determined by netting the wager against the winnings, but reportable gambling winnings in the case of keno are determined by netting winnings and losses from one game. Netting the wager reduces the winnings, resulting in less withholding liability.
The rules also require the payor to obtain two forms of identification from the gambling winner (payee) to verify the payee’s identity. One of the forms of identification may include the payee’s photograph, and the payee can provide a Form W-9 in lieu of identification that includes the payee’s social security number.
Withholding Lowered for Pari-mutuel Betting
Reporting for pari-mutuel betting is covered in the most recent regulations. In pari-mutuel betting, all bets are placed together in a pool and payoffs are calculated by sharing the pool among all winning bets. This type of betting is associated with horse racing, dog racing and jai alai.
Changes to the regulations were requested by over 2,500 commenters most of whom complained that the previous rules resulted in scenarios where the amount withheld greatly exceeded the actual tax liability. The new rules alter the method of calculating the amount of pari-mutuel winnings subject to withholding and simplifies the way the winnings are reported. Specifically, they allow all wagers placed in a single pari-mutuel pool and represented on a single ticket to be aggregated and treated as a single wager. The regulations do not limit the number of bets on a single ticket, whether that ticket is paper or electronic. This rule makes it easier on the industry because payors no longer have to collect information reflected on multiple tickets.
The rules also specify that the withholding rate for gambling winnings is the third-lowest tax rate or 25% under current tax brackets. Payers do not have to withhold for all types of gambling until winnings exceed $5,000.
Both sets of regulations go a long way toward striking a balance between the collection and reporting of wagering information and the compliance burden on gambling. The new rules are a welcome modernization that reflect new practices and new technologies used in the gaming industry.