Some countries leave casino winnings alone, some tax winnings and deduct losses, and other confiscate winnings completely. This article will give some examples from all three groups.
When you win $10,000 at a casino you should take home $10,000, right? As a profit-earning business the casino should pay taxes on income, but you shouldn’t. The sad reality is that things don’t always work this way. In some countries winnings are not considered forms of income, so are not taxable. On the other side of the coin, losses are not tax deductible. In other countries gambling is considered an income-earning activity and winnings are taxed. In others still gambling is illegal and winnings can be confiscated completely.
The non-taxing countries
In the UK, Canada and Germany (among others too numerous to mention) gambling is not treated as a legitimate means of earning income. Winning is essentially the same as finding money on the street, so is not taxed. On the other side of the coin, losses are not deductible. This has an upside and a downside. On the plus, every penny that you win at the land-based or online casino in Germany, Canada or Britain is yours to take home; the state won’t intrude itself by taking a cut.
But since losses are not deductible it’s more difficult to earn a living as a professional gambler. Pros usually win and lose a large amount in a single year, and deducting losses allows the player to turn a decent profit. Imagine a gambler who wins $60,000 and loses $50,000. The $10,000 margin is not enough to live on, but in a system where winnings are taxed and losses are deducted, that number gets much larger.
In total, a non-taxing system like we see in Germany, Canada and the UK is friendly to casual gamblers with modest winnings and losses but makes life harder for professional gamblers. In Canada someone who earns a living by gambling is legally classified as a vagrant.
The taxing countries
The US has the most sophisticated tax system with regards to gambling. American gambling laws treat the activity as a means of earning legitimate income, so winnings are taxable and losses are deductible. That’s where things get complicated. Losses are only deductible up to the amount of the money that the gambler reported as winnings. For example, if you win $5,000 and lose $8,000 you can only deduct $5,000. In this case you would take home $10,000 minus whatever you paid in taxes. This rule is to prevent gamblers from running up huge losses and then pushing the bill onto the state.
• In the US gambling is treated as a legitimate profession, with winnings taxed and losses deductible
• In the UK and Germany gambling is not a means to earning income, so winnings aren’t taxed and losses aren’t deductible
• In prohibition countries like India and China, winnings are confiscated and gamblers can face fines and prison sentences
This system was established by the landmark case of Bathalter vs. Commissioner. The case involved a professional horserace bettor who won $91,000 and lost $87,000 in a single year, then attempted to deduct the losses. This was challenged by the Internal Revenue Service. The court ruled in his favor, declaring gambling to be an income earning activity and thus deductible, but only in cases where taxed winnings exceed deductible losses. If losses weren’t deductible, it wouldn’t be income earning, would it? This system is beneficial to professional gamblers, allowing them to increase the spread between their winnings and losses.
With regards to online gambling, the activity is illegal everywhere except New Jersey and Delaware, so in all other states income is not taxed and losses are not deducted. In 2009 the Justice Department went so far as to seize $34 million from accounts belonging to 27,000 online poker players across the US. In 2011 the Justice Department changed direction and announced that it would not prosecute online gambling cases in states where the activity is legal.
In addition, the winnings of citizens of several countries are not taxed in the US. If you are a visiting gambler from most EU countries, Japan, Russia, Turkey, South Africa, Tunisia or Ukraine, you will be able to leave the country with every penny that you won at the casino.
Then there are those of the third group, who choose to prohibit rather than regulate. Some notable examples include India and China. In these countries any winnings from gambling are considered illegally-gotten money, so gamblers do anything they can to hide them. As for deducting winnings, you already know the answer to that one. In gambling raids the police in India seize all cash involved, including player winnings.
In prohibition countries those caught gambling can also face much more than confiscation of winnings. In China those caught gambling can be sentenced to up to three years in prison. The Turkish government is proposing fines of $55,000 for those caught internet gambling in Turkey, roughly 10 times the yearly income of the average Turk.