I tangentially addressed tax implications for international players on New Jersey online gambling sites when commenting on New Jersey’s proposed iGaming regulations.
For this post, by international player, we mean a nonresident of the United States (the technical term is nonresident alien). The fourth and final part of this series will address players that fall into this category.
Similar to out-of-state players on NJ sites, international players are subject to paying New Jersey income tax on net gambling winnings won on NJ sites. The federal tax situation for international players is quite more complicated.
All gambling winnings of international players won in the U.S. are taxable under the Internal Revenue Code.
Gambling winnings from playing online in New Jersey or elsewhere in the U.S. are no different than from playing at brick and mortar casinos in the United States. Gambling winnings are reported on Form 1040NR.
Gambling losses for international players are deductible against gambling winnings in the U.S. only if the player is a professional gambler. Amateur gamblers cannot deduct at all NJ online gambling losses for federal income tax purposes.
For international players, gambling winnings and losses are determined on a per-session basis.
Accounting for gambling winnings by session is the same for U.S. residents. This is actually a recent development in the tax law for international players. Previously, the IRS had held the view that international players must account on a per-bet basis.
Gambling winnings for international players are generally subject to thirty-percent withholding by online gambling websites in the United States.
The operators are also required to issue a Form 1042-S. The withholding and reporting are not required for proceeds from a wager placed in blackjack, baccarat, craps, roulette, or big-6 wheel, if the player is not a professional gambler.
International players who are professional gamblers may be subject to paying U.S. income tax on all gambling winnings won in the United States.
International players from treaty countries may reduce or eliminate the withholding requirement for online gambling winnings in New Jersey.
Tax treaties serve two primary purposes: (1) avoid double taxation on the same income, and (2) prevent taxpayers from evading taxes.
Pursuant to tax treaties between the U.S. and other countries, gambling winnings of residents of the following countries are not taxable in the United States:
Austria, Belgium, Bulgaria, Czech Republic, Denmark, Finland, France, Germany, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, Russia, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Tunisia, Turkey, Ukraine, and the United Kingdom.
Amateur gamblers must submit to the online operator a Form W-8BEN to claim treaty benefits of gambling winnings.
International players who are required to file a U.S. income tax return or claim treaty benefits must obtain an individual taxpayer identification number (“ITIN”). To obtain an ITIN, a taxpayer must submit to the Internal Revenue Service a Form W-7 with supporting documentation.
What if the international player’s resident country also taxes the player’s NJ online winnings?
It may be possible to claim a credit in the home country for taxes paid in the United States. One should contact local counsel to find out a resident country’s specific rules.
With legalized, regulated internet gambling at its infancy in the United States, we are only scratching the surface of the corresponding tax considerations.
With this mini-series concluding, here are a couple of questions to think about:
Which state would have the primary right to tax the winnings of a player physically located in one state but playing on a site based in another state?
Would the federal government or New Jersey have grounds to tax a player’s gambling winnings on a NJ site if the player is physically located outside of the United States?
Disclaimer: Nothing contained in this article is specific legal advice, as each person’s situation is different. Contact a tax professional to discuss particular facts and circumstances.
IRS Circular 230 Notice: This article is not intended to be used, and it cannot be used by any taxpayer, for the purpose of avoiding federal tax penalties that may be imposed on a taxpayer.