The IRS typically collects over $2 billion annually in taxes on gambling wins

Even The Federal Government Benefits From Gambling Expansion, By Taxing The Winners

Online casinos in Michigan, New Jersey and Pennsylvania managed to exceed $3 billion in gross gaming revenue (GGR) during 2021. Operators are clearly benefiting from lawmakers’ decisions to legalize online gambling. States, too, are winning out in the form of tax revenue.

What about the US at large, though? Online Poker Report‘s investigation into Internal Revenue Service (IRS) figures regarding taxation on winnings show that, yes, federal coffers are also filling.

State-level governments are clearly getting the greatest benefit from US online gambling. Michigan, for instance, received more than $179 million in taxes and other payments from Jan. 22 to Nov. 30, according to the Michigan Gaming Control Board (MGCB).

However, the federal government benefits from the taxes the IRS collects from winning gamblers. In 2019, the IRS gained $2.5 billion in income tax withheld on “horse racing, dog racing, jai alai, lotteries, keno, bingo, slot machines, sweepstakes, wagering pools, poker tournaments, etc.” That’s up from $2.3 billion in 2018. These figures come from IRS Form W-2G: Certain Gambling Winnings.

Unfortunately, the IRS doesn’t separate out information on online casino and sportsbook taxes. However, regulated online operators withhold taxes on large prizes just like their retail counterparts.

Federal filers are paying taxes on online casino wins

It may be impossible at the moment to separate online casino from other gambling wins when it comes to federal tax payments. However, it’s likely that much of that W-2G growth was due to the expansion of sports betting and iGaming. Daily fantasy sports income filers don’t use the W-2G.

The IRS also has yet to publish such data for 2020, let alone 2021. It’s safe to assume that its taxes on gambling winnings will be down a lot in those years, however, because of the pandemic and its impacts on the retail casino industry. In states with legal online casinos, iGaming picked up much of the slack. However, in 2020 that included only New Jersey and Pennsylvania, plus a tiny contribution from West Virginia in the latter half of the year.

Now, however, the retail industry is on the road to recovery, and online channels are stronger than ever. Since May 2018, when the US Supreme Court repealed the Professional and Amateur Sports Protection Act (PASPA) and states moved to legalized online sports betting, a few also legalized online casino gambling. Now, 20 states and the District of Columbia allow online sportsbook operators to accept bets.

Five of those states also introduced regulated online casino wagering:

  • Connecticut
  • Michigan
  • New Jersey
  • Pennsylvania
  • West Virginia

Michigan’s strong start

Using Michigan as an example again, its retail casinos generated $118 million in state wagering tax revenue in 2019, according to the MGCB. That revenue plummeted in 2020, to just over $50 million, when physical casinos shuttered during the beginning of the pandemic. In 2021, the same year the Wolverine State launched online casinos and online sportsbooks, Michigan’s retail casinos recovered a bit to generate almost $93.6 million in state wagering tax revenue.

However, Michiganders wagering in online casinos alone far surpassed both figures – bringing in more than $179 million in Total Internet Gaming State Tax/Payment from Jan. 22 to Nov. 30, 2021. During that same period, the state saw $992.2 million in online casino GGR.

Michigan online casinos have beaten both those years combined, with that $179 million in taxes and payments, which doesn’t even include December. (Michigan revenue figures for December should become available in the next week or so)

It helps that Michigan taxes its online gambling operators at between 20% and 28%, depending on their earnings. Operators partnered with one of the three Detroit commercial casinos pay an additional 1.25% to the city.

Federal figures on online casino are hard to track

Gaming regulators from Michigan, New Jersey and Pennsylvania told OPR they don’t keep track of gambling earnings that get reported to the IRS.

Kerry Langan, in the public information office at the New Jersey Division of Gaming Enforcement (DGE) told OPR:

“You would have to get this information from the feds.”

Similarly, FanDuel Publicity Director Kevin Hennessy said to OPR that FanDuel Casino and FanDuel Sportsbook do withhold federal taxes on earnings and send winners W-2Gs. However, “We are not allowed to give out individual tax information – even a combo number – due to privacy requirements.”

Plus, the IRS itself is slow to add taxation categories.

Even though the Continental Congress partly funded the Revolutionary War with a lottery, cities and states were the first ones to tax gambling, according to a gambling history timeline written by George G. Fenich. He’s a professor in the School of Hospitality Leadership, College of Business at East Carolina University.

IRS Media Relations Specialist Eric Smith told OPR that his agency “only began separately tabulating” gambling earnings in 1995.

Smith said to OPR:

“The number of returns and reported winnings have fluctuated from year to year, but in general terms, the trend line has been upward over that time period, with the number of returns reporting gambling income nearly doubling and the dollar amount of reported income more than quadrupling.”

IRS sees gains from online gambling growth

The IRS tallied reported gambling earnings for 2019 at nearly $35.8 billion, up almost $3.2 billion from tax-year 2017. That, of course, falls in line with the end of PASPA. Online gambling grew exponentially during 2018 and 2019.

Plus, those numbers are only going to continue to climb. US online gambling is a growing business and not all states are yet in the fold.

During fiscal year 2020, the agency processed more than 240 million tax returns and other forms and collected nearly $3.5 trillion in taxes.

In 2018, more than 5 million filers submitted IRS Form W-2G.

If online gambling winnings reach a certain threshold, the IRS taxes them at 24%. With millions of new online casino and sportsbook bettors, that adds up.

Hennessy told OPR about FanDuel’s Terms and Conditions:

“We report winnings to the Internal Revenue Service (IRS) and the State of New Jersey Division of Taxation, for:

“a. Any bet which results in proceeds of $1,200.00 or more from a slot game; or

“b. Any bet which results in proceeds of $600.00 or more where the winnings are at least 300 times the amount of the wager.

“We also withhold taxes on any bet which results in proceeds of $5,000.00 or more where the winnings are at least 300 times the amount of the wager. We withhold 24% of the proceeds and remit such amount to the Internal Revenue Service (IRS) [plus] 3% of the proceeds […] to the State of New Jersey Division of Taxation.

“If you are subject to IRS reporting requirements, we will send you Form W2-G summarizing the information for tax purposes by January 31st of the year following the end of the tax year of winning.”

Gambling jackpots grow, even as the number of taxed winners shrink

In 2019, 1,947,628 tax filers claimed gambling earnings on their tax forms. That’s down from 2018’s 1,993,632 and 2017’s 2,094,093.

During that same time, reported gambling earnings increased by $3.2 billion:

  • 2019: $35.8 billion
  • 2018: $32.9 billion
  • 2017: $32.6 billion

This data seems to show that operators are seeing gamblers win smaller, untaxed prizes and churn that money back into play. Once bettors win big, they need to pay the IRS.

Considering the online gambling market only continues to grow, this strategy seems to be a win-win.

- Heather Fletcher is the lead writer with OnlinePokerReport. She's a career journalist, with bylines in The New York Times, Adweek and other publications. Reach her at [email protected]
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