Gambling Winnings Across Borders: How to Navigate U.S. and Canadian Tax Laws Without Losing Your Jackpot

Gambling income is treated differently in the United States and Canada, with significant variations in tax reporting requirements, deductions, and the way casual and professional gambling is classified. For individuals who may need to report gambling income to both the Internal Revenue Service (IRS) in the United States and the Canada Revenue Agency (CRA), understanding the specific rules of each country is crucial to ensuring compliance.

Taxation of Gambling Income in the United States

In the United States, gambling income is considered fully taxable under federal law and must be reported on the taxpayer’s return, regardless of whether the winnings are large or small. According to the IRS, gambling income includes winnings from lotteries, raffles, horse races, casinos, and even fair market value of non-cash prizes like cars or trips.

IRS Regulations and Code

The IRS enforces a comprehensive set of rules for gambling income, documented under Publication 525 and Publication 529, as well as in IRC (Internal Revenue Code) Section 61(a), which defines gross income. Key documents and sections governing gambling income include:

• Topic No. 419 – Gambling Income and Losses: IRS – Topic 419
• Publication 525 – Taxable and Nontaxable Income: IRS Publication 525
• IRC Section 165(d) – Gambling Losses: This section allows taxpayers to deduct gambling losses, but only to the extent of gambling winnings. Losses can only be deducted if the taxpayer itemizes deductions on Schedule A (Form 1040).

Reporting Requirements

• Form W-2G: Casinos and other gambling establishments are required to issue this form if the taxpayer’s gambling winnings exceed certain thresholds:
  • $600 or more from horse racing (if the payout is at least 300 times the bet).
  • $1,200 or more from bingo or slot machines.
  • $1,500 or more from keno.
  • $5,000 or more from poker tournaments.
  If a taxpayer wins less than these amounts, they are still obligated to report the income, even if the establishment does not issue a W-2G.
• Deductions: Gambling losses can be deducted only up to the amount of gambling income and are claimed on Schedule A (Form 1040). The IRS also requires taxpayers to maintain accurate records of their gambling activities, including receipts, tickets, and statements, to substantiate any losses.
• Professional Gamblers: If gambling is a taxpayer’s primary occupation, gambling income and expenses must be reported on Schedule C (Form 1040) as self-employment income. Professional gamblers may be subject to self-employment tax under IRC Section 1402.

Taxation of Gambling Income in Canada

In Canada, the taxation of gambling income is generally more lenient than in the United States. Casual gambling winnings are typically not subject to taxation under the Income Tax Act (ITA), except in specific circumstances where gambling constitutes a business activity.

CRA Regulations and Code

• Income Tax Folio S3-F9-C1: This document provides guidelines on the tax treatment of windfalls, including gambling winnings, and details when gambling winnings may be considered taxable income. It can be found here: Income Tax Folio S3-F9-C1
• Prizes and Lotteries: According to the CRA, most prizes from gambling, such as lotteries, are non-taxable unless the individual is engaged in the activity as a business.

Casual vs. Professional Gambling

• Casual Gambling: In most cases, casual gamblers are not required to report gambling winnings as taxable income. This applies to winnings from lotteries, casino games, and other similar gambling activities, as they are viewed as windfalls rather than regular income.
• Professional Gambling: When gambling activities are conducted in a systematic way, with the intention to profit, the CRA may classify the income as business income. This classification is dependent on factors such as the frequency and consistency of the gambling activities, and the expertise of the gambler. If a taxpayer is classified as a professional gambler, their gambling winnings are taxable as business income under the Income Tax Act, Section 9.

Case Study: A Taxpayer with U.S. and Canadian Reporting Obligations

Scenario

Maria is a Canadian citizen but resides part-time in the United States as a U.S. tax resident. She enjoys gambling and has won significant amounts in both countries. In 2023, she wins $30,000 from a casino in Las Vegas and another $15,000 from a lottery in Canada. She is required to report her gambling income in both the U.S. and Canada.

U.S. Tax Obligations

• Maria receives a Form W-2G from the Las Vegas casino for her $30,000 winnings. Since she is a U.S. tax resident, she must report these winnings on Form 1040 as taxable income, regardless of where she resides most of the time. If she has any gambling losses, she can deduct them only if she itemizes her deductions on Schedule A and keeps accurate records of both her wins and losses.
• Assuming Maria is in the 24% tax bracket, her $30,000 winnings will result in $7,200 in federal taxes. She may also be subject to state income tax, depending on where she won her money.

Canadian Tax Obligations

• For her $15,000 lottery win in Canada, Maria is not required to report or pay tax on the winnings, as Canadian law generally exempts lottery winnings from taxation. However, since Maria is also a U.S. tax resident, the U.S. might tax this lottery win, as it taxes worldwide income for its residents.

Dual Taxation and Relief

• Under the U.S.-Canada Tax Treaty, Maria may be eligible for relief from double taxation through the foreign tax credit provisions in the treaty. For the $30,000 she won in the U.S., if she pays U.S. taxes on it, Canada will not tax it again since gambling income is generally not taxed there. For the $15,000 Canadian lottery winnings, since Canada doesn’t tax lottery wins, Maria must check if she owes U.S. taxes on her worldwide income and could use Form 1116 to claim a foreign tax credit, though it depends on treaty specifics.

Professional Gambler Scenario

If Maria is a professional gambler, both the IRS and CRA may treat her income differently:

• In the U.S., her gambling winnings would be considered self-employment income, and she would need to file Schedule C and possibly pay self-employment tax.
• In Canada, if her gambling is classified as a business, the CRA may subject her winnings to taxation under business income rules, particularly if her gambling activities are part of a structured, systematic approach to earning a profit.

Conclusion

Taxation of gambling income differs significantly between the U.S. and Canada. In the U.S., all gambling winnings are taxable, and careful reporting is essential to avoid penalties. In Canada, gambling winnings are generally not taxable unless gambling is conducted as a business. For individuals like Maria, who have gambling activities in both countries, understanding the U.S.-Canada tax treaty and taking advantage of foreign tax credits can help avoid double taxation.