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Gambling Gains for Non-Residents of the U.S.

05/03/2014


You, a Canadian resident, go to Las Vegas and enjoy a couple nights of gambling. After winning a considerable sum you find yourself asking what every sensible gambler does:

“Is that taxable in the U.S.?”
“Can we utilize gambling losses?” and
“Are there U.S. withholding tax requirements on the winnings?”

For U.S. citizens, gambling gains are generally taxable for U.S. income tax purposes, but those gains can be reduced by deducting gambling losses to the extent of their gambling gains. Recreational non-resident gamblers are also subject to U.S. tax on their gains, but may not deduct any gambling losses. However, under the Canada-U.S. Income tax treaty, Canadian residents can claim their U.S. gambling losses up to the amount of U.S. gambling gains for the year using the same rule that would apply to U.S. citizens and residents. To claim a refund of taxes withheld from gambling gains, you must file form 1040NR, U.S. Non-resident Alien Income Tax Return.

In general, the IRS has applied the tax on gains of non-resident gamblers on a "per bet" basis, whereas, U.S. residents are taxed on a "per session" basis. The position of the IRS has always been that 30% withholding tax is required on gross gambling gains on a per bet basis. The recent decision of the U.S. court of Appeals for the DC district for Sang Park finally provides non-resident gamblers with common sense relief under the U.S. tax law.

This case represents a landmark victory for non-resident gamblers who have taxes withheld by U.S. casinos at a gross federal tax rate of 30%. The Appellate Court concluded that calculating gains must be done on a “per session” basis, not a “per bet” basis, to be taxed on the actual economic gains from each session of gambling. This decision makes a radical difference and should provide a legal remedy for thousands of recreational non-resident gamblers who have had U.S. casinos take the 30% federal withholding tax from each and every winning spin of a slot machine; even if the non-resident gambler ultimately lost money playing the slots that particular session.

A basic example in the court case demonstrates just how strict the position of the IRS has been against non-resident gamblers. The court highlighted the application of this rule in the following example of how U.S. citizens and non-resident aliens are taxed differently with respect to gambling winnings. Consider the following two scenarios:

The first person, a U.S. citizen, walks into a casino and sits down to play slots. The player first wins $100 but then loses the $100 before leaving the casino for the night. In that hypothetical, the U.S. citizen would have $0 in income to report because the IRS interprets the applicable provision of the Tax Code to cover only gains measured over a session of gambling.

The second person, a non-resident alien, also wins $100 and then loses $100. The non-resident alien is in the same financial situation as our U.S. friend. But according to the IRS, the non-resident alien has $100 in income to report (the $100 he won in the initial bet) because the IRS interprets the applicable provision to require non-resident aliens to pay taxes on gains from each bet.

The outcome of 30% withholding tax on a "per bet" basis demonstrates just how unfair the result is to recreational non-resident gamblers.

That said, a non-resident could still obtain a more advantageous tax treatment on their gambling gains without having to worry about “per session” treatment by simply playing blackjack, baccarat, craps, roulette or big-6 wheel. The U.S. tax law specifically exempts gains from these games; an exemption which was not challenged or changed by this Park court decision. In conclusion, Park won his court case, but he could have saved those legal fees and taxes by just changing to a different game.