There is no getting away from the taxes if you win big at a Colorado casino or sportsbook. As in most states, you’ll need to pay income tax on that windfall. To balance this, you can deduct gambling losses — even if they come from a different form of gambling from your win. As you will see below, making your deductions “audit proof” requires some work.
With sports betting now in Colorado, many people will be hitting the 300x-their-bet threshold, which triggers a W2-G to be issued. A copy of this form will go to the IRS, making declaring it on your return mandatory. You’ll have to declare all wins, with the W2-G ensuring that bigger amounts are declared.
Under the new law, those who itemize deductions will continue to be able to deduct gambling losses up to the amount of their total winnings. For example, a slot player who wins $25,000 in jackpots may deduct up to that amount in verifiable gaming losses when they fill out an itemized tax form. For many of us, gambling means buying the occasional lottery ticket on the way home from work, but the Internal Revenue Service says that casual gambling also includes raffles, casino games, poker, sports betting—and, yes, even fantasy football. When you win, your winnings are taxable income, subject to its own tax rules. Gambling Wins and Losses on a Tax Return Gambling wins are reported on the front page of Form 1040 for tax years 2017 and prior. Gambling wins are reported on Schedule 1, Line 21 for tax year 2018. All gambling wins are required to be reported even if the casino doesn’t report the win to the IRS.
This page has you covered for state and local income taxes on gambling winnings in Colorado. There is also information on how the gambling businesses are taxed — and the good causes that Colorado gambling supports.
Federal income taxes on gambling wins in Colorado
You should declare every cent won in all forms of gambling to the IRS on your yearly tax returns. This includes wins from casino games, lottery windfalls, sports betting, horse racing bets or skill games, including DFS contests.
Many people are under the impression that you only need to declare those wins reported on a W2-G form. These are issued by casinos and sportsbooks for wins over a certain threshold. Here are some key examples:
- Slot Machines/Bingo Game: $1,200
- Keno Game: $1,500
- Poker Tournament: $5,000 (reduced by entry fee)
- Sports Bets/Pari-Mutuel Bets: $600 and 300x your stake
In some instances, the casinos will automatically withhold your taxes. This is required for betting wins over $5,000. You still need to report this on your tax return, though the tax will already be paid.
Offsetting losses from your federal tax return
Simply collecting losing tickets or bet slips is not enough to offset your gambling losses. In the event of an audit, you will need to provide proof that all your wins are listed, and that all your losses were accurately recorded. This is hard to do, making rigorous record keeping very important.
A diary/log of your sessions, recording wins and losses, is a starting point. Where the game allows this, proof that you bought the tickets or participated in a game is the starting point for backup documents.
Keep in mind that you can only offset gambling losses against the tax you pay on gambling wins. The best outcome is that you cancel out any W2-G wins on your return.
Colorado state income tax and gambling winnings
Colorado has a flat state income tax of 4.63%. This replaced a tiered system, which had higher rates based on the amount you earned. You’ll need to have a similarly rigorous standard for reporting your wins/losses at the state level as you did at the federal level.
If you won money in another state — for example at a Las Vegas casino — then your state taxes will depend on what was already withheld. You won’t be double-taxed, as long as you can prove that this has already been paid in the state you won in.
You won’t be able to offset gambling losses against any other portion of your return than the gambling wins. As with the federal taxes, you are required to list (itemize) all losses and wins, not just those that triggered a W2-G to be issued.
How are the casinos, sportsbooks and OTB offices taxed?
It is not only individuals that pay tax on gambling profits in the Centennial State. The casinos at Central City, Black Hawk and Cripple Creek are subject to a gaming tax. The tribal casinos at Ute Mountain do not pay this.
The amount of taxes the casinos pay is based on gross profits (what they take in, minus what they pay to winners). This is tiered, with the marginal rate going up as the profits get bigger. Below, you will find the latest schedule of tax rates:
- Under $2 million: 0.25%
- $2 million to $5 million: 2%
- $5 million to $8 million: 9%
- $8 million to $10 million: 11%
- $10 million to $13 million: 16%
- $13 million+: 20%
Sportsbooks are taxed at a flat rate of 10% of gross profits. This includes both the retail and mobile sportsbooks. With only gambling, you’ll have a perfect record of your wins and losses — which make it easy for individuals to itemize for tax return purposes.
Pari-Mutuel betting is also taxed, though at a lower rate. While there is no greyhound racing in Colorado after the 2014 ban, it is still possible to bet on dog races via simulcast. This is taxed at 4.5%. By contrast, horse race bets are taxed at just 0.75%.
The lottery has a profit margin built in. This is for good causes, and so not subject to additional taxation. Wins need to be reported by individuals.
Gambling taxes in Colorado: Where the money goes
While some gambling tax money finds its way to the treasury via regular tax returns, the money collected via the lottery and casinos is earmarked for good causes. Here are some of the organizations and initiatives that benefit from gambling revenues in Colorado:
- Community colleges
- Colorado State Historical Fund
- Travel and Tourism Promotion Fund
- Gaming cities and counties
- Advanced Industries Acceleration Cash Fund
- Local Government Limited Gaming Impact Fund
Gambling and the Law®: By Professor I Nelson Rose
The Internal Revenue Code is unkind to winners -- and it doesn't much like losers, either. The federal government taxes gambling winnings at the highest rates allowed. So do the manystates and even cities that impose income taxes on their residents. If you make enough money, in a high-tax state like California or New York, the top tax bracket is about 50 percent. Out ofevery additional dollar you take in, through work or play, governments take 50 cents.
Of course, the tax-collector first has to find out that you have won. Congress and the Internal Revenue Service know gambling is an all-cash business and few winners indeed wouldvoluntarily report their good luck. So, statutes and regulations turn the gambling businesses, casinos, state lotteries, race tracks and even bingo halls, into agents for the IRS.
Big winners are reported to the IRS on a special Form W-2G. If winnings are to be split, as with a lottery pool, winners are reported on a Form 5754.
Pooling money to buy lottery tickets is common among employees and friends. But whether there are two or 200 in the pool, there is going to be only one winning ticket, and somebody has toturn it in. If you are that someone, make sure you fill out a Form 5754. If your share of a $5 million prize is $1 million, you do not want to be stuck with paying income tax on the entire $5million.
Gambling has become such big business that the IRS receives nearly four million Forms W-2G and 5754 each year. This tells the tax-collectors that nearly four million big winners are outthere, waiting to be taxed.
But the IRS does not always wait. The government wants to make sure it gets paid. What good does a W-2G do if the winner is a foreigner who is going to be in his own foreign country whenApril 15th rolls around?
So, the IRS not only wants reports filed, but often requires that a part of the winnings be withheld. As anyone who has a salary knows, withholding also allows the government to usetaxpayers' money for many months, without having to pay interest.
The withholding rate for nonresident aliens is 30%. Not coincidentally, the tax rate for nonresident aliens is also 30%. So, if a citizen of a foreign country wins $1 million cash at aslot machine in Las Vegas, he will find he is only paid $700,000. The remaining $300,000 is sent to the IRS. The foreign citizen is unlikely to ever file an income tax return, but the IRS getspaid in full anyway.
Citizens of foreign countries are also, of course, usually taxed by their own governments. So some countries have treaties with the U.S., which protects those foreigners from having topay the 30% withholding to the IRS.
U.S. citizens and resident aliens have it both better and worse than nonresident aliens. The withholding rate for gamblers living in American is only 28% (it was 20%, up to1992). Having the IRS take $28,000 out of a jackpot of $100,000 is painful. But, it can hurt even more when tax forms are filled out. There is no 30% maximum tax for people living in the U.S.,and really big winners often end up paying a lot more than 28% or 30%.
Federal Tax Law Gambling Statute Of Limitations
The one good news is Nevada casinos were also able to convince the IRS that they could not keep track of players at table games. They said that when a player cashes out for $7,000,they do not know whether he started with $25 or $25,000. So it is actually written into the law that there is no withholding or even reporting of big winnings to the IRS for blackjack,baccarat, craps, roulette or the big-6 wheel.
There is another general IRS rule that says anyone paying anyone else $600 in one year is supposed to file a report. The IRS has been going after casinos and cardrooms that runtournaments, forcing them to file tax reporting forms on grand prize winners. Here the IRS has the very good argument that the operator knows exactly how much a player has paid to enter thetournament and how much the finalists are given.
Is there anything a winning player can do to lower the bite of the income tax? And what about those who gamble and lose? Which is everybody, occasionally. The law does allow players totake gambling losses off their taxes, but only up to the amounts of their winnings.
Of course, if you win, say $135,000, you can take off all gambling losses, up to that amount. If you gambled away, say $65,000, you would only have to pay taxes on the remaining, let'ssee: $135,000 minus $65,000 equals $70,000. The tax on $70,000 is a lot less than the tax on $135,000.
Of course, you have the small problem of proving that you actually lost $65,000. Large winnings may be required to be reported to the IRS; large losses are not.
One former IRS Revenue Officer, who quit government to open his own small tax preparation firm, thought he found the answer. One of his clients won a share in a state lottery: $2.7million, paid out over 20 years in installments of about $135,000, before taxes. The winnings were reported, but the tax return claimed gambling losses of $65,000. The IRS decided that $65,000was a lot to lose, and it sent an agent to conduct an audit.
The tax preparer found a man with an extremely large collection of losing lottery tickets and made a deal: he would borrow 200,000 losing tickets for a month for $500. The losing ticketswere bound in stacks of 100 and shown to the IRS auditor: 45,000 instant scratch tickets, 5,000 other Massachusetts lottery tickets, and 16,000 losing tickets from racetracks throughout NewEngland. So many losing tickets, that it would have been physically impossible for one man to have made these bets. The New York Times called it, 'one of the more visibly inept efforts at taxfraud.' They pleaded guilty eight days after being indicted.
Federal Tax Law On Gambling Winnings
By the way, the man who rented the tickets was not charged. It's not a crime to collect losing lottery tickets, only to use them to try and cheat the IRS.