Compared to U.S. resident gamblers, nonresident gamblers have had it far worse: Gambling losses are not deductible at all unless connected to a trade or business. Also, games like poker and slots are subject to thirty-percent withholding on a per-bet basis, as opposed to a per-session basis.
Until today, that is.
The District of Columbia Court of Appeals has ruled in Park v. Commissioner that a nonresident gambler may calculate gambling winnings or losses on a per-session basis.
To elucidate the practical significance of this holding, the court explained the tax outcomes when applying each method:
Consider two people. The first, 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.
Section 165(d) of the Internal Revenue Code states that a U.S. resident taxpayer may deduct losses from wagering transactions only to the extent of gains from such transactions. Section 871(a)(1)(A) requires nonresident taxpayers to include in income, among other things, “gains” received from sources in the United States.
The IRS has held the view that “gains” under 165(d) may be calculated over a series of separate plays or wagers. The IRS demonstrated some common sense when stating in 2008 that “fluctuating wins and losses left in play are not accessions to wealth until the taxpayer redeems her tokens and can definitively calculate” the amount realized.
The IRS demonstrated an equivalent lack of common sense interpreting “gains” under section 871 to mean a per-bet approach for gambling. In Park, the IRS argued that because losses aren’t deductible, then all winning bets are taxable.
This logic is backwards: We need to figure out how to calculate winnings and losses first, the court noted.
The taxpayer, Sang Park, played the slot machines. A lot. His case has been remanded to the U.S. Tax Court for the parties to calculate his proper tax liability.
For a summary of the U.S. Tax Court’s opinion that was reversed in part by the D.C. Court of Appeals, check out this post from Russ Fox. If Park’s gambling records are as poor as the Tax Court opinion indicates, he may not fare any better on remand.
Are there any other significant implications from the appellate court’s holding?
In general, payers of gambling winnings to nonresidents are required to withhold 30% of the winnings and issue the payee a Form 1042-S (exception: proceeds from a wager placed in blackjack, baccarat, craps, roulette, or big-6 wheel are not amounts subject to reporting).
Based on the IRS position in Park, theoretically U.S. casino operators should have been withholding (if appropriate) 30% on any winning bet subject to 1042-S reporting (such as slot machines and poker). As the decision notes, this reporting does not necessarily economically reflect the player’s gains from gambling per session.
Park essentially requires U.S. casino operators to make the Form 1042-S reporting and withholding determinations for slot machine play when the nonresident player seeks to cash out tokens or redeem a ticket.
Although this is how U.S. casino operators are also supposed to approach reporting and withholding determinations for slot machine play by U.S. residents, I believe there is inconsistent application of this rule. I’ve heard casinos issuing Form W-2Gs to U.S. residents when their slot machine pull results in a win exceeding $1,200. If a casino has been issuing W-2Gs on a per-bet basis in some situations now, I question whether Park would impact its approach for either U.S. residents or nonresidents.
Unfortunately, the decision does not attempt to further define what a gaming “session” means beyond slot machine play. There is little court precedent for what a gambling “session” is for other games, such as poker. In any event, since this case was about slot machine play, such interpretation would likely be considered dicta.
Nevertheless, the case is a victory for nonresident gamblers. Their treatment just became a bit more similar to resident gamblers for tax purposes.