Federal Government Gambling
This U.S. Federal gambling law prohibits the operation of interstate betting activities in the United States. The Federal Wire Act, also known as the Interstate Wire Act of 1961, specifically made it illegal for illicitly run US-based sports gambling businesses to utilize any form of wire communications to send or accept betting information and wagers from across state lines or foreign US-owned territories.
Some opponents of what Reid is trying to do object to the federal government raising revenue through gambling revenues. Even more troubling may be the fact that the federal government has. A payer is required to issue you a Form W-2G, Certain Gambling Winnings PDF if you receive certain gambling winnings or have any gambling winnings subject to federal income tax withholding. You must report all gambling winnings as 'Other Income' on Form 1040 or Form 1040-SR PDF (use Schedule 1 (Form 1040 or 1040-SR) PDF ), including winnings. The Federal government has designated some forms of gambling as prohibited within the US and has created laws that are non-negotiable in the regulation of such prohibited activities. On this subject, the Federal government may outlaw any form of gambling and states must abide by their law as Federal regulation will always trump state laws.
The Federal Wire Act officially amended Chapter 50 of Title 18 of the United States Code of Laws. The law has since been interpreted by the DOJ to include interstate online communications; hence its effective prohibition of interstate online sports betting in the US. For this reason, it is important that players and operators understand the specific laws concerning gambling implemented in countries they choose to participate and practice gaming-related activities in.
History of the Federal Wire Act
Then-US attorney general Robert F. Kennedy, who was emboldened by the presence of his brother John F. Kennedy as the US president, suggested to Congress passing a law which would prohibit interstate gambling. His suggestion led to a newly crafted bill which was introduced in the US Senate as SB 1656. This bill would be later known as the Federal Wire Act. SB 1656 was included in eight bills presented to Congress that year. The Federal Wire Act as proposed by Robert F. Kennedy would help the US Justice Department effectively slow down the sportsbook activities of criminal organizations operating within the United States and its territories. The Wire Act was signed on September 13th, 1961 by then-US President John F. Kennedy.
What is the Federal Wire Act?
The Federal Wire Act is a law that was designed to curb the illegal bookmaking activities of organized crime syndicates. Its language included and punished domestic businesses and bookies who accepted bets over the telephone or telegraph. This Act was created to specifically address the ongoing and growing issue of organized interstate racketeering and number-fixing which demonstrated to be profitable to criminal organizations and Mafia families. The Federal Wire Act proved to be successful as it severely damaged the 1960’s era mobsters from generating revenue from illegal bookmaking activities. The Act’s language minimized the mobs reach within the nation and cut their connection from U.S. territories.
What Does the Federal Wire Act Regulate?
The Federal Wire Act regulates the use of wire communication networks by domestic state-based sports betting operations. The Act effectively bans any US-based sportsbooks using wired communications to communicate between states as an attempt to destroy illegal crime networks that profit from game-fixing, racketeering, and wager collecting. While this effectively worked in the 1960’s, the Act was not prepared for the invention of the internet nor capable of foreseeing online gaming markets. A law later on known as PASPA would come to regulate domestic brick and mortar sports betting operations and activities for 25 years before its removal from the U.S. lawbooks.
Does The Federal Wire Act Effectively Prohibit Sports Betting In The US?
The Act gave local state law enforcement more strength to apply stricter punishment to mobsters by imposing longer sentences than previously possible under existing state legislation. The Federal Wire Act cut the flow of wealth provided through illegal bookmaking and number fixing to criminal organizations without effecting casual bettors. The Act was not designed to attack players from the U.S.A. but rather to strike unlicensed gambling services that used wired communicates to collect bets and pay out winnings from and to domestic players, respectively. Therefore, the Federal Wire Act was actually an anti-organized crime law not anti-gambling legislation, as while the law is relevant to gambling it also has nothing to do with gamblers.
It is stated in the Federal Wire Act, those caught in violation “shall be fined or imprisoned for no more than 2 years or both”. This improved the Justice Department’s ability to combat the unlicensed illegal sports betting industry which was at the time run by the Mafia and smaller local bookies. The laws enacted by the U.S. Congress and President Kennedy were known as the 1960’s Interstate Anticrime Acts which empowered the Federal Government to take a more effective role in the fight against organized crime and racketeering. At the time, the Mafia manipulated Labor Unions, shook down businesses, and ran unlicensed gambling rings.
The Act’s language was intended to assist territories and states in enforcing their respective laws on illegal bookmaking. However, as time came to show, the language in the Federal Wire Act could be circumvented by illegal figures through its exclusion of the internet as a wired communication facility. For this reason, in 2001 the Department of Justice under the Bush administration declared the Federal Wire Act of 1961 intended to expand its regulatory prohibition to all forms of US-based online gambling. However, in 2011 the DOJ officially clarified its position that the Federal Wire Act only outlawed US-based intrastate online sports betting operations, and had no application regarding state-regulated online casinos, online sportsbooks, poker sites or other online gambling initiatives allowed by state law.
In 2018, after the repeal of PASPA, the issue of the Federal Wire Act’s relevancy to online sportsbooks was brought into question. It was clarified that the Federal Wire Act only restricted -USbased interstate wagering on sports. Meaning that the Wire Act makes it illegal for any domestic state-regulated online sportsbook to accept bets outside fo their state. This allows state-approved sportsbook the capability to offer wagering online to any bettor residing in or visiting their state without violating the Federal Wire Act.
FAQ’s
DOES THE FEDERAL WIRE ACT AFFECT ONLINE GAMBLING IN THE UNITED STATES?
The Federal Wire Act was once interpreted as federal legislation that could regulate all forms of online gambling, specifically in the 1990’s dot-com era. However, this stance was challenged when the DOJ released a formal opinion on their interpretation of the Federal Wire Act. According to the DOJ’s 2011 statement, the Federal Wire Act only applied to US-based online sports betting and did not apply to casino or poker online gambling nor extend its jurisdiction beyond the United States and its declared territories.
In 2018 following the repeal of PASPA, the Wire Act was once more considered due to the major changes in the US sports betting market. The Wire Act now only restricts interstate online betting, which means that state-regulated online sportsbooks are not permitted to accept bets across state lines or from sources outside of the United States. This is a stark contrast from the law’s previous application which effectively prohibited all US based online sportsbook activity.
DOES THE FEDERAL WIRE ACT MAKE ONLINE SPORTS BETTING ILLEGAL FOR US RESIDENTS?
No. The Federal Wire Act does not criminalize offshore online gambling as it only outlaws interstate wagering through state-regulated online sports betting. For this reason, states are not permitted to accept bets from outside of their state. If an individual state decides to accept out of state wagers, they would immediately face legal actions and injunctions by sports leagues or the federal government for their violation of this law.
DOES THE FEDERAL WIRE ACT APPLY TO OFFSHORE ONLINE SPORTSBOOKS?
No, the Wire Act only has prohibitive jurisdiction concerning betting activities between states within the United States and its territories. Outside of the U.S., governing jurisdictions are free to regulate and license online sportsbooks and offer their betting services to whomever they choose.
The US does not have any federal law on the books that outlaws offshore gambling, therefore, US players are free to access offshore betting destinations. However, the states of Washington and Connecticut do have state laws in place to prohibit residents from engaging in any type of online betting including both US based and/or offshore gambling.
ARE THERE PENALTIES FOR US RESIDENTS WHO BET ON SPORTS ONLINE?
Under the Federal Wire Act, it is only a crime to accept bets outside of a state’s jurisdiction or operate a sportsbook on US soil that is unregulated and unlicensed. However, nowhere in the law does it place prohibitions on bettors from the U.S.A. wagering on sports at legally licensed online sportsbooks.
ARE THERE ANY LEGISLATIVE PUSHES TO REWRITE THE FEDERAL WIRE ACT?
Before 2011, the DOJ improperly used the Federal Wire Act to prosecute countless individuals and businesses under the general interpretation of the Wire Act. Since the rise of the internet, the anti-gambling leaning members of Congress intended to use the Wire Act to rid the Internet of casino-style gambling.
In 1996, then-US Senator of Arizona Jon Kyl introduced a bill called the Crime Prevention Act that included an amendment to the Wire Act to encompass the Internet under its prohibitive jurisdiction.
In 1996, then-US Representative Tim Johnson of South Dakota introduced his own bill to take a jab at online gambling called the Computer Gambling Prevention Act.
In 1997, Senator Jon Kyl tried once more to introduce another anti-internet gaming legislation by the name of the Internet Gambling Prohibition Act which would make all contests, sports games, or games of chance classified as a bet or wager thus illegalizing its online forms.
In 1999, after his previous attempt in 1997, Senator Jon Kyl tried to reintroduce the same legislation.
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In 2002, then-US Representative Bob Goodlatte of Virginia introduced his own prohibitive bill called the Combating Illegal Gambling Reform and Modernization Act which would classify bets and wagers to include all gambling activities and games of chance.
All of these attempts to pass anti-internet gambling legislation failed and due to the DOJ’s clarification regarding the application of the Federal Wire Act, few states and government entities were able to prosecute legitimate online businesses and social bettors.
However, in the past few years a new bill has gained momentum and is aimed to outlaw most forms of online gaming. In 2014, Sheldon Adelson the world’s wealthiest casino owner who has a great distaste for regulated online gambling is the primary supporter and push behind this bill.
RAWA also known as the Restoration of America’s Wire Act which would ban domestically regulated online gambling and immediately criminalize and shut down multiple state-regulated online gaming industries across the US. RAWA could effectively ban online lottery sales, online poker, online sportsbooks, online casinos and online bingo, exemptions include online horse race wagering and daily fantasy sports contests.
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Do you like to gamble? If so, then you should know that the taxman beats the odds every time you do. The Internal Revenue Service and many states consider any money you win in the casino as taxable income. This applies to all types of casual gambling – from roulette and poker tournaments to slots, bingo and even fantasy football. In some cases, the casino will withhold a percentage of your winnings for taxes before it pays you at the rate of 24 percent.
Casino Winnings Are Not Tax-Free
Casino winnings count as gambling income and gambling income is always taxed at the federal level. That includes cash from slot machines, poker tournaments, baccarat, roulette, keno, bingo, raffles, lotteries and horse racing. If you win a non-cash prize like a car or a vacation, you pay taxes on the fair market value of the item you win.
By law, you must report all your winnings on your federal income tax return – and all means all. Whether you win five bucks on the slots or five million on the poker tables, you are technically required to report it. Job income plus gambling income plus other income equals the total income on your tax return. Subtract the deductions, and you'll pay taxes on the resulting figure at your standard income tax rate.
How Much You Win Matters
While you're required to report every last dollar of winnings, the casino will only get involved when your winnings hit certain thresholds for income reporting:
- $5,000 (reduced by the wager or buy-in) from a poker tournament, sweepstakes, jai alai, lotteries and wagering pools.
- $1,500 (reduced by the wager) in keno winnings.
- $1,200 (not reduced by the wager) from slot machines or bingo
- $600 (reduced by the wager at the casino's discretion) for all other types of winnings but only if the payout is at least 300 times your wager.
Win at or above these amounts, and the casino will send you IRS Form W2-G to report the full amount won and the amount of tax withholding if any. You will need this form to prepare your tax return.
Understand that you must report all gambling winnings to the IRS, not just those listed above. It just means that you don't have to fill out Form W2-G for other winnings. Income from table games, such as craps, roulette, blackjack and baccarat, do not require a WG-2, for example, regardless of the amount won. It's not clear why the IRS has differentiated it this way, but those are the rules. However, you still have to report the income from these games.
What is the Federal Gambling Tax Rate?
Standard federal tax withholding applies to winnings of $5,000 or more from:
- Wagering pools (this does not include poker tournaments).
- Lotteries.
- Sweepstakes.
- Other gambling transactions where the winnings are at least 300 times the amount wagered.
If you win above the threshold from these types of games, the casino automatically withholds 24 percent of your winnings for the IRS before it pays you. If you cannot provide a Social Security number, the casino will make a 'backup withholding.' A backup withholding is also applied at the rate of 24 percent, only now it includes all your gambling winnings from slot machines, keno, bingo, poker tournaments and more. This money gets passed directly to the IRS and credited against your final tax bill. Before December 31, 2017, the standard withholding rate was 25 percent and the backup rate was 28 percent.
The $5,000 threshold applies to net winnings, meaning you deduct the amount of your wager or buy-in. For example, if you won $5,500 on the poker tables but had to buy in to the game for $1,000, then you would not be subject to the minimum withholding threshold.
It's important to understand that withholding is an entirely separate requirement from reporting the winning on Form WG-2. Just because your gambling winning is reported on Form WG-2 does not automatically require a withholding for federal income taxes.
Can You Deduct Gambling Losses?
If you itemize your deductions on Schedule A, then you can also deduct gambling losses but only up to the amount of the winnings shown on your tax return. So, if you won $5,000 on the blackjack table, you could only deduct $5,000 worth of losing bets, not the $6,000 you actually lost on gambling wagers during the tax year. And you cannot carry your losses from year to year.
The IRS recommends that you keep a gambling log or spreadsheet showing all your wins and losses. The log should contain the date of the gambling activity, type of activity, name and address of the casino, amount of winnings and losses, and the names of other people there with you as part of the wagering pool. Be sure to keep all tickets, receipts and statements if you're going to claim gambling losses as the IRS may call for evidence in support of your claim.
What About State Withholding Tax on Gambling Winnings?
There are good states for gamblers and bad states for gamblers. If you're going to 'lose the shirt off your back,' you might as well do it in a 'good' gambling state like Nevada, which has no state tax on gambling winnings. The 'bad' states tax your gambling winnings either as a flat percentage of the amount won or by ramping up the percentage owed depending on how much you won.
Each state has different rules. In Maryland, for example, you must report winnings between $500 and $5,000 within 60 days and pay state income taxes within that time frame; you report winnings under $500 on your annual state tax return and winnings over $5,000 are subject to withholding by the casino due to state taxes. Personal tax rates begin at 2 percent and increase to a maximum of 5.75 percent in 2018. In Iowa, there's an automatic 5 percent withholding for state income tax purposes whenever federal taxes are withheld.
State taxes are due in the state you won the income and different rules may apply to players from out of state. The casino should be clued in on the state's withholding laws. Speak to them if you're not clear why the payout is less than you expect.
How to Report Taxes on Casino Winnings
Federal Government Gambling Laws
You should receive all of your W2-Gs by January 31 and you'll need these forms to complete your federal and state tax returns. Boxes 1, 4 and 15 are the most important as these show your taxable gambling winnings, federal income taxes withheld and state income taxes withheld, respectively.
You must report the amount specified in Box 1, as well as other gambling income not reported on a W2-G, on the 'other income' line of your IRS Form 1040. This form is being replaced with a simpler form for the 2019 tax season but the reporting requirement remains the same. If your winnings are subject to withholding, you should report the amount in the 'payment' section of your return.
Different rules apply to professional gamblers who gamble full time to earn a livelihood. As a pro gambler, your winnings will be subject to self-employment tax after offsetting gambling losses and after other allowable expenses.