Over the past few weeks we received a couple of questions. Here they are with answers.
Timing of Online Gambling Income
Question—What if you are gambling on an online site over the course of a year and you win some money, however you don’t make a withdrawal from the account that year? Say you save up what you win for two years then withdrawal some do you have to report it the year you win or when you actually withdraw it ad have in your hand?
The year your income is earned is the year that it is taxable. If an individual has online gambling income earned in 2008 but doesn’t make a withdrawal in 2008 he still has 2008 income that must be reported on his 2008 tax returns.
Ohio and Gambling Losses
Question—I’m a resident of Ohio. I think it’s ridiculous that even though I’ve been a net loser in gambling this year I must pay state income tax on my “wins.” How can this be constitutional?
In several states, mostly in the Midwest, the state income tax is based on gross income (Federal Adjusted Gross Income with a few changes); no itemized deductions are allowed. Under the US Tax Code gambling income is considered Other Income included in Federal AGI; gambling losses are an itemized deduction allowed up to the amount of wins on Schedule A.
The situation you describe—being taxed on phantom gambling income—is quite possible. There is a Wisconsin case (Wisconsin also doesn’t allow gambling loss deductions) which explains the philosophy. As I quoted in March 2007:
“Effective January 1, 2000, gambling losses were no longer offset against gambling winnings under the Wisconsin tax code because, effective on that date, Wisconsin no longer permitted as a deduction from Wisconsin taxable income “[m]iscellaneous itemized deductions under the Internal Revenue Code,” see Wis. Stat. § 71.07(5)(a)7 (2003–04), one of which, the Department contends and Dettwiler does not dispute, was the deduction for “wagering losses,” under section 165(d) of the Internal Revenue Code…His contention that he should nevertheless be permitted to subtract from his Wisconsin taxable income the offset permitted by section 165(d) of the Internal Revenue Code is not only circular and without merit, but is wholly contrary to the legislature’s decision to eliminate such offsets effective January 1, 2000.
“The Tax Appeals Commission decision is perfectly logical, appropriate, and correct. Accordingly, we affirm.”
It’s actually worse in Ohio. This will not only impact your Ohio income tax but your city income tax. Ohio is truly not a good location to be an amateur gambler. I suggest you contact your state legislators and request that the law be changed.
That’s a pretty ridiculous law. The best part is that it encourages high-risk forms of gambling. If you play blackjack, and win $1000 and then lose $950, you still end up behind — but if you play something that makes you a net loser most years, with a big win every few years, you’ll at least turn a profit some of the time.