Gambling winnings usually make people really happy! Imagine the euphoria of the foreign national on vacation in Las Vegas or Atlantic City when she wins $1,000,000 at the casinos. Now, imagine her extreme disappointment and unhappiness when the casino pays her only $700,000 and tells her that the balance will be paid over directly by the casino to the United States taxation authorities, the IRS. “Is this possible?”, she wonders. YES, it is! Here are the basic facts about gambling winnings won by a nonresident alien individual (NRA) in the United States.
By way of background, a NRA who is considered to be “engaged in a US trade or business” at any time during the tax year, is taxed at regular graduated US rates on the net taxable income effectively connected with that business. This means she is taxed on the US source gross income minus all permissible deductions. Sometimes, depending on the facts, professional gamblers may be considered “engaged in a business”.
On the other hand, a NRA is taxed by withholding, at a flat 30% (or lower treaty rate, if applicable) on certain US-source income that is not treated as effectively connected with a US trade or business. In this context, the 30% withholding regime would apply to the casual as opposed to the professional gambler on certain types of gambling winnings. Some types of gambling winnings are specifically exempt from tax. Generally, these are winnings from blackjack, baccarat, craps, roulette or big six wheel, except to the extent provided in IRS regulations.
US Tax Treaty Exemptions
The gambling income won by residents of certain countries is not taxable by the US pursuant to a tax treaty negotiated with that country. These countries are: Austria, Belgium, Bulgaria, Czech Republic, Denmark, Finland, France, Germany, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, Russia, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Tunisia, Turkey, Ukraine, and the United Kingdom. Other countries may have a tax treaty with the US that reduces the 30% withholding tax rate.
If the individual is a resident of any of the treaty countries that exempt winnings from US tax, they will really be in the money because they can present a form to the casino to prevent withholding. In order to do this, the NRA should use Form W8-BEN to claim the treaty benefits, with a TIN (taxpayer identification number). There are some very limited circumstances when the casino, if it is a so-called “acceptance agent” that can request expedited ITINs, can make payment without withholding even in the absence of a TIN on the W8-BEN.
In the event tax was withheld, the NRA can file with the IRS for a refund of the 30% withholding tax. The individual must file a tax return (Form 1040-NR) after the end of the tax year to claim back the withheld tax.
The Professional Gambler
If the NRA has gambling winnings that are not from the tax-exempt class of games (e.g., blackjack, baccarat etc.), and her country of residence either has no tax treaty with the US or the treaty does not exempt gambling income, attaining the status of a “professional gambler” (one engaged in a “trade or business”) may be the only way to avoid the 30% withholding tax on the winnings.
In looking at whether a taxpayer can be treated as “engaged in a US trade or business”, generally, the taxpayer’s activities in the US must be continuous, regular and substantial rather than just isolated or sporadic. In the gambling context, if a NRA is in the US often enough to be treated as engaged in “continuous and regular” gambling activity, she is likely in the US long enough to be treated as a US “resident” (thus, subject to US tax on worldwide income) under the “substantial presence” test. The “substantial presence” test looks at one’s physical presence in the US over a three-year look-back period.
It is possible that under case law decided about other types of activity, even if the NRA-gambler was only in the US a few times per year, she can argue she was engaged in a US business if her gambling activity involved significant amounts of money. In other words, the “quality” of the activity might be sufficient to justify treatment as a professional gambler even if the “quantity” of the activity is lacking. The ability to file tax returns as a professional gambler engaged in the trade or business of gambling in the US can make a huge difference in the tax outcome. The winnings can be offset by losses and the net gains taxed at graduated income tax rates which can be much lower than the 30% rate imposed under the withholding regime. Whether the activity gives rise to professional gambler status will depend on a very careful analysis of the facts.