Online Gaming Winnings and tax information reporting obligations for gaming companies

Online Gaming Winnings and tax information reporting obligations for gaming companies

All income is taxable and that includes gaming winnings. The Internal Revenue Service (IRS) has specific tax information reporting obligations gaming companies are to follow associated with payments to winners.

For online gaming companies tax information reporting rules should be considered whenever making a payment, which could be for winnings or prizes.  There could also be tax reporting obligations if a gaming company acts as a broker for game tokens or game artifacts.

There are three main components of tax information reporting gaming companies need to be able to facilitate:

• Documentation – collecting of a tax form from the players prior to payment.
• Withholding – ability to apply tax withholding rules to a payment and deposit the information with the regulator in a timely manner according to the regulations.
• Reporting- reporting to the IRS and the taxpayer of payments.

IRS rules for documentation, withholding and reporting on gaming winnings can be complex and nuanced. Additionally, individual states can have separate obligations that can vary. If not done correctly, the gaming company can be liable for the taxes on the proceeds that are paid and fines and penalties for improper reporting. Below is a general overview of federal obligations and is not meant for tax advice.   Please consult with a tax advisor regarding tax matters.

Documentation

The IRS requires U.S. payers and withholding agents, to obtain certain IRS tax certification forms from those that receive payments that could be reportable and subject to withholding. Without proper tax forms, those making the payment generally are to make certain presumptions and withhold taxes on reportable payments at the highest rate set by law.

For U.S. winners paid U.S. sourced income

In general tax Form W-9, Request for Taxpayer Identification Number and Certification, is typically used when a person or entity is required to report certain types of U.S. sourced income for a U.S. person. The form helps businesses obtain certain information from payees to prepare information returns for the IRS.

The backup withholding rate under Internal Revenue Code to certain winnings where the winner does not furnish a correct taxpayer identification number (TIN) is 24%.   Collecting a W-9 form online prior to a payment, and many times at an account setup is, a valid way to collect a certified TIN and avoid 24% backup withholding from a payment.

The information provided by the player on a W-9 (e.g. name, social security number, and address) is used to populate IRS Forms W-2G and/or 1099-Misc.

For non-US winners paid U.S. sourced income

For non-US winners to avoid or reduce US withholding taxes, they can provide a W-8Ben.  Casinos and other gaming institutions are required to obtain information about winners in order to satisfy their reporting requirements with the IRS.  A W-8BEN can satisfy the information needed and allow for zero or reduced withholding of federal income tax on gaming winnings.

Withholding

Withholding tax is the money withheld from a payment and sent directly to the government. If one does not provide a U.S. TIN, withholding can apply.  Systems need to be in place to withhold the money and deposit with the IRS in a timely manner in accordance with IRS deposit rules.

Reporting

Tax reporting in general is the requirement of a business that makes reportable transactions during the calendar year, they must file information returns to report those transactions to the IRS and furnish a copy of the information returns to the recipients.

For tax reporting and gaming, there are multiple tax reporting forms that can be issued for winnings. The type of form depends on the type of winnings, if  the person being paid  is a U.S. person or a nonresident alien and who is the payor. Generally, a W2-G is issued for gambling winnings from casinos and a, 1099-MISC for prizes.  Tax forms to consider for winnings can be:

1099-misc

If there is a net profit of $600 or more for the year playing on websites such as DraftKings and FanDuel, the organizers have a legal obligation to send both the player and the IRS a Form 1099-MISC.

The 1099 tax forms report a player’s winnings to the taxing authorities and also provide the player information for completing their taxes.

A Form 1099-MISC for each player who has been paid during the year is required for payments of at least $600 in prizes and awards include amounts paid to a winner of a sweepstakes not involving a wager. If payment is for a wager, winnings are reported on Form W-2G.

W-2G

A form W-2G is to report gambling winnings and federal income tax withheld on those winnings. The requirements for reporting this form and withholding depend on:

• the type of gambling,
• the amount of the gambling winnings, and
• generally, the ratio of the winnings to the wager.

Forms W-2G may be issued immediately or by January 31 following the year of the payment.

Form W-2G is used for specific winnings, that include:

1. The winnings (not reduced by the wager) are $1,200 or more from a bingo game or slot machine.
2. The winnings (reduced by the wager) are $1,500 or more from a keno game.
3. The winnings (reduced by the wager or buy-in) are more than $5,000 from a poker tournament.
4. The winnings (except winnings from bingo, slot machines, keno, and poker tournaments) reduced, at the option of the payer, by the wager are:
   1. $600 or more, and
   2. At least 300 times the amount of the wager; or
5. The winnings are subject to federal income tax withholding (either regular gambling withholding or backup withholding).

1099-K

Payments for winnings through payment processors like PayPal, CashApp, Zelle, or Venmo, the reporting form may be on a Form 1099-K.

The IRS planned to implement changes to the 1099-K reporting requirement for the 2022 tax year. However, the IRS delayed the implementation of a new $600 reporting threshold for goods and service transactions from third party processors like Venmo and PayPal to 2023, reverting tax year 2022 back to the previous higher 1099-K reporting threshold (over $20,000 in payments and more than 200 transactions). If one did not receive a 1099-K, the IRS still expects income to be reported by the player regardless of the amount.

1042-S

Payments of gambling winnings to a nonresident alien individual or a foreign entity aren't subject to reporting or withholding on Form W-2G. Gambling winnings paid to a foreign person can be subject to 30% withholding under sections Internal Revenue Code (IRC) 1441(a) and 1442(a) and are reportable on Form 1042. Form 1042-S is an information return filed by a withholding agent to report the amounts paid to foreign persons,

This is a general overview of considerations when making payments for online gaming.  The rules can be nuanced and complicated.  Please consult with a tax advisor regarding tax matters.

How Can TAINA Help? 

TAINA’s advanced software can provide an automated process for solicitation, processing, and maintenance of tax forms from clients and provides for withholding and information reporting data for operational processes. 

TAINA is the market-leading, fully automated FATCA and CRS Validation Platform that is revolutionizing the way that financial institutions and gaming companies manage compliance. TAINA’s automated tax compliance platform is being used at scale by the world’s largest and most sophisticated financial institutions to revolutionize their customers’ experience and compliance.  

TAINA’s flexible and lightweight platform validates tax forms in all formats, saving our clients costs and time, reducing their risk, and radically improving their customer and investor experience. 

We would value speaking with you about your compliance process and how our award-winning FATCA and CRS Validation platform may help you comply with the documentation, withholding and reporting obligations of gaming companies.