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Winning Big While Gambling In The U.S. Can Bring Tax Pain

11/23/2015 05:10 EST | Updated 11/23/2016 05:12 EST
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Dice

Non-residents can make a claim against the IRS's lottery or gambling tax withholding but you need the paperwork

According to a new study from Solutions Research Group (SRG), more than five million Canadians have placed a bet online or via a mobile device to play fantasy sports. Not surprisingly the NHL was the top league but was followed by the NFL, Major League Baseball and Major League Soccer. And many Canadians are using U.S. websites like DraftKings and FanDuel to play fantasy sports.

And while governments may be moving to regulate these growing fantasy sports sites, you may find the taxman is also taking an interest in your latest picks. Unlike Canada, the U.S. does not let you have lottery or gambling wins tax-free. So whether you are playing fantasy sports sites based in the U.S., gambling in Vegas or playing a U.S. lottery, you can expect the Internal Revenue Service (IRS) to be interested in your winnings.

The IRS automatically withholds 30 per cent for any gambling win over certain amounts which can be a little alarming. And this applies to other types of prizing too. For example, I have a client who won a guest draw held by the hotel where she was staying. She opted to take the cash rather than the prize since it wouldn't fit into her suitcase. She was surprised to find that the amount was reduced by 30 per cent when she received the cheque.

But all is not lost. Article XXII(3) of the Canada-U.S. tax treaty means you may be able to get some or all of the tax withheld back with the right documentation and paperwork. The article allows Canadians who are not U.S. citizens, green card holders or considered resident aliens for tax purposes to claim losses against winnings.

However, the catch is proof. The taxman expects you to keep an accurate diary of losses and winnings supported by all your gambling receipts, tickets and statements. The diary must be detailed. The IRS does not believe what happens in Vegas stays in Vegas. They want to know the dates and the types of wagers or activity as well as the name and address of where you were playing. You must also include the names of the other people present while you were gambling and the amounts won and lost should be recorded.

Though it might be hard while you are enjoying yourself, you also need to keep paperwork to support the information in your diary. Items such as cancelled cheques, credit records, wagering tickets, bank withdrawals, statement of actual winnings or payment slips should all be kept. Casino frequent player cards can be a perfect source of information to keep the IRS happy. It may seem tedious but if you hit a big win, you will thank yourself.

Blackjack, baccarat, craps, roulette, dog or horse racing and Big-6 wheel winnings are not taxable so money spent on these wagers must be excluded. Keno, slot machines, table games such as poker or wheel of fortune, bingo and lotteries are considered eligible expenses. Don't expect to get the entire 30 per cent back. It will depend on the losses you can claim. So if you get really lucky and win big early, you might not have too many expenses to claim.

There is a process if you want to claim back some of your 30 per cent withholding. You will need a U.S. tax ID number known as an Individual Taxpayer Identification Number (ITIN) and file a U.S. Form 1040NR tax return. If you don't already have an ITIN, you would apply by completing a Form W-7 and attaching it to the tax return for the year you need to claim. You will also need a copy of your passport certified by Passport Canada. You mail all of it with your supporting paperwork to the IRS and expect to wait. Currently, the IRS is taking longer to complete these returns because they are verifying 100 per cent of the tax slips issued to non-residents showing U.S. tax withheld so you may wait eight to 12 months for your refund.

Only U.S. gambling losses may be used to offset U.S. winnings and they can only be deducted from wagering gains in the same year. As a U.S. non-resident, there is no other way to obtain a legal refund of taxes withheld. So whether you are planning a weekend in Vegas or playing fantasy sports on a U.S. website or winning a prize across the border, it may be worthwhile keeping records of your activity. It may take some of the pain out of the tax withholding.

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