The IRS applies different methodologies for calculating the gambling winnings of US taxpayers and Nonresident Aliens (NRAs). For US taxpayers, the IRS calculates earnings based on winnings over the course of a gambling session, while for NRAs the IRS has taken the position that gambling winnings should be calculated based on each bet.
So, for example, if a US taxpayer enters a casino in Las Vegas with $1,000.00 and plays slots until they lose their $1,000.00, they will have no taxable income even if they won some jackpots during the session because the gambling session resulted in a no net gain. On the other hand, if a NRA enters a Las Vegas casino and plays slots with $1,000.00, the IRS would treat each pull of the handle as a separate, taxable transaction. So the NRA who pulls the handle three times would have three separate taxable transactions resulting in, for example: (1) a gain $4,500.00; (2) a loss of $2,250.00; and (3) a loss of $2,250.00.
This distinction is important because NRAs are not allowed to deduct gambling losses to offset their US source income, even if their income is from gambling winnings. In the example provided above, the NRA would have to report $4,500.00 in gambling winnings and is prohibited from deducting either loss of $2,250.00 from pull number 3 or 3 to offset the winnings from the first pull.
Fortunately, the US Tax Court decided on July 9, 2013, that NRAs may calculate their gambling winnings based on their total winnings over the session, just like US taxpayers. However, NRAs still need to keep adequate records of their winnings and losses because the NRAs have the burden to prove their bookkeeping is adequate. In addition, the term “session” has not been defined by the IRS or a court, so the NRA should make sure that any trip to the casino’s buffet or bathroom is as short as possible. Finally, if the IRS is feeling lucky, it does have the right to appeal the US Tax Court decision to the appropriate district court. We’ll have to see if the IRS is feeling lucky.