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Does the IRS consider cashback and free-play gambling income?
[Editor's note: The following answer is adapted from the new fourth edition of Tax Help for Gamblers, which will be available both in print and e-book in a few weeks and covers all the changes from and implications of the so-called Tax Cuts and Jobs Act of 2017.]
Cashback is a popular gambler benefit about which the IRS has yet to make a ruling. As with many tax issues vis-a-vis gambling, there’s no consensus on how to treat it, even among tax experts.
Casinos usually don’t issue 1099s for cashback, even if you collect a large amount at one time. However, a very few casinos do issue a 1099 if it’s more than $600, treating it as a prize, or they give a W-2G if more than $1,200, treating it as a machine jackpot.
And to confuse matters, some casinos give you a choice of cash or comps for the points you earn in their players clubs. Thus, many players believe that cashback falls under the same category as comps, a reward from the casino that’s not gambling income. Others feel it’s more like a rebate of some of your losses and should reduce the total losses that you report. This is another gray area and you need to discuss your particular situation with your tax preparer.
Marissa Chien, Enrolled Agent and co-author of Tax Help for Gamblers, tells her clients that cashback is gambling income, whereas free buffets aren’t. The standard she applies is that cashback is statutory, while a comp from the players club booth or your host, such as the free buffet, is discretionary. Since the comp is entirely up to the host’s discretion — i.e., he or she could refuse to issue it for any reason— to Marissa, that doesn’t fall under the definitions of income in the tax code. Cashback is earned pursuant to a particular formula and you’re entitled to that cashback if you meet the statutory requirements of earning it.
The biggest argument as to why cashback is income is that if you’re 86ed (barred) from a Nevada casino, Nevada Gaming Control has ruled time and time again that you’re entitled to the cashback earned, whereas comps in your comp account are forfeited, since they’re discretionary.
As for free play, these days, casinos often give you free play instead of cash rewards. Free play comes in credits that must be played through a video poker or slot machine at least once before you can cash it out for money that you can put in your pocket.
This again is a gray area not specifically addressed by the IRS or any court cases. Some people don’t include free play in their gambling win, since they say it’s just like comps, a non-cash gift from the casino. Some only count as a win what they actually have left to cash out after they play it through the machine once, as required by the casino. Others keep churning it through the machine until they have nothing left (in which case they feel they have no “win”) or until they hit a big jackpot (which they do count as a win).
Marissa recommends that free play be incorporated into one’s log of session results. If someone receives $2,500 in free play, the actual proceeds after playing it through the machine should be recorded and reported as a win. A big difference between free play and cashback is the fact that free play always has an expiration date and is usually valid for only a short period of time. Cashback can expire as well (for example, if for a lack of play during a set period, your players account is closed), but it’s usually available to collect for a much longer period of time.
And here’s another nuance to the cashback issue. As soon as you pick up your cashback, it becomes income and needs to be accounted for as such. But what if you don’t pick it up? For example, there might be valid reasons for not collecting cashback, as when it’s a small amount or a player plans to pick it up later, but never gets back to that casino, so his or her account is closed. I believe it would be very hard for the IRS to argue that it should count as income, even if you file as a business on an accrual basis. (I suppose if you do, you’d have to declare it as income, but then you’d probably write it off as a bad debt, though that doesn’t make much sense either.) Actually, at some point, it should be declared as retained earnings by the casino.
The same is true for free play. Many players don’t always collect their free play, especially if it’s a small amount and/or it’s not convenient or a good use of one’s time to go back to that casino before it expires. Therefore, it’s logical not to count it as gambling income until you actually redeem it.
As you can see, a 10-word question about gambling and taxes requires nearly 800 words to answer and even then, the response is ambiguous, obscure, inconclusive, unclear, equivocal, and even enigmatic and dubious -- which is why no gambler with tax issues should tackle these things on his or her own. At the very least, Tax Help for Gamblers, now in its fourth edition, will help you understand the many nuances of gambling and taxes and can help your tax preparer resolve these kinds of polysemous and tenebrous cryptograms.
Who knows? By the time you finish the book, you might be able to give an IRS agent or auditor a clinic.