Gambling Gains for Nonresidents Now the Same as for U.S. Residents

Editor: Valrie Chambers, Ph.D., CPA, Corpus Christi, Texas

Foreign Income & Taxpayers

Historically, gambling gains are taxable. Generally, the IRS has applied the tax on gains of nonresident alien gamblers on a per-bet basis, whereas U.S. residents are taxed on net gains on a per-session basis. The difference is subtle, but it has been expensive for nonresident aliens identified by the IRS. A decision by the D.C. Circuit (Park, Nos. 12-1058 and 12-1059 (D.C. Cir. 7/9/13), rev’g 136 T.C. 569 (2011)) changes that treatment, putting nonresident aliens’ gambling gains on a closer footing to those of U.S. residents.

This distinction is important for nonresidents, such as Sang Park, who play the slot machines. Previous to the Park decision, a gambler winning $100 on one bet at a slot machine then losing it on another would historically pay either up to 39.6% or $0, depending on whether he or she was taxed on each winning bet or on each winning session of gambling, and that depended on whether he or she was a U.S. resident or a nonresident alien. U.S. residents would declare their net gains for a given session (Sec. 61, Chief Counsel Memorandum AM 2008-011) and deduct their gambling losses from other sessions up to the amount of their gains (Sec. 165(d)).

No statutes or rulings permitted nonresident aliens to net their wins and losses. The only law that applied is very general: Sec. 871(a)(1)(A) permits the taxation of nonresident aliens’ gains received from sources inside the United States. No guidance addressed whether to calculate gambling gains on a per-bet or per-session basis, and nothing in the Code allows nonresident aliens to deduct their gambling losses.

Under the Park decision, nonresident aliens pay tax on sessions with net gains, as has been done by U.S. residents. However, they cannot offset the gains from U.S. gain sessions with losses from U.S. loss sessions. So, although the taxation of gambling gains in the United States is now more consistent between residents and nonresident aliens than it was before the Park decision, it is still less favorable for nonresident aliens than it is for U.S. residents.

The treatment of other gambling gains could actually be more advantageous for the nonresident alien than for U.S. residents. Sec. 871(j) specifically exempts gains from blackjack, baccarat, craps, roulette, or big-6 wheel, unless Treasury has determined by regulation that collecting that tax is administratively feasible. Sec. 871(j), however, was not challenged or changed by the recent court decision. Park won his court case, thus reducing his taxes and eliminating his underpayment penalties, but he could have avoided both the tax and the court case (and legal expenses) by changing games.