Thursday, March 7, 2013

Tax Break for Foreigners Betting on American Dogracing and Horseracing

Gambling earnings from lotteries and sports betting are taxed as ordinary income.  Foreigners are taxed at a rate of 30% on their gross gambling winnings from US sources, with some exceptions.

Internal Revenue Code section 872(b)(5) provides a nice exception for foreigners, who are not taxed on their winnings from "a parimutuel pool with respect to a live horse race or dog race in the United States," if the wager is legal and initiated outside the United States. 

A parimutuel pool is the form of race betting where all the money are placed in a pot, the house or track takes its cut, and the remaining cash is divided among the winners.

This rule was added by the American Jobs Creation Act of 2004.  Before 2004, the taxation of foreigners on their parimutuel winnings depended on what kind of pool they were betting in, with some pools subject to US tax and some pools not subject to tax.  Congress made things easier for everyone by exempting all pools from US tax, as long as they involved American horse racing or dog racing (and a foreigner betting on them).

Section 872 Gross Income
***
(b) Exclusions.
The following items shall not be included in gross income of a nonresident alien individual, and shall be exempt from taxation under this subtitle: ***

    (5) Income derived from wagering transactions in certain parimutuel pools.
    Gross income derived by a nonresident alien individual from a legal wagering transaction initiated outside the United States in a parimutuel pool with respect to a live horse race or dog race in the United States.

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