Monday, March 11, 2013

Tax Exemption for Foreign Gamblers Playing Five Specific Games

To follow up on last week's dogracing tax break for foreigners, a nonresident alien (foreigner) is taxed on all of his or her income from US sources, including gambling winnings in the United States.  However, a foreign gambler pays no US tax on winnings from blackjack, baccarat, craps, roulette, or big-6 wheel in the United States.

The five-specific-games gambling exception was added to the Internal Revenue Code by the Technical and Miscellaneous Revenue Act of 1988.  Congress discovered that it was difficult to collect taxes on so-called "table games" when casinos did not want to check the passport of every gambler who walked in the door.  It did not help that the American casinos were competing against tax-free gambling in Monaco and other countries.

However, the casinos have somehow managed to generally comply with Currency Transaction Report filings and tax withholding for American gamblers.  The foreign gamblers exception does not apply in any case where the Secretary of the Treasury determines by regulation that tax can be collected in an administratively feasible fashion, but no such regulation has ever been issued.

A foreign winner of other types of games will pay 30% of the gross winnings in US taxes.  In the landmark case of Barbra v. United States2 Cl Ct 674 (1983), a Mexican traveler who won $61,580 on two Las Vegas keno tickets had to pay 30% of the winnings in taxes, even though he lost over $475,000 on other gambling in the same year.  He could not deduct his gambling losses against his gambling winnings. 

Update: on July 9, 2013, in the landmark case of Park v. Commissioner [pdf], the District of Columbia Court of appeals concluded that the 30% tax on foreign gamblers of other games applies on a per-session basis, not on a per-bet basis.  For example, if Mr. Barbra won $61,000 on one poker bet and lost $475,000 on another poker bet in the same session (presumably the same day), the 30% US tax is imposed on his session's net winnings, which is zero.  But if he won $61,000 in one session and lost $475,000 in another session, he would have to pay the 30% withholding tax on the $61,000 of winnings. 

Section 871 Tax on Nonresident Individuals
(a)(1) Income other than capital gains. 
Except as provided in subsection (h), there is hereby imposed for each taxable year a tax of 30 percent of the amount received from sources within the United States by a nonresident alien individual as—
(A) interest (other than original issue discount as defined in section 1273 ), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income,
(j) Exemption for certain gambling winnings. 
No tax shall be imposed under paragraph (1)(A) of subsection (a) on the proceeds from a wager placed in any of the following games: blackjack, baccarat, craps, roulette, or big-6 wheel. The preceding sentence shall not apply in any case where the Secretary determines by regulation that the collection of the tax is administratively feasible.

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