Generally, nonresident aliens who gamble in the United States must pay U.S. tax on their gambling income won in the United States; however, the United States has tax treaties with 27 countries (see IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities) that exempt their citizens from tax on U.S. gambling winnings. U.S. citizens may deduct their gambling losses to the extent of their gambling gains; however, recreational nonresident alien gamblers may not deduct any gambling losses. IRS Advice Memorandum 2008-011 permits U.S. citizens to compute their gambling gains for each gambling session (per-session approach) rather than for each bet placed (per-bet approach) which was the rule for nonresident gambling sessions. Nonresident aliens engaged in the trade or business of gambling in the United States may deduct their gambling losses.
Nonresident Gambling Losses
If you’re not a U.S. citizen or permanent U.S. resident, in other words a nonresident alien, you can only deduct items effectively connected with the conduct of a trade or business within the U.S. As a result, gambling losses are not deductible by a nonresident alien (there are a few limited exceptions that we will explain later in a future article). While that is not fair, and we hope that it changes at some point in the future let’s talk about another component of taxes on gambling winnings.
New Ruling On Nonresident Gambling Sessions
In 2008, the IRS ruled that U.S. citizens could measure their gains on a per-session basis. In effect, you don’t have to compute each wager separately to determine if you won or lost and by how much. Just tally your total at the end of your gambling session.
But guess what, the IRS said that this only applied to U.S. citizens and permanent residents, not nonresident gambling aliens. They said nonresident aliens have to still go bet by bet.
But alas came Mr. Park, a nonresident gambling alien, who periodically came to the U.S. to gamble. Although he had net gambling losses, the IRS determined that he had both gambling gains and gambling losses, because it treated each bet separately. The IRS said he couldn’t offset them.
The IRS claimed that his wins were “effectively connected” to the U.S., but not his losses! And the U.S. Tax Court agreed. But Mr. Park appealed, and the D.C. Circuit Court of Appeals reversed. It held that the per-session rule applies to residents and nonresidents alike.
The D.C. Circuit Court decision now allows a nonresident gambling alien to use the same approach (per-session) to compute his gambling gains as used by U.S. citizens. The court found no reason nonresident aliens should have to use a different approach.
The Appeals Court said there was nothing in the law to vary the tax rules on gamblers depending on whether they were U.S. citizens. The court pointed out that the IRS itself had said that offsetting wins and losses per session made sense–for citizens. To the court, the IRS opened the door.
If the rule made sense for U.S. citizens, it made sense for nonresidents too. The per-session approach avoids the administrative and practical difficulties of having to track every single win. There is nothing in the law to make this rule any less sensible for nonresidents. Likewise, our hope is that that the unfavorable treatment of nonresident gambling losses will change as well in the future.
Tax Samaritan is a team of Enrolled Agents with over 25 years of experience focusing on the taxation of US taxpayers living abroad. Our services include tax returns for nonresident gambling. We maintain this tax blog where all articles are written by Enrolled Agents. Our main objective is to educate Americans abroad on their tax responsibilities, so that they can look for planning alternatives on time. They are also designed to help taxpayers looking to self prepare, providing specific tips and pitfalls to avoid. If you found this article helpful, you’ll likely benefit from our future ones as well – so we encourage you to avoid pitfalls and join our mailing list:
You can also request a no charge consultation by requesting a quote for our services here:
Or speak to us live through the chat button on the bottom of your screen or by calling us directly at 702-350-1040.