With tax season approaching, sweepstakes casino winners must consider the financial and tax implications of their winnings.
Sweepsy spoke with Mark Gallegos, CPA, MST, Tax Partner at Porte Brown LLC, about how these winnings should be reported, common pitfalls for winners, how sweepstakes payouts differ from typical gambling winnings for tax purposes, and tips winners should know to stay compliant and financially sound.
“The IRS looks at whether someone received something of value that they can control or convert to cash and if they did, it’s generally taxable income,” Gallegos said. “Sweepstakes winnings are typically taxed as income at the federal level, even though they may not be called gambling winnings. People get confused between sweepstakes winnings and gambling winnings completely.”
Sweeps Coin redemptions constitute taxable income
Gallegos said a common misconception is that people think because it’s sweepstakes and not traditional gambling, it’s isn’t taxable. However, if you receive cash or something you can cash out, then the IRS generally considers that taxable income and it should be included in your income on your tax return.
For the most part, Gallegos said sweepstake casino winners don’t know what to do.
“They’re like, ‘What am I supposed to do?’,” he said. “People always rely on getting a tax form. When the winner takes over the value, they take control of it, typically when credits are redeemed for cash or paid out.”
An example Gallegos will sometimes see is earnings and in-app credits that can be cashed out but aren’t taxable at the moment.
“But once those credits are converted to cash or deposited into a bank account, that’s when income is typically recognized for tax purposes,” he said, referring to Sweeps Coin redemptions. “Timing can also matter if the payout crosses from one year to another.”
The biggest misconception that Gallegos sees is people only reporting large redemptions and ignoring smaller ones.
“An example is if someone says, ‘Hey, I got $10,000, I’ll report that, but if I got a couple hundred dollars, then I can just blow it off, right?’ That is not how you should look at things,” he said. “Failing to keep records with no tax form and spending money without setting aside anything for taxes — these things can be a problem.
“‘I received X amount of dollars … I’ve spent the money. I didn’t put any money aside for the taxes.’ That’s where people get blindsided when they go to file their tax return. It’s like, ‘I owe a couple bucks on what I received, and I didn’t put any money aside for it.'”
What tax forms will players receive?
Some platforms may issue a form 1099 or maybe a 1099-K, but many do not issue any tax form at all.
“In gambling, people will receive a W-2G,” Gallegos said. “In this particular case, people typically don’t receive anything. That’s where the confusion kicks in — that doesn’t mean it doesn’t eliminate the tax obligation of the taxpayer. They still have to report their taxable income whether or not they receive a tax form.”
One of the biggest mistakes is assuming that if no form shows up, the income doesn’t need to be reported.
“You want to make sure you’re tracking,” Gallegos said. “’Did I receive some sort of value in sweepstakes winning? Did I convert it to cash? Did I deposit it?’ And tracking that — irrespective of whether you received a 1099 or a form of any kind, it’s still taxable to you.”
If you do not receive a form, you should do your best to account for what you do throughout the year and determine if it is taxable or not, Gallegos reiterated.
Sweepstakes winnings vs. gambling income
Sweepstakes casinos operate differently than traditional casino concepts, with most often two forms of currency: Gold Coins, which can be purchased and are not redeemable for cash, and Sweeps Coins, which can’t be purchased and are redeemable for cash. So players are never technically wagering using real money. But from a tax perspective, the label doesn’t matter much.
“The IRS looks at whether someone receives something of value that they control or convert to cash,” Gallegos said. “If they did, it’s generally taxable income versus something like, ‘I’m gambling at a sporting event or I’m gambling on a table game or a slot machine. There’s an instant gratification clearly defined when I receive income or not, depending on if I win or lose.'”
There is one significant difference between sweepstakes winnings and traditional gambling winnings: The latter is usually reported as gambling income.
“Sweepstake winnings, on the other hand, are typically treated as a prize or other income, so they’re not treated as gambling,” Gallegos said. “Losses usually can’t be deducted against that income. So, in many cases, people get that tax without the offset they might expect from a gambling loss.”
