Winning money at a casino, hitting a jackpot on a scratch ticket, or taking home a major lottery prize sounds purely positive — until the tax bill arrives. The IRS treats gambling and lottery winnings as ordinary income, taxable at your marginal rate. Here is what you need to know before you plan how to spend your windfall.
Gambling Winnings Are Fully Taxable
The IRS is explicit: all gambling winnings are taxable income and must be reported on your federal tax return, regardless of the amount and regardless of whether you received a Form W-2G. This includes:
- Casino winnings (slots, table games, poker tournaments)
- Lottery prizes (state lotteries, Mega Millions, Powerball)
- Horse racing, sports betting, and fantasy sports winnings
- Keno, bingo, and game show prizes
- Online gambling and poker winnings
The income is reported on Schedule 1 of Form 1040, and it is taxed at your ordinary income tax rates — the same brackets (10%–37%) that apply to wages and salary.
When You Will Receive a Form W-2G
Payers are required to issue a W-2G and withhold taxes in the following situations:
| Type of Winnings | W-2G Required If… | Federal Withholding |
|---|---|---|
| Lottery, sweepstakes | Winnings ≥ $600 (and at least 300× the ticket price) | 24% if winnings ≥ $5,000 |
| Slot machines, bingo, keno | Winnings ≥ $1,200 (slots/bingo) or $1,500 (keno) | 24% if winner does not provide SSN |
| Poker tournaments | Net winnings ≥ $5,000 | 24% |
| Horse racing | Winnings ≥ $600 (and 300× the wager) | 24% if winnings ≥ $5,000 |
| Sports betting | Winnings ≥ $600 | 24% if winnings ≥ $5,000 |
The 24% withholding is not your final tax rate — it is a prepayment. If your marginal tax rate is 37%, you will owe additional tax at filing. If 24% exceeds your actual rate, you may receive a refund.
Federal Tax on Large Lottery Prizes
For a truly large lottery win, the federal tax bite is substantial. The top marginal federal income tax rate in 2025 is 37%, which kicks in at taxable income above $626,350 (single) or $751,600 (married filing jointly).
Example — $100 million Powerball prize:
| Lump Sum | Annuity (30 years) | |
|---|---|---|
| Gross prize | $100,000,000 | $100,000,000 |
| Lump sum cash value (approx. 60%) | $60,000,000 | N/A |
| Federal withholding (24%) | –$14,400,000 | –$24,000,000 over 30 yrs |
| Additional tax owed (to reach 37%) | –$7,800,000 | varies by year |
| After federal tax (approx.) | ~$37.8M | ~$63M over 30 yrs |
These numbers are rough — the actual tax depends on your other income, deductions, and filing status. A tax professional is essential for prizes above $100,000.
Lump Sum vs. Annuity: The Tax Tradeoff
Most major lottery prizes offer a choice between a lump sum cash payment (typically 50–65% of the advertised jackpot) and an annuity paid over 20–30 years.
Lump Sum
- You receive the discounted cash value upfront
- The entire amount is taxed in one year at your (top) marginal rate
- You have control over investment decisions
- If tax rates fall in future years, you lose nothing since you paid all taxes now
Annuity
- Payments are spread over decades, keeping each annual payment in a lower bracket (if your only income is the annuity)
- You pay taxes as each annual payment arrives
- The total nominal payout is higher, but inflation reduces purchasing power
- If tax rates rise, you pay more over time
- If you die early, remaining payments typically continue to your estate
General guidance: For very large prizes where even annual annuity payments exceed $1 million, both options push you to the 37% bracket, making the bracket-spreading benefit of the annuity minimal. Financial planners often favor the lump sum for large jackpots when the winner is financially disciplined.
State Taxes on Gambling Winnings
Most states with income taxes also tax gambling winnings as ordinary income. Some states do not participate in multi-state lotteries or have specific exemptions; others are among the most aggressive.
State Gambling Tax Highlights
| State | Tax Treatment |
|---|---|
| California | No state tax on lottery winnings (but taxes casino/sports betting) |
| New York | Up to 10.9% state + NYC local tax (up to 3.876%) |
| New Jersey | 10.75% on winnings above $500,000 |
| Maryland | Up to 5.75% state + local taxes |
| Texas, Florida, Wyoming, South Dakota | No state income tax |
| Arizona | 2.5% state flat tax |
| Pennsylvania | 3.07% flat rate |
New York City winners face a combined federal + state + city rate approaching 51% on winnings in the top bracket — meaning barely half the prize remains after taxes.
Non-Resident Withholding
If you win a lottery prize in a state where you do not live, that state will typically withhold its own income tax. You will also owe taxes in your home state (with a credit for taxes paid to the other state, in most cases).
Deducting Gambling Losses
The tax code allows you to deduct gambling losses up to the amount of your gambling winnings. This is not a net loss deduction — you cannot deduct $20,000 in losses against $10,000 in winnings and show a $10,000 net loss.
Rules for Claiming Gambling Losses
- You must itemize deductions (losses are not available if you take the standard deduction)
- Losses are deducted on Schedule A as “Other Itemized Deductions”
- You must keep detailed records: date, type of game, location, winnings, and losses per session
- A gambling log, receipts, casino win/loss statements, and bank records all support your deduction
Example:
- Gambling winnings: $15,000 (reported as income)
- Gambling losses: $12,000 (deductible on Schedule A)
- Net taxable gambling income: $3,000
If you do not itemize (most taxpayers since the 2017 TCJA doubled the standard deduction), you cannot deduct any gambling losses.
Professional Gamblers
If gambling is your primary occupation, the IRS may classify you as a professional gambler. In that case:
- Gambling is reported on Schedule C (business income/loss)
- Net gambling losses can offset other income
- Business expenses (travel, entry fees, software) may be deductible
- Self-employment tax (15.3%) applies to net gambling profits
The IRS scrutinizes professional gambler status closely. You must demonstrate a profit motive and consistent level of activity. Casual gamblers, even very active ones, do not qualify.
Practical Tips for Lottery and Gambling Winners
- Do not spend before consulting a tax pro. Withholding at 24% may not cover your total liability if you are in the 37% bracket.
- Stay anonymous if your state allows it. Some states permit lottery winners to claim through a trust, protecting privacy.
- Consider the timing of large wins. Winning late in the year gives you less time to plan before the tax is due.
- Keep a gambling log. Even if you do not itemize, good records protect you if the IRS questions reported winnings.
- Account for state taxes upfront. If you are in New York City, assume roughly 50 cents of every dollar won goes to taxes.
Key Takeaway
Lottery and gambling winnings are ordinary income taxed at federal rates up to 37%, plus state taxes in most states. For large prizes, the lump sum vs. annuity decision is primarily a financial one rather than a tax one (for very large jackpots). Gambling losses are deductible only up to winnings and only if you itemize. Use our income tax calculator to estimate your actual liability before counting on a windfall.