Will There Be a Spread in, "Tax Evading" in Slot Machines?

Introduction

The first thing that I want to do is thank LoquaciousMoFW for posting this thread linking to this article by Vital Vegas, which first brought a certain slot machine to my attention.

Vital Vegas gives a thorough detailing of the mechanics of the, “Quick Hit” themed slot machine in question, so I would encourage everyone to check out their article (linked above) if you want to read more about it. I’m not going to go into so much detail as I did not independently discover the machine: What I will say is that the machine’s fundamental goal is to make handpays from (one of) the bonuses impossible by charging the same amount (on a per spin basis) for each bonus game such that the result of each is under $1,000.

Naturally, a game specifically designed for the U.S. would simply need to keep the win under $1,200 (as that is the W-2G threshold for automatic reporting), but this machine was originally designed for Canada. The present article is going to be more U.S.-specific, so again, I would recommend reading the Vital Vegas article for more information as to why such a machine would be created with Canadian slot players in mind.

MAKING A FEW OMELETS

They say you can’t make an omelet without breaking a few eggs, so I am going to get into something that I will be calling the, “Egg Equivalency Index.” The way the Egg Equivalency Index works is that it compares how many eggs a jackpot equates to.

Vital Vegas reports that the W-2G threshold has been in place since 1977, which sounds like the year I remember last time I wrote about it. Before this writer was born, in any event. If that ends up being the wrong year, blame Vital Vegas and hold me faultless for being too lazy to double-check the year, at the moment.

According to IN2013Dollars, the cost of a dozen eggs was $0.87092, on average, in 1977, which they say they got from the U.S. Bureau of Labor Statistics, which would mean that the bare minimum taxable jackpot of $1,200 would have got you:

1200/(.87092/12) = 16534.2396546

About 16,534 eggs. It’s a little bit more than that, technically, but if anyone has any techniques for getting all of the yolk out without any sticking to the shell; I’m all ears.

In 2023, the W2-G threshold remains $1,200, so checking out Kroger’s website:

I am seeing a price of $4.19 for a dozen eggs. Sad to say, but that seems pretty low compared to what I have seen in my nearby grocery stores, but we’ll go with that. The egg Equivalency Index would say that one lowest taxable jackpot of $1,200 would get you:

1200/(4.19/12) = 3436.75417661

Or, about 3,436 eggs today. I’m not rounding up on that because, how can you round up to the nearest egg? An egg either exists or it doesn’t.

We are currently operating at an Egg Equivalency Index of .2078 (Rounded) using our rounded numbers in coming up with that calculation. In other words, the lowest possible jackpot amount will get you barely one-fifth as many eggs as it would have in 1977. In the meantime, the W2-G to W2-G Index is 1, which is to say that the minimum amount that constitutes a jackpot remains unchanged.

Put another way, inflation is a thing that exists, and the IRS still doesn’t care.

And, here’s another tax-related article I wrote about W2-G’s. Wherein, I stated:

Like it or not, gambling wins constitute income, and that's not just true of jackpots. Strictly speaking, an individual should file a tax return on all gambling winnings and off-setting losses, and that individual should also have fairly detailed logs in order to back up same. While it is true that gambling losses in excess of wins do not (they should, if wins count) constitute a loss in income, gambling profits do constitute an increase in income.

THE W2-G TAXATION IS FUNDAMENTALLY RIDICULOUS

I’m probably preaching to the gambling choir here, but my opinion is that issuing W2-G’s on gambling winnings is fundamentally ridiculous for a number of reasons:

1.) Ignoring the Egg Equivalency Index, inflation will remain a thing that exists. This inflation calculator would have it that an item that cost $1,200 in 1977 would cost $5,795.15 in 2022. Strangely enough, there was actually talk (several years ago) about reducing the W2-G threshold to $600, as opposed to $1,200!

Obviously, should gambling winnings be taxed at all by the Feds, (which they shouldn’t for reasons I will describe later) then that tax should be consistent with the value of the minimum jackpot to be won. For that reason, the taxable jackpot minimum should be raised to at least $5,000, I would think, in order to establish a nice round number. In fact, if they agree to do this, I will promise not to complain again until inflation causes what would have been a $1,200 jackpot in 1977 to look more like $10,000 in today’s money…which might only be a few months away. (Kidding, of course)

2.) The fundamental notion that gambling winnings, of any variety, also become income is also ridiculous.

-The IRS immediately invalidates their apparent assertion that gambling winnings should be treated as taxable income by not making gambling losses a loss to income.

Granted, you can write off gambling losses when you do your taxes, but for folks not filing as professional gamblers, this can only be done to the extent of your gambling winnings. What I do not understand is how the results from gambling can, effectively, only increase income.

In other words, gambling can only cause your income to increase, which immediately makes no logical sense, because most games are played in a negative expectation state. Technically, gambling can also cause your income to remain the same as it would have been had you not gambled, but that only happens if you lose precisely to the tune of your winnings or lose more than the amount that you won.

3.) The Federal Government has nothing to do with gambling…usually.

-Another important element to consider is that the Federal Government has almost nothing to do with gambling or the regulation of gambling. The closest that they have come to doing so, in recent years, has been with the Professional and Amateur Sports Protection Act (PASPA) which, in effect, restricted sports betting to Nevada.

Of course, the Supreme Court overturned PASPA as Unconstitutional on several grounds, but most relevantly, on Tenth Amendment grounds as there is nothing in the Constitution such that gambling regulation should not be handled by individual states.

Anyone can correct me if I’m wrong, but the only Federal Legislation that directly speaks to gambling in any impactful way (that is still law) is the Indian Gaming Regulatory Act, which mainly speaks to what states must allow Tribal Casinos to do on their own property, which is technically sovereign land.

The point is, I wish there would be something to make it to the Supreme Court by way of challenging the Federal Government’s right to not only declare gambling winnings to be taxable income, but rather, to declare that gambling winnings are income at all. Naturally, any such challenges that would arise would entail new Legislation that gambling winnings could be taxed as income if you are an individual who makes x%, or more, of your income from gambling or, alternatively, are in fact a business that derives a substantial percentage of your revenues from gambling—such as a casino.

In any case, I disagree with the fundamental position that gambling winnings on a negative expectation game should ever constitute, ‘Income,’ at all, with exception only to professional or semi-professional gamblers.

4.) W2-G Taxation is Hypocritical and Inconsistent.

On its face, the W2-G regulations are hypocritical and inconsistent.

Let’s suppose for a second that two individuals are playing an Electronic Roulette game with one betting $2,000 on red and the other betting $2,000 on black. For this purpose, we will assume that the next spin is either red, or black and that this particular jurisdiction treats the game as a slot machine, rather than as a Table Game.

In this event, one person will have lost $2,000 and the other individual will have won $2,000. The winning individual will get a W2-G reflecting a win of $4,000 offset by a wager of $2,000 automatically for a $2,000 net win.

Winning and losing aside, there is one key difference between these two individuals: The winner had a potential change in their, ‘Income,’ for the year, whilst the loser did not.

If we assume that both individuals work the same job at the same salary and have no other earnings, this one Roulette game aside, the winner had a greater income for the year than the loser, but the loser’s income remains unchanged. Assuming they both made $60,000 from employment, the winner shall file taxes on $62,000 in income while the loser shall file taxes on $60,000 in income.

As we can see, this situation is immediately inconsistent. How can making money on gambling constitute an increase in income while losing at gambling does not constitute a loss of income?

The reason that I also claim this is hypocritical is because the inconsistency is only (arguably) helping the IRS and can only financially harm individuals.

***Of course, I understand why money lost gambling could not categorically be treated as a loss of income. The reason for that is pretty simple: Everyone could simply claim to have lost any amount upon which they do not want to pay taxes as a result of gambling…the IRS would also have a difficult time proving such a claim to be untrue. The fairest solution, of course, is not to have gambling results treated as income, at all, exception to gambling institutions as well as pro and semi-pro gamblers.

THE TAXMAN GOETH AWAY

DISCLAIMER: The next section is not meant to convey tax advice and should not be taken as doing so. Mission146 is not a tax expert and is in no way, shape or form licensed to offer any sort of tax advice. Mission146 has stayed at Holiday Inn Expresses in the past, but at no time recently. Everything in this entire article is to be construed as being for commentary and entertainment purposes only.

The good news for recreational gamblers is that gambling winnings can be directly written off by gambling losses when doing one’s taxes. In that sense, gambling losses are conditionally to be construed as a loss of income, but only to such extent that the income was made from gambling.

This isn’t exactly what you would call a, ‘Loophole,’ either. That’s especially true if you agree with my position that recreational gamblers shouldn’t be taxed on gambling winnings in the first place. Anyway, if you have any friends who play slots regularly, I would recommend that you tell them about this as not as many people as should know about it do, in my opinion.

The way that this works is that the IRS will want you to keep some sort of, ‘Log,’ of your play, that way you can see what your total is for the year. If you want to get rid of the tax obligation that the W2-G form places upon you, it is not enough to simply have lost money gambling, you will still have to fill out all of the appropriate information on your tax return.

The good news is that you don’t necessarily have to provide the log itself right away, but it will be good to have it at the ready in the event you are audited or otherwise asked for it. From what I have seen in the past, information such as dates, locations, times and amount won/lost should suffice.

In case the IRS ever does look at your log, my advice would be not to just include sufficient losing days to cover the amount of the W2-G obligation. Remember, taxes are technically to be paid on ANY gambling winnings, not just those listed on the W2-G. The W2-G form doesn’t mean that tax obligations are necessarily restricted only to those winnings listed on the form; (though the IRS, in my estimation, is more than happy just to take any money paid on those) it’s the minimum amounts won that result in mandatory reporting…on the casino’s part.

With that, your gambling log should be honest, or appear to be so, which would include both winnings and losing days for most individuals. Generally speaking, word has it that Casino Win/Loss statements are not necessarily going to be acceptable to prove net losses, which makes a certain kind of sense, because Casino Win/Loss statements are notoriously inaccurate (usually for legitimate reasons) anyway.

When it comes to gambling logs, the IRS kind of has to take your reporting at face value. While it is true that you will not, strictly speaking, be able to prove that all of your losses happened and your logs are accurate; the IRS, equally, cannot prove that your losses are inaccurate or didn’t happen whatsoever.

For that reason, a person might have losses that they claim that came about as a result of unrated Slots or Table Games play in a casino. Again, casino records generally are worthless as far as the IRS is concerned, anyway, but even if they weren’t worthless…no records would exist for play that the casino is unaware of.

You might also play in locations that have no player tracking whatsoever, but are totally state-regulated, such as Limited Video Lottery Terminal parlors in states such as Montana, Illinois or West Virginia. In some of these locations, there might not be any player-tracking programs to begin with; West Virginia is a good example of this as these Limited Video Lottery locations cannot offer any comps or cashback associated with play anyway.

With that, if you went into such an establishment, particularly any time that’s not late into the year; you probably wouldn’t be able to necessarily prove (logs aside) that you were ever there. There is no player tracking and any camera footage that would theoretically put you there might be long deleted anyway.

Similarly, the IRS could not prove that you weren’t there. It’s highly unlikely that they would ever try, unless you were trying to write-off a six-figure win, or something, to the extent of your losses. I could see someone attempting to write off a jackpot like that, especially if they don’t otherwise show a lot of W2-G’s that year, as perhaps inviting more scrutiny. However, I don’t see the IRS looking deeply into someone trying to claim they lost some amount greater than a handful of small jackpots.

THE STATES ARE A MESS

Perhaps one day I will undertake a project that attempts to dive into how all of the individual states handle W2-G winnings, but that day is not today. For the time being, I would simply suggest that you look into your state of residence for yourself, or alternatively, consult with a tax preparer or tax accountant.

One thing that I can say is that The Suckeye State of Ohio is the worst state I am aware of in this regard. The reason I say that is because gambling winnings constitute an increase in income, at least to whatever extent those winnings are mandatorily reported to the IRS, and there is absolutely no way to offset them for Ohio residents.

Why is that so bad? Let me make this clear, in theory, you could have a jackpot that:

1. Was won in a different state.
2. At a casino owned by a company that doesn’t even operate in Ohio.
3. That still doesn’t put you ahead for the year.

And, Ohio would require that you pay personal income tax on that jackpot. This remains true even if you are able to write said jackpot off for the purposes of Federal Taxes, by way of losses.

In other words, the state is taxing you on a jackpot that could conceivably have nothing to do with the State of Ohio, aside from the fact that you happen to reside there. Interestingly enough, this was the case even before Ohio actually had casinos! There is also no way whatsoever to write this jackpot off!

In theory, you could lose money for the year gambling, but then have more money in total jackpots (particularly if you are a high-rolling player) than the amount that you actually netted in income for the year and would then have to pay personal income tax on that total amount.

As far as playing at a casino in Ohio goes, if you win more than $5,000, the casino is actually required to withhold 24% for the purposes of Federal Income Tax, despite the fact that you might not actually end up owing the IRS any of it if your losses exceed your winnings for the year. For all W2-G’s, the casino will automatically withhold 4% of the amount for State Income Tax purposes, since there’s no getting out of paying that anyway.

By the way, that’s the same state that taxes casinos 33% of all gross revenues.

If you can think of a worse state when it comes to gambling taxation, or you think some of my information about Ohio is incorrect, please let me know in the comments!

WILL THE QUICK HIT GAME START A TREND?

The hubbub is that the Quick Hits game is extremely intelligent in design and might start a trend of slot machines designed to accomplish the same ends.

I think the opposite: While this machine is certainly newsworthy and has accomplished the goal of drawing some attention, perhaps designing machines with the express goal of avoiding taxable jackpots, while paying more than a taxable jackpot on what is, really, a single bonus game initiating event, isn’t really that great of an idea.

The first thing to note is that a machine like this isn’t an entirely new concept. There have been a few games sprinkled about by which players, ‘Pay,’ for each bonus game. I have seen variants of the niche Video Poker Game, “Triple Ace Poker,” that have operated this way and the Bonus Games on Super Bonus Keno, in WV Video Lottery Parlors, have also done that. I’m not sure what the reason is for the machines to operate that way is, but the Quick Hit themed game is certainly not the first time a machine has ever done so.

Secondly, any machine (or game) with a top jackpot of less than $1,200 also stays under the W2-G threshold; it just doesn’t necessarily make a blatant production of doing so. I seem to recall single-line machines with a top pay of $1,199, in the past, or second top pay of that amount (several machines, including Black Tie and some Red, White and Blue variants) so we all know the reason that they chose that amount.

By their very nature, some machines/games just fundamentally don’t pay $1,200+. For example, non-progressive single-line Video Poker (without an added feature) at the $0.25 denomination would generally have a maximum jackpot (Royal Flush, most often) of $1,000. The same can be said for certain Video Keno Games, depending on numbers played and bet amount. I also assume that there are some slot machines out there that cannot hit for $1,200+; they just don’t make a big production out of that fact.

The only reel difference with this Quick Hit themed game is the fact that they are making sure to stay under the $1,200 reporting threshold by way of triggering what is, effectively, a single event. I wonder if the machine will even let a player cash out during such time that Bonus Spins could theoretically be played? If nothing else, that would be a once in a lifetime vulture find; although, the 1 in 999 would come into play and I would probably hit for $0.

Anyway, I do not believe that this Quick Hit variant will start a trend, nor do I believe that it should start a trend. I tend to not be in favor of, ‘Poking the Bear,’ as it were, and would rather let sleeping dogs lie and just continue to mix my metaphors.

The one thing that slot manufacturers and players have to accept is that, if the IRS is going to change this antiquated W2-G reporting law at all, then they will most likely change it for the worse. As I mentioned earlier, the IRS has already flirted with $600. I also standby my conclusion in that article:

In reality, there are only three possible fair ways to tax gambling winnings for non-professional gamblers:

1. Don't.
2. Don't.
3. Don't.

In any case, I wouldn’t want to do anything that might goad the IRS into an action that would make the situation even worse for players and casinos.

FOR EXAMPLE…

Here’s the thing: If the IRS really wanted to make it a goal that everyone pay taxes on all profits that are made by way of gambling, as income, then it would be relatively easy for them to change the laws to accomplish that. There are a variety of ways this could happen, barring the SCOTUS stepping in and declaring something Unconstitutional. For instance:

All Buy-Ins and Cash Outs to be Strictly Accounted For

-The first thing that they could do is make it a requirement that gambling entities monitor all player buy-ins and cashouts. There are really a number of ways this could be done:

A.) All Wagers to be Made Electronically:

When it comes to slot machines and similar games (such as Video Poker) this is already mostly the case. In terms of Table Games, it could be mandated that all wagers must be made electronically, though the games could still use physical implements, such as physical cards or dice.

In addition, they could require that all players must play rated—which is to say with a card or after having shown ID.

In order to effectuate the above, the IRS (presumably under an anti money laundering guise) could declare that slot machines will not function without a players’ card in them and any such player cards must be associated with the individual players of Table Games, Keno, Bingo, Sports Betting or other games.

Naturally, strict implementation of these guidelines would be an absolute nightmare for slot manufacturers and casinos alike, but that’s not really something that the IRS really has to care about; they just need to be concerned with getting their money.

B.) All Players Must Buy-In and Cash Out at Cage:

Even ignoring the possibility of requiring all individual play to be rated, the IRS could instead require that all player transactions be logged electronically, provided those transactions are related to cash.

Basically, players would enter casinos (or anywhere else) to report directly to the cage and hand over cash money (or do an electronic transaction) which would then result in their funds being loaded onto their players’ club card. When the player is ready to leave, the player would then have to take the players’ club card back to the cage to withdraw winnings and/or whatever money is left on it after losses.

The result would be that the IRS would no longer need to be concerned with W2-G mandatory reporting of individual hits whatsoever, which does eliminate that headache for players and casinos and replaces it with a new, and much more frequent, headache. Instead, the IRS would have a clear record of a player’s actual results.

One might suppose that such a system would be rife for fraud, but not really. Ultimately, someone is going to have to claim the winning result. If the only place where cash money can be obtained, or even used, is the cage, then any winnings are going to have to be claimed by someone. This is especially true if there exists a, “Cash Balance,” on players club cards as it is clear who did the winning or losing as opposed to who is collecting the money.

Abolishing the Writing-Off of Losses to the Extent of Winnings

This is fairly self-explanatory; the IRS could simply declare that losses are no longer permitted to offset wins and that any winnings at or above the W2-G threshold will be treated, unconditionally, as personal income. Once again, Ohio already does this.

Granted, that still doesn’t get around the problem of designing machines such that no single events, or very few single events, exceed the threshold, but the IRS has talked about reducing the mandatory reporting threshold before…so I don’t think such a thing would be impossible. That’s especially true if losses could no longer offset winnings.

WHY THIS SHOULDN’T REALLY CHANGE ANYTHING

The first reason why I don’t think this Quick Hits variant will change anything is that I don’t think it will actually start a trend, for reasons stated in that section. I think most slot manufacturers, and even the former Scientific Games, are probably going to take into account the fact that it wouldn’t be a good idea to have an entire casino floor flaunting the fact that the machines are structured as to skirt W2-G reporting guidelines. For that reason, I don’t think we are going to see a trend in slot machines such that single events result in jackpots of $1,200+ that are only, very technically, not single events.

Of the two responses that the IRS could theoretically engage in above, I think the most likely of the two would be the all electronic reporting thing. Quite frankly, it would only require that the Win/Loss reporting that the casinos already sort of try to do become more accurate. It could also eliminate the need for W2-G’s entirely, assuming that the reporting is strenuous enough.

While I don’t think that would actually happen, if it did, it would be more in accordance with the IRS’ supposed actual intent of people reporting gambling net profits as income. Again, by the letter of the law, this is supposed to be happening anyway. If there is an electronic log of all transactions and results, which online casinos have already proven is possible, then that would eliminate the need for any paper documents whatsoever, CTR’s aside, as applicable.

I don’t think the IRS would ever go the route of requiring all transactions to take place at the cage as that would be an undue and unfair burden on casinos. Casinos are simply not designed to operate that way anymore, as evidenced by the myriad of redemption machines littering casino floors. Of course, as with anything else, those are now being used to short change (literally) players.

The other aspect of casino operations that would change is that casinos, in effect, would be requiring players to present ID in order to buy-in or cash out, because if not, how else would you be tracking them? It would also create messy situations when it comes to accounting, though perhaps not quite as messy as having slot tickets that technically take anywhere from thirty days to the End of Forever (Pennsylvania) to resolve. For instance, how long should unused, “Cash Balance,” remain on a card and by what mechanism would that be resolved after x period of the player not using said cash balance?

That said, I don’t think either of those outcomes is particularly likely—especially as long as no trend is started by way of slot manufacturers directly giving the IRS the middle finger.

The biggest reason that I don’t think either outcome is particularly likely is that the IRS knows damn well that most players lose for the year, which includes any number of players who do not offset their W2-G winnings by way of those losses, or alternatively, for those slot players whose total in deductions (even including gambling losses) would not exceed the Standard Deduction anyway, so therefore are better just eating the tax on the W2-G income and taking the Standard Deduction.

Basically, it’s an IRS cash grab and any requirement that would result in net wins/losses being strictly recorded by all gambling enterprises, for every player, then being reported to the IRS by gambling enterprises and players would result in mountains of (digital or paper) documents with less actual revenue going to the IRS.

CONCLUSION

At the end of the day, I think that this will simply be a machine that attracts some tax form averse slot players and will be a novelty for that reason. While it is almost certain that other slot designers might design similar machines for high-limit clientele, I do not expect that these sorts of machines will become a general trend.

Even if they did, I don’t think it would take too long for the IRS to notice a conspicuous absence of W2-G’s being filed by major casinos, who would normally file hundreds of them monthly, if not thousands, and decide that they should probably do something about that.

What exactly the IRS would do about it I cannot claim to know, but the one thing that I am reasonably confident of is the result would be worse, for players and casinos alike, than the current state of affairs that exists today. Like I said in the $600 article, the IRS might find a way just to make things worse for everyone—themselves included!